CNOOC, Sinopec and Petro China

Written By Christian DeHaemer

Posted August 13, 2010

I was playing lawn darts and drinking beer when the Amish prostitute showed up. The last time I played lawn darts was in the late seventies. We used to throw them over the house just to see where they landed.

You can’t get them anymore at the store, so my buddy Jeff pays $125 for them on eBay. They arrive via mail in their original packaging, some come with old, price stickers of $3.99. The plastic is brittle, so replacement is frequent.

The girl wandered over like a duck kneading dough and asked what we are doing.

“Playing cards” said Jeff as he tossed his blue missile next to the yellow circle.

“I’m wondering why the United States has no energy policy.” I said.

“Oh,” she said thinking a moment and tucking a wisp of hair under her white hat.

“But it does have an energy policy.” She claimed. “The DoE, using TARP funds, just gave Beacon Power a $43 million loan to finance its flywheel based electric storage facility in New York.”

Beacon Power (NASDAQ: BCON)

I knew immediately what she was getting at. This was no idle pillow talk. Of course, it was common knowledge that Beacon Power Corp. had the best flywheel storage technology going.

When its factory was up and running they would be able to buy cheap power during low-use times, such as at night, and sell it back to the grid at high-use times, like during the day.

I had played Beacon Power many times over the years and happened to have a copy of the chart in my pocket. I smoothed out my wrinkled copy on a nearby picnic table:

Beacon Power

I showed it to her and went on to explain that Beacon was a quintessential story stock. In fact, it had been riding up and down on the news for the past ten years.

I’ve made a lot of money buying Beacon at the lows and selling the news at the top. Every brown-out, natural gas spike, or government hurdle passed launched the stock 150%. But as often happens with such stocks, by the time it comes to fruition investors have given up, having been teased once too often.

True Story

Beacon has passed two rigorous government tests – one in California and one in New York – showing that it can be successfully hooked up to the grid as a low-cost energy storage device. It works and is two or three quarters away from being operational.

Other energy storage systems involve pumping water uphill during low power usage time and letting it fall through a turbine during high use times. It works, but it requires expensive and specific land and water.

Beacon is building a $69 million, 20 megawatt plant in Stephentown, New York. They have been running a smaller one in Massachusetts for the past two years. The company claims it will be up and running by the first quarter of 2011.

“But, if you invest in Beacon you have to worry about dilution,” I said as I attempted to get my metal spike down range in a way to ward off Jeff’s double strike.

“There has been some dilution in the past, but the float is only 180 million. That’s not that crazy for a company with a market cap of $59 million.” She countered.

“And the NASDAQ listing?” I asked.

“There is a chance that they could get delisted for being under a $1, but the NASDAQ has been fairly lenient in down times for companies that are two quarters away from ramping up revenue.”

“Still,” she admitted, “a flywheel plant in the middle of NY is not a coherent energy policy. Did you read the Mackenzie report?”

“Of course I’ve read the Woods Mackenzie report,” I snorted at her ignorance while dodging an errant throw from my competitor. It ended stuck in a deck support column near my head. The red, plastic tail-fins quivered malevolently.

The Chinese Demand

“The Chinese have an energy policy,” I boomed. “They are insuring their future by buying up all the oil, coal and natural gas they can find. They know these low prices won’t last forever.”

I could quote the numbers from the report by heart.

Overseas production for the Chinese big three oil companies – CNPC/Petro China, Sinopec Group, and CNOOC Ltd. – were now more than 1 million BoE per day. This was a new record.

Furthermore, this Three-headed Dragon has committed nearly $25 billion to asset and corporate acquisitions since April 2009, far exceeding previous annual spending. This represents 20% of the global deal value in the first quarter of 2010 alone.

The drive to acquire global oil assets is simple. China is now the worlds number one consumer of energy, and domestic demand continues to go up.

According to the Wall Street Journal, China requires total energy investments of some $4 trillion over the next 20 years to keep feeding its economy and avoid power blackouts and fuel shortages.

It is expected to build 1,000 gigawatts of new power-generation over the next 15 years. That’s the total current, U.S. capacity, which took 100 years to build.

Rock Solid

And it’s not like these companies are being altruistic. All three have healthy cash-flows and strong balance sheets. CNOOC, for example, has $7.69 billion in cash and only $2.76 billion in debt.

Chinese energy demand is as clear and stable an investment trend as you will ever find. The three-headed Chinese oil dragon will continue to go out and buy energy assets to meet its needs, and deprive its competitors.

And in good news for the Chinese, Mongolia, a country sitting on their northern border, has more than 6 billion barrels of oil, 100 billion metric tons of coal, and 60,000 metric tons of uranium reserves.

China Map

Back at the house, we sat under the porch and sipped our beers as Jeff wrapped his T-shirt around his foot to stop the bleeding.

The girl spoke up. “You know, one way to play Chinese demand is to buy Mongolian energy companies. I know this guy who made 727% in about six months from a little known oil company. Last week he recommended an undervalued coal company that is up 20% already.”

“Really?,” I asked excitedly. “Is there anyway your average Joe can get in on those kinds of gains?”

“Sure,” she smiled, “all you have to do is click here. In fact, its so good I may quit my day job.”


Christian DeHaemer
Friday Editor, Energy and Capital

P.S. I hope you enjoy the rest of your summer. I’m off to sit by a mountain lake for a week and jump off waterfalls with my offspring. I’m looking forward to it.

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