Profit from Asia's hunger for energy
Jul 15, 2009
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On 17 September last year, shares in Tanganyika Oil were trading at just C$14.5 each. In just over a week, they had soared to C$29.1 – a gain of 101%. Over the same time, the Toronto Stock Exchange rose by just 6%.
The trigger that sent Tanganyika's shares soaring came from the other side of the world. Chinese oil giant, Sinopec, launched a take-over bid for Tanganyika in order to secure its oil fields in Syria.
Now Syria isn't a place most investors would go looking for profits. But the smart ones who did made a killing while global share markets were tanking. The deal cost the Chinese $2 billion. But they were happy to pay it. $2 billion is pin money for the Chinese these days. By the time the deal was done, investors who held on booked a gain of 117%.
This wasn't a one-off event either.
On 5 June, shares in Addax Petroleum were trading at C$36. And then came the announcement that it was in takeover talks. Once again China had pounced. On 24 June, Sinopec launched a take-over offer at C$52.80 per share – a 47% premium. They're now finishing-up that deal. And they will get control of Addax's valuable oil fields in Africa and Iraq. The price tag this time was C$8 billion. The Chinese are clearly ramping-up their take-over operations.
It isn't just the Chinese either. India's national oil-company ONGC outbid the Chinese to snap-up London-listed Imperial Energy for £1.3 billion last December. That netted them top-class Russian oil fields and resulted in a 62% windfall gain for Imperial's shareholders.
Asia's cash-rich and energy-hungry resource companies are on the prowl. The take-overs that we have seen so far could just be the tip of the iceberg. They are trying to take advantage of lower share prices to buy-up natural resources companies on the cheap...
The big question is who is next? Get that right and you could clean-up. So let me just show you where the really big opportunities are.
Falling markets will speed-up the pace of takeovers
Asian energy companies are set to increase the speed of their takeover plans in the coming months. And here's why – energy prices have dropped sharply in the last two weeks. And, as I will show you in a moment, global stock markets look set to tank. That combination of lower energy prices and cheaper shares is going to open-up a window for aggressive, cash-rich energy companies from Asia to snap-up their battered rivals on the cheap.
The price of oil has fallen from $73 per barrel to $59 over the last two weeks. While we are bullish on the price of oil over the medium-term, there is room for it to drop further over the next couple of months.
And share markets around the world have started wobbling over the last two weeks. Asian markets have fallen for five straight days for the first time since October. Russia is now officially in a bear market. Its MICEX share index is down by 21% over the last month. Brazil has fallen by about 8% over the last month. And the US is down by 7%.
You can bet that they have a lot further to fall. Because global markets are still looking over-valued relative to earnings.
Here's where to look for quick profits
Just like us here at The Right Side, the Asians are betting on sharply higher energy prices over the medium-term. That is why a sharp pull-back in stock and energy prices might give them a window of opportunity to get in on the cheap. You can bet that they are going to take it.
China is going to be in the lead on this. The country is sitting on almost $2 trillion in foreign exchange reserves. They've got more than enough money to buy-up whichever energy companies they want. But they are being careful about what they buy. They aren't going for the biggest oil companies. Because launching a take-over for something like Shell or BP would quickly turn in to a political headache. Instead, they are focusing on mid-sized companies that operate in off the beaten track areas – such as Africa, Syria, Iraq and Kazakhstan...
Once you have grasped the strategy that they are using, it becomes a lot easier to start spotting potential targets. Here are three London-listed companies that are definitely worth looking at. Heritage Oil (LSE: HOIL) and Tullow Oil (LSE: TLW) which operate in Africa and have substantial oil reserves. They are the sort of company that the Chinese have been stalking.
Dragon Oil (LSE: DGO) operates in now Uzbekistan and is in takeover talks with the Emirates National Oil Company. Its share price has already risen sharply. But if the takeover does go through, there could be an easy 15-20% gain in there over the next couple of months.
The Asian energy-grab is coming and we're on the look out for the next way to play it.
• This article was written by Manraaj Singh for The Right Side free daily investment email. Manraaj is Chief Investment Strategist for the Profit Hunter newsletter.
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