“On March 29th, a Small Chinese Energy Company’s Announcement Could Send Its Stock Soaring” (Nicholas Vardy)

By Travis Johnson, Stock Gumshoe, March 22, 2010

Time once again to have a quick look at a teaser pick from Nicholas Vardy for his Global Bull Market Alert — a small Chinese oil company that he thinks is under the radar and primed for takeoff. So who is it?

Well, for Vardy’s full answer you’ll need to pony up for a subscription which is “on sale” for $995. But for the low, low price of $0 we can take a look at the clues and identify his stock for you.

So how about those clues, then? Here’s an excerpt from the ad, with most of the clues included so you can play along at home …

“This opportunity is coming from a small, privately-owned Chinese company that operates oil producing wells located in one of central Asia’s most lucrative fields. Since the end of last year, the company’s been establishing itself as a seriously aggressive contender in its very profitable sector. Specifically…

“Management recently diversified the company when it acquired an oilfield services entity …. This will singlehandedly boost revenue estimates for this year by a whopping 50%!

“The company’s net margin of 28% compares with 8.9% for Chevron, 6.5% for Exxon Mobil, 4.3% for Royal Dutch Shell, and 4.1% for ConocoPhillips, making it one of the most efficient oil companies in the world.

“It has a 20-year agreement to sell its oil to the largest gas and oil producer and distributer in China….

“… Since December alone, it’s secured two new contracts totaling 55 new wells in a region of central Asia noted for proven reserves.

“… recently announcing plans to consolidate 36 smaller companies in its industry while increasing the size and scope of its own drilling services.

“With very little debt and more than $33 million in cash on its balance sheet, this company’s positioned itself to be an active player throughout the remainder of 2010.

“But best of all for investors, the company is a bargain right now. It’s extremely undervalued versus its peers and it trades at roughly half the industry average for price-to-earnings ratio (12 vs. 21). It’s equally cheap, based on measures like price to sales, price to cash flow and enterprise value to EBITDA.”

So who is this little private company? (That’s private as in non-government, not private as in “not publicly traded”)

Well, tossing all those clues in the Thinkolator the answer we get seems spot-on:

China North East Petroleum (NEP)

This firm calls itself “the first Chinese non-state-owned oil company trading on the NYSE Amex,” which as far as I know is true — they got their listing on the NYSE back in June, which helped drive the shares up to around $6, and then mergers and improving results and more attention gave them another leg up as Winter began, getting the stock up over $10 for a brief while. The shares currently change hands for about $8.30.

And yes, it is significantly cheaper than most of the big western oil companies, with a PE of about 11 at the moment. Based on forward estimates the PE is shockingly low at 6, but that’s based on the estimate of just one analyst (and I haven’t checked, but usually if there’s only one analyst it’s from the firm that helped them raise money).

NEP does have a 20-year oil sales agreement with PetroChina, largely because they’re leasing the Jillin Qian’an oil field from PetroChina and then selling them the oil … though finding buyers for oil has not been a problem for any oil company lately. and they do have contracts for 55 new wells.

The net margin info looks like it was lifted right from either the analyst report or a TheStreet.com article touting NEP as an “under the radar” pick (a different author from the same site noted it more recently as a micro-cap pick for 2010). This one has gotten a fair amount of attention in recent months as the shares were climbing, including from Ian Wyatt and his SmallCapInvestor PRO, and it’s also a favorite over at the Motley Fool.

The firm is tiny, with a market cap of around $200 million, and based on the numbers it sure looks pretty cheap — the oil services firm they merged with is Tiancheng Drilling, which has helped to diversify their earnings and boost revenues, and it does certainly look like there’s plenty of oil exploration going on in the Middle Kingdom — and that there’s a government push to produce whatever they can. This is still a tiny company with a lot of warrants and a relatively complex ownership picture, as is fairly typical for Chinese small caps, but if oil keeps going up I’d imagine that it’s a good bet that NEP would leverage any increases in oil prices. That said, energy is not necessarily an open or free market, particularly for Chinese companies that operate solely in China, so the global oil trends might not move profits in the direction that you’d always expect. The Chinese oil companies have occasionally run into problems with government price controls — as, for example, when PetroChina had to import oil to make gasoline for the increasing demand, but was required to sell gas at unprofitable prices for a while. Not that it has put a big crimp in the overall growth rates of the big firms like Petrochina, CNOOC or Sinopec, no one is weeping for their shareholders at the moment (unless they bought near the peak in the winter of 2007/2008).

I don’t know whether the earnings release will actually come on March 29 as Vardy teases, but he’s right that we do know that the numbers will be pretty good — that’s because they’ve already preannounced, they gave a fair amount of information about their 4Q results in a press release last week. In that announcement they noted that they would release their earnings “within the next few weeks”, so it certainly could come next Monday as teased, or sometime around then. Since they did preannounce, I don’t know that the results will cause any movement in the price unless they held back some positive news or predictions, but one can never tell what investors will do with earnings announcements, particularly when there’s only one analyst covering the stock and most investors have to come up with their own “consensus” earnings numbers and determine whether or not the company “beat.”

So there you have it — the shares have come back a bit from the highs of earlier this year, but based on earnings the price is pretty low whether they’re at $10 or $8, the unpredictable Chinese regulatory environment, future oil prices, integration risk for their acquisitions, and the fact that this is a microcap Chinese company all probably contribute to the uncertainty that lets them trade for a very low PE ratio compared to small US oil and oil services companies. Is it worth a risk for you? Well, it’s your money — you tell us, that’s why we’ve got the friendly little comment box below, opine away.

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March 28, 2010 8:09 pm