• Reliable sources of energy.
• A modern, efficient infrastructure, consisting of a good road and rail system, reliable power grids and high-speed digital communications networks.

And if a country wants to be considered a “global economic powerhouse,” it’s nearly impossible for it to do so without these critical building blocks.

So it’s not too surprising that China is spending unprecedented amounts of money to beef up its infrastructure.

It’s also spending huge amounts of money on long-term oil and gas contracts. And with nearly $2 trillion on hand, it’s the perfect time for China to go on an energy acquisition spree.

Right now, it’s spending like a thirsty sailor on shore leave…

You see, despite the recent pullback in the Chinese stock market, the country is still on an economic roll that will continue for the next 50 years. According to The Economist, China’s capital spending is a whopping 44% of its GDP, and in raw dollars could exceed that of the United States for the first time this year.

And you can bet that its increase in energy use will track right along with its growth.

But China’s energy problems are similar to those of the United States: It doesn’t have enough of its own sources of fossil fuel to meet its needs.

So what is China doing to combat this? And is there a way to tap into this in terms of investing? Answers below…

China’s Energy Asset Acquisition Spree

At the moment, China is importing coal, liquefied natural gas (LNG) and crude oil. And to guarantee that those supplies are uninterrupted, it’s buying some major deposits of oil and gas, along with the refineries to process it.

We’re not just talking small potatoes, either. Since Christmas, China has been on an overseas energy asset acquisition spree. The country has spent a total of $17 billion, easily topping the $13.1 billion it spent in all of 2008. What’s more, the pace of acquisitions doesn’t appear to be slowing – and could even ramp up into 2010.

Many companies are teaming up, putting together joint deals that insure even the largest purchases have funding behind them. And some are very, very big. For example…

• In April, PetroChina (NYSE: PTR) partnered with KazMunaiGaz and plunked down a cool $5 billion to purchase JSC MangistauMunaiGas from Central Asia Petroleum. This was one of the first instances of Chinese firms partnering together to purchase a foreign oil company.
• June saw a highly publicized $20 billion deal, in which China National Petroleum Corporation joined forces with BP (NYSE: BP) to buy a 75% stake in the Rumaila oil field in southern Iraq. The consortium’s bid topped that of the Exxon/Mobil (NYSE: XOM)/Shell (NYSE: RDS) partnership.
• Just one month later, the China National Offshore Oil Company (NYSE: CEO) – often referred to as CNOOC – hooked up with Sinopec. The two of them coughed up $1.3 billion to acquire a 20% stake in a deepwater block off Angola from Marathon Oil.

China’s Knee-Deep In Canadian Oil Sands

Now, the Chinese have landed in Canada. And it’s not because they like hockey. They’ve quietly bought up several parts of different oil sands operations.

Just a few days ago, PetroChina announced a $1.7 billion deal, in which it will acquire a 60% stake in Athabasca Oil Sands Corp’s MacKay River and Dover oil sands fields.

This isn’t the first time that China has invested in Canadian oil sands. Back in 2005, CNOOC purchased a 16.7% stake in MEG Energy Corporation, while China Petrochemical Corporation plunked down $83 million for a stake in Syneco Energy, Inc.

So why is China interested in something like oil sands – oil that is very difficult and expensive to bring to fruition? Simple. All the easy, lucrative projects have already gone. It’s a disturbing indication of China’s quiet determination to increase its oil and gas reserves… at any price.

So what’s next?

How To Invest In China’s Energy Acquisition Express

As evidenced by the variety of different operations that China has acquired recently, the country is taking a shotgun approach to energy.

And while it’s not easy to see what it’s focused on next, the best way to play this trend is by owning shares of the buyer. This includes big Chinese oil companies like…

• PetroChina
• Sinopec (NYSE:SHI)
• CNOOC

All these firms have American Depositary Receipts (ADRs), which means you can trade them on the U.S. exchanges.

One note of caution before you do, however: If you read my colleague Louis Basenese’s piece on the China sell off earlier this week, he highlighted 10 reasons why the Chinese market is set to fall from here.

I agree with Lou – and I believe waiting until we see evidence that the Chinese markets have bottomed will represent an excellent time to take a position in some of these companies.

Good investing,

David Fessler

Source: China’s Energy Acquisition: Three Ways to Invest in China

If you’re looking for the next “Big Oil” play, bet on Beijing.  As we’ve been reporting for the past several years, China has been on a global commodities shopping spree, which includes locking up every source of oil that it can.

The Red Dragon has cut deals in Africa, South America Russia and the Middle East – and won’t stop there. Even the mainstream news media is finally becoming aware of this crucial trend.

But here’s the thing. It’s not enough just to know that this is happening. In order to profit, an investor really needs to understand why it’s happening – and to invest accordingly. Investors who lack this insight may make the strategic misstep of betting heavily (or exclusively) on the Western heavyweights – Exxon Mobil Corp. (NYSE: XOM), BP PLC (NYSE ADR: BP) or Royal Dutch Shell (NYSE ADR: RDS.A, RDS.B) – while ignoring the oil sector’s real growth story, which is China.

Just this year alone:

• China and Russia have signed a multi-billion-dollar, intergovernmental agreement to construct an oil line from Russia that will supply oil directly to China. Actually seven agreements in one, the terms depict a deal worth trillions of dollars – including a 20-year oil contract to pump Russian oil to the Chinese market. In return, China has agreed to provide a total of $25 billion in loansto Russian oil companies Transneft and OAO Rosneft Oil Co. China even gets a cut of Rosneft’s production, as part of the deal.
• In Africa, China’s CNOOC Ltd. (NYSE ADR: CEO) and Sinopec Shanghai Petrochemical Co. (NYSE ADR: SHI) are teaming up to buy a $1.3 billion stake in Angolan offshore development rights from U.S.-based Marathon Oil Corp. (NYSE: MRO). A key point of note: Angola – historically one of Exxon’s favorite investment targets – has recently overtaken Nigeria as Africa’s biggest oil producer.
• While noting that it’s hardly a done deal, The Wall Street Journaldid report earlier this month that China National Petroleum Corp. (CNPC) is interested in buying all or a part of Argentina’s YPF SA (NYSE ADR: YPF) for $14.5 billion.
• In Africa, China’s CNOOC Ltd. (NYSE ADR: CEO) and Sinopec Shanghai Petrochemical Co. (NYSE ADR: SHI) are teaming up to buy a $1.3 billion stake in Angolan offshore development rights from U.S.-based Marathon Oil Corp. (NYSE: MRO). A key point of note: Angola – historically one of Exxon’s favorite investment targets – has recently overtaken Nigeria as Africa’s biggest oil producer.
• Reports continue to circulate that CNPC will be taking the majority stake in Iraq’s Rumaila oilfield from BP. Rumaila is Iraq’s biggest oil field, producing more than a million barrels of crude oil per day.
• And China has become quite chummy with Brazil’s Petroleo Brasileiro (NYSE ADR: PBR). Petrobras is developing a huge new offshore field – one of the biggest new discoveries in decades, in fact – and any deal would include a production-supply agreement.

This flurry of deals hasn’t been a surprise to Money Morning readers. Even so, it’s worth taking a moment to look at some of the key catalysts behind many of these deals. Let’s look at the Top Three:

• Nervous Reserves: China is sitting on the world’s largest pile of cash – more than $2.3 trillion by some estimates. With an estimated 70% of that, or about $1.61 trillion, in U.S. dollars, there is no question it’s a huge source of financial firepower strength at a time when global markets are uncertain, if not downright weak. But it’s also a liability, too, in that China can’t diminish its high-concentration of greenback holdings without pushing the dollar off a cliff. So buying oil is a great way for China to diversify its reserves without kneecapping poor old Uncle Sam.
• Those Not-So-Free “Free” Markets: China has less faith in the “free” markets than the West does. Ironically, the United States and other Western powers are partly to blame for Beijing’s free-market skepticism. For instance, not only did the United Statesslam the door in China’s face when China tried to buy Unocal Corp. [now a part of Chevron Corp. (NYSE: CVX)]  a few years back, but when former U.S. President George W. Bush invaded Iraq, the war summarily cut off China’s ability to source oil from that Middle East member of the OPEC 12 (the Organization of the Oil Producing and Exporting Countries). Prior to the invasion, Beijing really didn’t consider the need to diversify China’s foreign-oil sources so our military action prompted their economic reaction. Now the genie’s out of the bottle.
• Peerless Perspective: China’s leaders know that they must lock up oil supplies at a time when the Western world can’t seemingly be bothered to understand that this is a zero-sum game. In other words, China views the global financial crisis as an opportunity to be exploited for economic gain and the security of its people, not as a problem to be solved. China understands the big picture, and even though we apparently painted it, the West doesn’t.  By scouring the earth for oil at a time when the West is hamstrung by the global financial crisis, not only is China able to strike more favorable deals at more favorable prices, but it’s locking up huge supplies of commodities for its own use for years, even decades, to come. In doing so – and this is the part of the equation so many experts don’t get – these resources are no longer available for our use here in the United States, which has major supply and pricing implications for this market.

Bamboozled by the Western media – which has perpetuated the “global-recession-means-lower-demand” story – it simply hasn’t dawned on most people here in the West that China doesn’t care about the majorlong-term impact this global buying spree will have on our economy.
Besides, this whole story thesis is flat out wrong. While the recession is definitely dampening our use of oil and gasoline, China’s oil demand is growing by more than 20% a year. And of the 8 million barrels a day that China already uses, half comes from imports. Beijing sees those as troubling statistics, which means that China:

• Absolutely must lock up as many significant external supplies oil as possible right now.
• And must accelerate its domestic exploration-and-processing efforts at warp speed.

Nor is this a static situation. China’s auto market is growing by 50% a year. It’s already the world’s largest, having passed the United States earlier this year. In fact, according to some estimates, China will have more cars on its roads in the next 20 years than all those we currently have in this country – even if you include the engine-less “restoration project” your next-door neighbor’s son has sitting under an oak tree in their back yard.

China’s never known high prices and its consumers haven’t either. So they don’t care like we do about what “price” is posted at the pump. Sure, you can argue as many Western analysts do, that China’s fuel is highly subsidized, but so what? That’s a moot point. Consumers who remember what it was like back when gasoline was 99 cents a gallon aren’t going to grouse about how it now costs $6 a gallon – these newly minted motorists will merely see gasoline as just part of the cost of having a car.

Because it understands its need for continual economic progress – as well as the role oil has to play to make that a reality – China is doing whatever it takes to guarantee future supplies, including structuring deals in ways that have caught Western companies by surprise. For instance, China’s companies are looking at how they can get a deal done by giving the other party something it actually needs. Moreover, in a move that’s as frustrating to Western leaders as it is surprising, many of these deals come with no strings attached. I suppose you could call it the “Red Dragon Option” – although Western firms would do well to embrace these as potential Harvard Business Review case studies.

After reading this overview, a U.S investor might want to conclude that China’s already got this one wrapped up and that “any resistance is futile.” But that’s not necessarily true. While China’s grown by leaps and bounds in terms of its financial sophistication when it comes to these deals, the country still lacks the relative exploration-and-production technology to go after the deep-water reserves and complicated fields where most of the still-undiscovered oil remains. Those are also the same kinds of locations where natural gas may be the better bet.

And that suggests that investments in both sectors – including deep-water drillers and companies that specialize in natural-gas liquification -may pay off for investors anxious to dine with the Red Dragon, instead of being listed as an entrée on the menu.

Source: Three Reasons China is Positioned to be the Oil Sector’s Next Big Profit Play

[Editor's Note: The global economic recovery will create an estimated $300 trillion worth of global-investing-profit opportunities. To find out how to capitalize and profit, you just need to know where to look.

]]> http://www.contrarianprofits.com/articles/three-reasons-china-is-positioned-to-be-the-oil-sector%e2%80%99s-next-big-profit-play/19976/feed 0 http://www.contrarianprofits.com/articles/china-tightens-grip-on-africas-energy-resources-with-stake-in-offshore-field/19397 http://www.contrarianprofits.com/articles/china-tightens-grip-on-africas-energy-resources-with-stake-in-offshore-field/19397#comments Thu, 23 Jul 2009 19:27:59 +0000 Jason Simpkins http://www.contrarianprofits.com/?p=19397 CNOOC Ltd. (NYSE ADR: CEO) and Sinopec Corp. (NYSE ADR: SHI) have agreed to buy a 20% stake in an oil field off the shore of Angola for $1.3 billion, illustrating China’s persistent attempts to acquire resources for its economic expansion at a time of weakness for many Western oil majors.

CNOOC and Sinopec will form a 50-50 joint venture to buy the stake in the so-called Angola Block 32, which has 12 previously announced discoveries. The Chinese energy giants purchased the stake from U.S.-based Marathon Oil Corp. (NYSE: MRO), but the sale is still subject to government and regulatory approval.

Marathon’s existing partners in the block – France’s Total SA (NYSE ADR: TOT), Portugal’s Galp Energia SGPS SA, Exxon Mobil Corp. (NYSE: XOM), and Sonangal, Angola’s…

Table of Contents:

• Oil Production: Why OPEC’s Keeping a Lid on Production
• Oil Prices: Why Crude Thrives on the Diving Dollar
• Oil Outlook: The Coming Oil Price Shock
• Investing in Oil: The Best Companies, Stocks and ETFs

Oil has staged an impressive rally since dropping below $35 a barrel in mid-February.
And while there remains a risk that prices will retreat further due to sluggish demand, there are also three very compelling reasons why oil is still a safe long-term bet:

• OPEC has made substantial progress in reducing the amount of oil on the market.
• The dollar has been made vulnerable by the U.S. Federal Reserve’s aggressive policy of quantitative easing.
• And low oil prices and tight credit have reduced global energy investment, putting future supply at risk.

There’s no question that downside risk remains. On April 13, the Paris-based International Energy Agency (IEA) lowered its demand forecast by 1 million barrels a day, and now expects the world will use about 83.4 million barrels per day in 2009. That would be 2.4 million barrels a day, or 2.8% less than last year.

But so far dwindling demand has failed to contain oil prices.

As Money Morning predicted in its annual outlook series, the first quarter was a volatile one, in which oil prices tested the low $30s before surging over $50 in recent market rally.

And analysts are almost completely united in the view that, despite its short-term volatility, declines in production, exploration and development, and the value of the dollar will drive oil prices substantially higher in the years ahead.

Oil Production: Why OPEC’s Keeping a Lid on Production

The members of OPEC generated tremendous revenue from oil prices that soared over $147 a barrel last year. However, just as the world’s top oil producers began looking for ways to spend their massive stockpiles of cash, prices began a plunge that would see crude lose more than three-quarters of its value.

In a desperate effort to put a floor under oil prices, OPEC – supplier of 40% of the world’s oil – has issued three production cuts totaling 4.2 million barrels per day (bpd), or nearly 12% of its capacity, since September.

While the cuts have not yet been able to return oil prices to the group’s desired price range of $60-$70 a barrel, the cartel abstained from making any further reductions at its latest meeting in March and even voiced optimism that crude would reach $60 a barrel by the end of the year.

“That suggests to us that not only does OPEC have the firepower to support this oil price, but there’s enough internal agreement between OPEC members that they can actually achieve it,” Tom Nelson, an analyst for the Guinness Atkinson Global Energy Fund told BusinessWeek.

Many analysts had speculated that OPEC members would ignore the quotas and continue to produce oil to generate income, thereby rendering the cuts ineffective. But OPEC’s discipline has proven many critics wrong.

Despite foot-dragging from Iran and Venezuela – two countries that rely heavily on oil revenue to fund massive social programs – OPEC has gotten about 80% compliance on the 4.2 million bpd production cut. Historically, the cartel only gets about 60% compliance on such cuts.

As of February, Saudi Arabia accounted for about 46% of the 3.4 million bpd decline in production, according to PFC Energy. And the United Arab Emirates have fully complied with their share of the cuts. Iran’s compliance by that time was only 33% and Venezuela had only adhered to half of its commitments.

Still, Abdallah El Badri, OPEC’s Secretary General, estimates the production cuts will take about 800,000 bpd of supply off the market, significantly reducing the overhang in global markets, BusinessWeek reported.

OPEC officials from Libya, Algeria, and Iraq have all said that oil prices will reach $60 a barrel by the end of the year.

“One of the reasons why OPEC felt able to roll over quotas was that they do appear to have set a floor for prices,” Mike Wittner, an analyst at Societe Generale SA (ADR: SCGLY), told Reuters. “According to a lot of the balances, including ours, if you have OPEC holding steady or cutting a bit more, you get a big, counter-seasonal stock draw in the third quarter.”

Oil Prices: Why Crude Thrives on the Diving Dollar

Crude futures doubled from July 2007 to July 2008, soaring from about $74 a barrel to a record-high $147 a barrel. Much of that rise can be attributed to supply and demand, but there was another catalyst for the soaring prices that few investors recognized: The rapid decline of the dollar.

From July 2007 to July 2008 the dollar plunged 16% against the euro. And as the dollar became less valuable the cost of commodities around the world skyrocketed.

At the time, inflation – not deflation – was the predominant concern among the world’s leading economists, as a decade of low interest rates and unconstrained lending in the United States sucked the life out of the dollar. And while inflation is nowhere near the levels it reached last year, it’s important to recognize that the policies of the U.S. Federal Reserve are no less inflationary.

The Fed has cut its benchmark lending rate to a range of 0%-0.25%, and soon after, Fed Chairman Ben S. Bernanke said the central bank would purchase up to $300 billion of longer-term Treasury securities and $750 billion of mortgage-backed securities as it pursues a policy of quantitative easing.

This announcement by the Fed, along with a corresponding rise in equities, has been the driving force behind oil’s recent rally.

Ultimately, the same fear of inflation that typically drives investors into the gold market is similarly buoying oil prices. And even though the dollar has yet to be seriously affected, there’s no ignoring the fact that the more than $1 trillion worth of government bonds and mortgage-backed securities injected into the market will imperil the dollar’s value.

Oil Outlook: The Coming Oil Price Shock

Now that a weak dollar and reduced production have bolstered oil prices, there is a growing concern about how much higher crude will climb once demand returns. Tighter lending conditions and a trough in oil prices have badly crimped investment and jeopardized future supplies.

More expensive energy projects such as oil sands have been put on hold and the number of drilling rigs at marginal shallow-water fields around the world has been scaled back to a three-year low.

Oil drilling activity dropped 43% in the 12 months through March, with year-over-year oil exploration in the United States alone down 38%. High bids for offshore drilling rights in the central Gulf of Mexico fell by more than 80% compared with last year.

OPEC has said that with oil generating substantially less revenue as many as 35 new projects could be delayed past 2013.

“I have often described unsustainably low oil prices as carrying the seeds of future spikes and volatility. In a low-price environment, the trend is often to focus on survival instead of expansion,” said Ali al-Naimi, the Saudi oil minister. “If we place a low priority on preparing for the future, that lack of action can come back to haunt us through supply shortages and another round of high prices.”

The current economic crisis could reduce future oil supply growth by 8 million bpd, according to a recent study by the Cambridge Energy Research Associates (CERA).

CERA now says that production will grow by just 7.5 million bpd over the next five years, down from the 14.5 million bpd increase it predicted last summer. According to the research group, as demand recovers throughout that span, production will struggle to keep up and a new commodities bull market, similar to the one seen in 2008 will begin.

“Seven consecutive years of rising oil prices – unprecedented in the history of the oil industry – have come crashing down, thus burying the notion that the commodity price cycle was a historical relic,” said the report.

CERA isn’t the only organization worried about the lack of investment in new oil projects, either. The International Energy Agency (IEA) – energy advisor to 28 industrialized nations – has also issued warnings about a coming supply crunch.

The IEA estimates daily oil demand will rise from the current level of 86 million barrels to 106 million barrels by 2030. To meet that demand, the agency estimates that the world needs $26.3 trillion in supply-side investments over the next 21 years.

China, India and other developing countries, alone, will need investments of $360 billion a year through 2030, the agency said.  About 7 million bpd of additional capacity needs to be added to the market by 2015.

“Unless sufficient companies have the will and financial ability to invest through the down cycle, there is a real risk that supply growth may lag the eventual rebound of demand, leading to substantial price increases – possibly as early as this year,” Richard Jones, the IEA’s executive director said at a recent conference in London.

Jones estimates that as much as 2 million bpd of expected new oil production has already been deferred.

The IEA predicts that, by 2015, a lack of investment and rising demand will create a “supply crunch” – that will once again send oil prices up into the triple digits.

“There remains a real risk that under-investment will cause an oil supply crunch in that time frame,” the IEA said in an executive summary of its “2008 World Energy Outlook.” “The gap between what is currently being built and what will be needed to keep pace with demand is set to widen sharply after 2010.”
The agency predicts that crude will average more than $100 a barrel from 2008 to 2015 and rise above $200 a barrel by 2030, as demand far outpaces supply.

“Every bull market in oil is really born in the zenith of a bear market,” said Phil Flynn, an analyst at Alaron Trading Corp. “The cutbacks we see today are going to lead to a spike somewhere in the future. The big question is when it’s going to happen.”

Investing in Oil: The Best Companies, Stocks and ETFs

When it comes to investing, the oil sector poses some very clear risks, especially given the murky near-term outlook. However, there are a number of large-cap integrated oil companies that may offer some truly compelling values at current prices.

Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) are currently trading at multi-year lows, making them exceptionally cheap in both relative and absolute terms. These companies also have strong balance sheets (Exxon is “AAA”- rated and has more cash on its balance sheet than debt), generate strong cash flows, and have traditionally increased their dividends on a regular basis.

”Chevron is the kind of company that is capable of continuing to post large profits – propelling its share higher from current levels – even if oil-and-gas prices were to drop from current levels over the next three years,” Money Morning Contributing Editor Horacio Marquez said. “That’s because Chevron’s business is well cushioned, since refining, marketing and chemicals margins would expand dramatically if market ’spot’ prices were to decline. Also, the company’s production is poised to expand strongly and Chevron uses some selective hedging that works very well in downside oil markets.”USO

Offshore drillers, particularly those capable of drilling in the deepest waters, also offer value at current levels. Petroleo Brasileiro (PBR), also known as Petrobras, is particularly appealing, as it recently discovered one of the largest offshore oil fields on earth off the coast of Rio de Janeiro. Known as Carioca, the field could hold 33 billion barrels of oil and gas, making the world’s largest discovery in at least 32 years.

Keith Fitz-Gerald, Money Morning’s Investment Director, suggests investors look at China National Offshore Oil Corporation, or CNOOC Ltd. (ADR: CEO). The Hong Kong-based company recently got approval for a $29 billion exploration project in the South China Sea. The company expects to produce 50 million tons of oil equivalent per year from that region during the next 10-20 years. That would equal the production of China’s biggest project, the Daqing Oil Field.

Petrobras and CNOOC are also attractive because, as foreign companies, they will also get a boost from any devaluation in the U.S. dollar.

All of these companies have been hit hard by the combination of commodity-price weakness and credit market turmoil. But these operators do not require peak-cycle commodity prices to generate stellar results and have little or no credit-market exposure.

For a more direct play on oil prices, you might also try an exchange-traded fund (ETF), such as the United States Oil Fund LP (USO), the iPath S&P GSCI Crude Oil Total Return Fund (OIL), or the United States Gasoline Fund LP (UGA).

Source: Three Big Reasons Oil Prices Will Rally Back Big Time

After such a wrenching plunge, many analysts believe the outlook for the “black gold” remains bleak – and in the short term it certainly is. In the long run, however, dwindling supplies, resurgent demand, and a lack of investment will cause crude oil to double, triple, or even quintuple in price over the next few years.

In fact, the Paris-based International Energy Agency (IEA) – energy advisor to 28 industrialized nations – says oil will rise to $100 a barrel by 2015, as a result of a major “supply crunch,” and will ultimately soar to $200 a barrel.

But before it does, prices are likely to sink even further, perhaps falling as low as $20 a barrel in the first quarter of the New Year.

Indeed, much of Wall Street expects oil prices to average about $50 a barrel in 2009. Some of the firms and their specific forecasts include:

• Deutsche Bank AG (DB, which says oil prices will average $47.50 for all of next year.
• Merrill Lynch & Co. Inc. (MER), which predicts that prices will average $50 even.
• Moody’s Investors Service (MCO) also says crude will average $50 a barrel in 2009, but says that average will increase to $55 a barrel for 2010.
• Goldman Sachs Group Inc. (GS) is slightly more bearish, predicting that prices will average $45 for all of next year – after falling as low as $30 in the 2009 first quarter. (It’s worth noting that Goldman – just five months ago – predicted oil prices would hit $200 a barrel in 2009).

But analysts also agree on something else: When the recessionary tide finally recedes, all of the factors that drove oil to its record high last summer will once again be exposed, and crude again will again soar to record highs.

“We may see prices drop lower – into the twenties, even – but there’s a better-than-average chance that they’ll be back over $70 a barrel by the end of next year,” says Money Morning Investment Director Keith Fitz-Gerald. “That’s where firms like Goldman and Merrill are getting all of these ‘middle-of-the road,’ $50-a-barrel estimates. And it’s why investors who buy in through the first quarter could enjoy compelling returns at the end of the year.”

In the meantime, however, low oil prices are crimping investment in new capacity, a reality that will lead to much higher prices down the road.

Just ask the IEA.

IEA: Rising Demand + Lack of Investment = ‘Supply Crunch’

According to widely respected energy advisor, global oil demand will slide 0.2%, or 200,000 barrels per day (bpd), this year, falling to an average of 85.8 million bpd. But the IEA also says that oil demand will advance by an annual average of 1.6% between 2006 and 2030.

The bottom line: Regardless of any short-term pullback, daily demand will rise from the current level of 86 million barrels to 106 million barrels in 2030. In other words, daily demand in 2030 will be 23%.

To meet that demand, the agency estimates that the world needs $26.3 trillion in supply-side investments over the next 21 years.

China, India and other developing countries, alone, will need investments of $360 billion a year through 2030, the agency said.

About 7 million bpd of additional capacity needs to be added to the market by 2015. And right now – because of marketplace changes – the financial incentives to make that happen just don’t exist.

Exploration costs have more than quadrupled since 2000, as oil producers have been forced to take on more complex projects, and the costs of both labor and materials have skyrocketed. At the same time, the steep drop in oil prices has put even more pressure on energy companies to curtail their investments rather than increase them.

Earlier this year, for instance, ConocoPhillips (COP) and Saudi Arabia Investment Co. (ARAMCO) were forced to postpone bidding on the construction of a 400,000 bpd export refinery at the Yanbu Industrial City.

“We see and hear about energy investments being delayed … this is a major worry and could lead to a supply crunch and much higher oil prices than we’ve seen before,” said Fatih Birol, the IEA’s chief economist.

The IEA predicts that, by 2015, a lack of investment and rising demand will create a “supply crunch” – that will once again send oil prices up into the triple digits.

“There remains a real risk that under-investment will cause an oil supply crunch in that time frame,” the IEA said in an executive summary of its “2008 World Energy Outlook.” “The gap between what is currently being built and what will be needed to keep pace with demand is set to widen sharply after 2010.”

The agency predicts that crude will average more than $100 a barrel from 2008 to 2015 and rise above $200 a barrel by 2030, as demand far outpaces supply.

“While the situation facing the world is critical, it is vital we keep our eye on the medium to long-term target of a sustainable energy future,” Nobuo Tanaka, the Paris-based agency’s executive director, told reporters in London. “While market imbalances will feed instability, the era of cheap oil is over.”

While it’s probably true that the “era of cheap oil” is in our rearview mirror, a new question has arisen: Just how high do oil prices go?

According to some analysts, the IEA’s target price of $200 a barrel is far too conservative.

$500 Oil?

The lack of exploration and development is certainly a problem. But a much bigger issue is the fact that output from the world’s existing oil fields has sharply declined.

“The future rate of decline in output from producing oilfields as they mature is the single most important determinant of the amount of new capacity that will need to be built globally to meet demand,” the IEA says.

And output from the world’s oilfields is declining faster than previously thought.

In its “2007 World Energy Outlook,” the IEA estimated that output from the world’s existing oilfields was declining by 3.7% a year. But in its latest report, published in November, the IEA revised that estimate to an annual decline of 6.7%. (The November report was based on the first major study of the world’s 800 largest oil fields.)

Unfortunately, the IEA is behind the curve.

For nearly a decade, Matthew R. Simmons has said that the world’s oil production was nearing – or already at – an “inflection point.” While his book “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy,” was scoffed at when it was originally published back in 2005, Simmons is now viewed as perhaps the preeminent expert on the so-called “peak oil” movement.

“Like most people who ignore conventional wisdom, he was scoffed at, ridiculed, and denied,” commodities guru Jim Rogers told Fortune magazine. “And now, of course, people are starting to say, ‘Oh, well, I thought of that.’”

Simmons, chairman of the Houston-based investment bank Simmons & Co. International, poured through hundreds of technical documents submitted by Saudi oil geologists to the Society of Petroleum Engineers over the past 50 years.

“I finished reading the last paper on a Sunday afternoon,” Simmons told Fortune, “and I sat back and thought, ‘Holy crap, this is unbelievable. I’ve just discovered the biggest energy illusion ever in the world. We’re in big trouble. I’m going to write a book.’ ”

Much of the alleged Saudi Arabia subterfuge has to do with a complete lack of transparency with respect to the Organization of Petroleum Exporting Countries. After OPEC decided to base its production quotas on reserve figures in the 1980s, several of the cartel’s producers suddenly raised their levels of  “proven reserves” by 40% or more.

Back in 1988, for instance, Saudi Arabia raised its proven-reserve figure from 170 billion barrels to about 260 billion barrels. That figure has remained more or less constant since then, despite the fact that billions of barrels of oil have been pumped out of the ground.

“Saudi Arabia has announced for 20 years in a row that they have 260 billion barrels of oil in reserve,” Rogers told Money Morning during an exclusive interview in Singapore recently.  “It’s astonishing.  The figure never goes up and it never goes down.  They have produced dozens of millions – billions – of dollars of oil in that period of time.

“Every oil country in the world has declining reserves except Saudi Arabia,” Rogers said. “And I know that every oil company has declining reserves.  So unless somebody discovers a lot of oil very quickly in very accessible areas, the surprise is going to be how high the price stays, and how high it goes.”

Simmons thinks oil prices could hit $300 a barrel – and could possibly even surge as high as $500 a barrel – during the next several years.

“Black Gold” Profit Plays

When it comes to investing, the oil sector poses some very clear risks, especially given the murky near-term outlook. However, there are a number of large-cap integrated oil companies that may offer some truly compelling values at current prices.

Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) are currently trading at multi-year lows, making them exceptionally cheap in both relative and absolute terms. These companies also have strong balance sheets (Exxon is “AAA”- rated and has more cash on its balance sheet than debt), generate strong cash flows, and have traditionally increased their dividends on a regular basis.

Chevron was actually recommended as a “Buy” by Money Morning Contributing Editor Horacio Marquez in his “Buy, Sell or Hold” column earlier this year.

“Chevron is the kind of company that is capable of continuing to post large profits – propelling its share higher from current levels – even if oil-and-gas prices were to drop from current levels over the next three years,” Marquez said. “That’s because Chevron’s business is well cushioned, since refining, marketing and chemicals margins would expand dramatically if market ‘spot’ prices were to decline. Also, the company’s production is poised to expand strongly and Chevron uses some selective hedging that works very well in downside oil markets.”

Offshore drillers, particularly those capable of drilling in the deepest waters, also offer value at current levels. Petroleo Brasileiro (PBR), also known as Petrobras, is particularly appealing, as it recently discovered one of the largest offshore oil fields on earth off the coast of Rio de Janeiro. Known as Carioca, the field could hold 33 billion barrels of oil and gas, making the world’s largest discovery in at least 32 years.

Fitz-Gerald, the Money Morning investment director, suggests investors look at China National Offshore Oil Corporation, or CNOOC Ltd. (ADR: CEO). The Hong Kong-based company recently got approval for a $29 billion exploration project in the South China Sea. The company expects to produce 50 million tons of oil equivalent per year from that region during the next 10-20 years. That would equal the production of China’s biggest project, the Daqing Oil Field.

Petrobras and CNOOC are also attractive because, as foreign companies, they will also get a boost from any devaluation in the U.S. dollar.

All of these companies have been hit hard by the combination of commodity-price weakness and credit market turmoil. But these operators do not require peak-cycle commodity prices to generate stellar results and have little or no credit-market exposure.

For a more direct play on oil prices, you might also try an exchange-traded fund (ETF), such as the United States Oil Fund LP (USO), the iPath S&P GSCI Crude Oil Total Return Fund (OIL), or the United States Gasoline Fund LP  (UGA).

Source: Why Crude Oil Will Present Investors with a Golden Opportunity in 2009

Editor’s Note: This is the ninth installment of our “Outlook 2009” series, which looks at the global investing outlook for the New Year.

This from Money Morning:

Oil prices have fallen 70% since hitting a record $147.27 a barrel in July, which means in just five months, crude has given up all the price gains it made in the past four years.

After such a wrenching plunge, many analysts believe the outlook for the “black gold” remains bleak – and in the short term it certainly is. In the long run, however, dwindling supplies, resurgent demand, and a lack of investment will cause crude oil to double, triple, or even quintuple in price over the next few years.

In fact, the Paris-based International Energy Agency (IEA) – energy advisor to 28 industrialized nations – says oil will rise to $100 a barrel by 2015, as a result of a major “supply crunch,” and will ultimately soar to $200 a barrel.

But before it does, prices are likely to sink even further, perhaps falling as low as $20 a barrel in the first quarter of the New Year.

Indeed, much of Wall Street expects oil prices to average about $50 a barrel in 2009. Some of the firms and their specific forecasts include:

• Deutsche Bank AG (DB, which says oil prices will average $47.50 for all of next year.
• Merrill Lynch & Co. Inc. (MER), which predicts that prices will average $50 even.
• Moody’s Investors Service (MCO) also says crude will average $50 a barrel in 2009, but says that average will increase to $55 a barrel for 2010.
• Goldman Sachs Group Inc. (NYSE:GS) is slightly more bearish, predicting that prices will average $45 for all of next year – after falling as low as $30 in the 2009 first quarter. (It’s worth noting that Goldman – just five months ago – predicted oil prices would hit $200 a barrel in 2009).

But analysts also agree on something else: When the recessionary tide finally recedes, all of the factors that drove oil to its record high last summer will once again be exposed, and crude again will again soar to record highs.

“We may see prices drop lower – into the twenties, even – but there’s a better-than-average chance that they’ll be back over $70 a barrel by the end of next year,” says Money Morning Investment Director Keith Fitz-Gerald. “That’s where firms like Goldman and Merrill are getting all of these ‘middle-of-the road,’ $50-a-barrel estimates. And it’s why investors who buy in through the first quarter could enjoy compelling returns at the end of the year.”

In the meantime, however, low oil prices are crimping investment in new capacity, a reality that will lead to much higher prices down the road.

Just ask the IEA.

IEA: Rising Demand + Lack of Investment = ‘Supply Crunch’

According to widely respected energy advisor, global oil demand will slide 0.2%, or 200,000 barrels per day (bpd), this year, falling to an average of 85.8 million bpd. But the IEA also says that oil demand will advance by an annual average of 1.6% between 2006 and 2030.

The bottom line: Regardless of any short-term pullback, daily demand will rise from the current level of 86 million barrels to 106 million barrels in 2030. In other words, daily demand in 2030 will be 23%.

To meet that demand, the agency estimates that the world needs $26.3 trillion in supply-side investments over the next 21 years.

China, India and other developing countries, alone, will need investments of $360 billion a year through 2030, the agency said.

About 7 million bpd of additional capacity needs to be added to the market by 2015. And right now – because of marketplace changes – the financial incentives to make that happen just don’t exist.

Exploration costs have more than quadrupled since 2000, as oil producers have been forced to take on more complex projects, and the costs of both labor and materials have skyrocketed. At the same time, the steep drop in oil prices has put even more pressure on energy companies to curtail their investments rather than increase them.

Earlier this year, for instance, ConocoPhillips (NYSE:COP) and Saudi Arabia Investment Co. (ARAMCO) were forced to postpone bidding on the construction of a 400,000 bpd export refinery at the Yanbu Industrial City.

“We see and hear about energy investments being delayed … this is a major worry and could lead to a supply crunch and much higher oil prices than we’ve seen before,” said Fatih Birol, the IEA’s chief economist.

The IEA predicts that, by 2015, a lack of investment and rising demand will create a “supply crunch” – that will once again send oil prices up into the triple digits.

“There remains a real risk that under-investment will cause an oil supply crunch in that time frame,” the IEA said in an executive summary of its “2008 World Energy Outlook.” “The gap between what is currently being built and what will be needed to keep pace with demand is set to widen sharply after 2010.”

The agency predicts that crude will average more than $100 a barrel from 2008 to 2015 and rise above $200 a barrel by 2030, as demand far outpaces supply.

“While the situation facing the world is critical, it is vital we keep our eye on the medium to long-term target of a sustainable energy future,” Nobuo Tanaka, the Paris-based agency’s executive director, told reporters in London. “While market imbalances will feed instability, the era of cheap oil is over.”

While it’s probably true that the “era of cheap oil” is in our rearview mirror, a new question has arisen: Just how high do oil prices go?

According to some analysts, the IEA’s target price of $200 a barrel is far too conservative.

$500 Oil?

The lack of exploration and development is certainly a problem. But a much bigger issue is the fact that output from the world’s existing oil fields has sharply declined.

“The future rate of decline in output from producing oilfields as they mature is the single most important determinant of the amount of new capacity that will need to be built globally to meet demand,” the IEA says.

And output from the world’s oilfields is declining faster than previously thought.

In its “2007 World Energy Outlook,” the IEA estimated that output from the world’s existing oilfields was declining by 3.7% a year. But in its latest report, published in November, the IEA revised that estimate to an annual decline of 6.7%. (The November report was based on the first major study of the world’s 800 largest oil fields.)

Unfortunately, the IEA is behind the curve.

For nearly a decade, Matthew R. Simmons has said that the world’s oil production was nearing – or already at – an “inflection point.” While his book “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy,” was scoffed at when it was originally published back in 2005, Simmons is now viewed as perhaps the preeminent expert on the so-called “peak oil” movement.

“Like most people who ignore conventional wisdom, he was scoffed at, ridiculed, and denied,” commodities guru Jim Rogers told Fortune magazine. “And now, of course, people are starting to say, ‘Oh, well, I thought of that.’”

Simmons, chairman of the Houston-based investment bank Simmons & Co. International, poured through hundreds of technical documents submitted by Saudi oil geologists to the Society of Petroleum Engineers over the past 50 years.

“I finished reading the last paper on a Sunday afternoon,” Simmons told Fortune, “and I sat back and thought, ‘Holy crap, this is unbelievable. I’ve just discovered the biggest energy illusion ever in the world. We’re in big trouble. I’m going to write a book.’ ”

Much of the alleged Saudi Arabia subterfuge has to do with a complete lack of transparency with respect to the Organization of Petroleum Exporting Countries. After OPEC decided to base its production quotas on reserve figures in the 1980s, several of the cartel’s producers suddenly raised their levels of  “proven reserves” by 40% or more.

Back in 1988, for instance, Saudi Arabia raised its proven-reserve figure from 170 billion barrels to about 260 billion barrels. That figure has remained more or less constant since then, despite the fact that billions of barrels of oil have been pumped out of the ground.

“Saudi Arabia has announced for 20 years in a row that they have 260 billion barrels of oil in reserve,” Rogers told Money Morning during an exclusive interview in Singapore recently.  “It’s astonishing.  The figure never goes up and it never goes down.  They have produced dozens of millions – billions – of dollars of oil in that period of time.

“Every oil country in the world has declining reserves except Saudi Arabia,” Rogers said. “And I know that every oil company has declining reserves.  So unless somebody discovers a lot of oil very quickly in very accessible areas, the surprise is going to be how high the price stays, and how high it goes.”

Simmons thinks oil prices could hit $300 a barrel – and could possibly even surge as high as $500 a barrel – during the next several years.

“Black Gold” Profit Plays

When it comes to investing, the oil sector poses some very clear risks, especially given the murky near-term outlook. However, there are a number of large-cap integrated oil companies that may offer some truly compelling values at current prices.

Exxon Mobil Corp. (NYSE:XOM) and Chevron Corp. (NYSE:CVX) are currently trading at multi-year lows, making them exceptionally cheap in both relative and absolute terms. These companies also have strong balance sheets (Exxon is “AAA”- rated and has more cash on its balance sheet than debt), generate strong cash flows, and have traditionally increased their dividends on a regular basis.

Chevron was actually recommended as a “Buy” by Money Morning Contributing Editor Horacio Marquez in his “Buy, Sell or Hold” column earlier this year.

“Chevron is the kind of company that is capable of continuing to post large profits – propelling its share higher from current levels – even if oil-and-gas prices were to drop from current levels over the next three years,” Marquez said. “That’s because Chevron’s business is well cushioned, since refining, marketing and chemicals margins would expand dramatically if market ‘spot’ prices were to decline. Also, the company’s production is poised to expand strongly and Chevron uses some selective hedging that works very well in downside oil markets.”

Offshore drillers, particularly those capable of drilling in the deepest waters, also offer value at current levels. Petroleo Brasileiro (ADR:PBR), also known as Petrobras, is particularly appealing, as it recently discovered one of the largest offshore oil fields on earth off the coast of Rio de Janeiro. Known as Carioca, the field could hold 33 billion barrels of oil and gas, making the world’s largest discovery in at least 32 years.

Fitz-Gerald, the Money Morning investment director, suggests investors look at China National Offshore Oil Corporation, or CNOOC Ltd. (ADR:CEO). The Hong Kong-based company recently got approval for a $29 billion exploration project in the South China Sea. The company expects to produce 50 million tons of oil equivalent per year from that region during the next 10-20 years. That would equal the production of China’s biggest project, the Daqing Oil Field.

Petrobras and CNOOC are also attractive because, as foreign companies, they will also get a boost from any devaluation in the U.S. dollar.

All of these companies have been hit hard by the combination of commodity-price weakness and credit market turmoil. But these operators do not require peak-cycle commodity prices to generate stellar results and have little or no credit-market exposure.

For a more direct play on oil prices, you might also try an exchange-traded fund (ETF), such as the United States Oil Fund LP (NYSE:USO), the iPath S&P GSCI Crude Oil Total Return Fund (NYSE:OIL), or the United States Gasoline Fund LP (NYSE:UGA).

Source: Why Crude Oil Will Present Investors With A Golden Opportunity In 2009

• Sales of existing homes fell 3.1% in October, the lowest drop in four years, Reuters reported. Over the past year, medium home prices also declined 11.3% to $183,300, the biggest percentage drop since the National Association of Realtors began keeping records in 1968.

• Chile’s gross domestic product beat forecasts and grew 4.8% in the third quarter. Domestic demand was strong, as was energy output. “These figures surprised the market and showed that the Chilean economy is surprisingly resistant to a rapid deceleration,” Juan Pablo Castro, an economist at Banco Santander SA in Santiago, told Bloomberg. “Consumption is still growing at around 6 percent even though you’d expect to see the effects of inflation and interest-rate rises.”

• Shares of Solar power manufacturer SunPower Corp. (SPWRA) jumped yesterday after the company announced it had completed an 18-megawatt solar electric power plant in Badajoz, Spain. The plant’s SunPower Tracker follows the sun as it moves across the sky, increasing sunlight capture by up to 30% more than conventional fixed-tilt systems.

• China oil titan Cnooc Ltd. (CEO) and undisclosed partners may spend up to $29 billion to develop deposits in the South China Sea. The state-run oil company is making a big push to feed domestic energy demand as well as put its flag in an oil-rich aquatic area where its facing exploration competition from Vietnam and Indonesia, Bloomberg reported.

• Alpharma Inc. (ALO) yesterday (Monday) agreed to King Pharmaceuticals Inc.’s (KG) $1.6 billion cash takeover offer. The deal values Alpharma at $37 a share – a 54% premium to the company’s closing price on Aug. 21, the last trading day before King’s initial $33-per-share bid.

• Xerox Corp. (XRX) yesterday (Monday) said that 2009 profits are generally in line with analyst expectations and that its strong contingent of repeat customers coupled with cost cuts will help it weather the economic downturn. The company, which last month said it plans to cut about 3,000 jobs, or 5% of its work force, expects 2009 profit to range between $1 a share to $1.25 a share.

• The price of crude oil yesterday (Monday) rose $4.57 a barrel, or 9.15%, to settle at $54.50 a barrel on the New York Mercantile Exchange. Oil climbed more than $5 earlier in the day, reaching a session high of $55.30 a barrel on hopes that equity markets will continue to recover.

Source: Global Investing Roundups, Tuesday, November 25th, 2008

Coca-Cola’s offer of $1.56 per share (HK$12.20) is more than triple China Huiyuan’s recent closing price of HK$4.14 a share. It is the company’s largest overseas acquisition to date, and the biggest foreign takeover of a Chinese company ever. The deal values Huiyuan at 46.6 times this year’s estimated earnings, according to Bloomberg data.

“It’s a sizeable offer, but certainly a very smart one,” said Lou Basenese, editor of the Oxford Club’s Takeover Trader. “It’s better than building everything from ground zero. It’s a shortcut into a promising market.”

By 2025, China’s middle-class is projected to exceed 600 million. That’s twice the size of the entire population of the United States. And a great many of those people will be drinking Huiyuan products.

Sales of fruit and vegetable juices in China will grow 16% to $12.3 billion this year alone, according to Euromonitor International, whereas carbonated beverage sales are only forecast to rise 7% to $7.94 billion.

That gives Huiyuan a decided advantage. And not just because it’s a hometown player. With 220 beverage products and a 10.3% market share, Huiyuan is actually China’s biggest producer of fruit and vegetable juices. And when it comes 100% pure juice products, the Beijing-based beverage giant accounted for 43% of all sales last year.

“There’s no question Huiyuan is the market leader in China. It just isn’t a huge market right now,” said Basenese. “But that’s true of all emerging markets. It’s the massive growth potential that makes this deal, and emerging markets in general, attractive.”

Coca-Cola says that it expects more than 80% of its future growth to come from markets outside of the United States. The company’s sales in China jumped 18% last year.

There is also growing speculation that Coca-Cola will take Huiyuan’s products abroad.

“It’s very possible Coca-Cola will leverage the Huiyuan brand, acquire other Chinese juice makers, then boost their output for export,” Lawrence Chor, analyst at Tai Fook Securities, told Reuters.

However, the acquisition is still up for regulatory approval and there’s no guarantee the deal will pass.

Takeover Opportunities Abound in Emerging Markets

Inbound mergers and acquisitions are notoriously difficult in China, where state interference and red tape ensnare corporations and nationalistic pride triggers protests against foreign companies seeking influence over popular domestic brands.

“There are two main difficulties,” Mei Xinyu, a researcher at the Chinese Academy of International Trade and Economic Cooperation, told Xinhua. “One is the large size of the two companies, which will raise concerns about monopolies. The second is that the brand of Huiyuan is considered to be protected as a famous domestic brand.”

In July, U.S. private-equity firm The Carlyle Group ended its Herculean effort to buy a stake in Xugong Group, one of China’s biggest manufacturers of construction machinery, after three years of attempting to plow through regulatory resistance.

There’s also the matter of the U.S. government preventing Chinese companies from acquiring U.S. assets.

In September 2007, Huawei Technologies Co. and Bain Capital Partners LLC launched a $2.2 billion takeover bid for Internet-equipment-maker 3Com Corp. (COMS). That deal was blocked when it was revealed that exposure to 3Com’s technology might allow China to eavesdrop on U.S. domestic conversations, or make Chinese networks harder to tap. Three years ago, CNOOC Ltd. (ADR: CEO), a unit of China’s top offshore oil and gas producer, was forced to abandon its $18.5 billion bid for Unocal, after a political uproar in the United States.

“If you think back to Unocal or 3Com, there is already [a] precedent for the Chinese government to return the favor and block any U.S. company from making too big a splash in its domestic market,” said the Oxford Club’s Basenese.

Whether Coke’s deal for Huiyuan goes through or not, another potential takeover target is Wimm-Bill-Dann Foods OJSC (ADR: WBD), says Basenese. WBD is Russia’s largest dairy company and a global manufacturer of dairy and juice products.

The company fell short of analysts’ expectations in the second quarter, as high raw milk costs and slowing demand pinched margins and led to just an 8.8% rise in net profit. However, sales jumped 26% to $760.1 million, and earnings before interest, taxes, depreciation and amortization (EBITDA) were up 21% from a year ago, reaching $93.1 million.

WBD could easily find itself in the crosshairs of Coca-Cola, Groupe Danone SA (OTC: GDNNY), or Coke rival PepsiCo, Inc. (PEP).

In March, PepsiCo spent $1.4 billion to acquire Lebedyansky JSC, a Russian producer of juice, juice drinks, nectars, ice tea, mineral water, baby juices and baby food. And it won’t stand pat if Coke succeeds in its bid for Huiyuan. And Danone, which owns one-fifth of Huiyuan, is a minority shareholder in WBD, as well.

Danone has already agreed to sell its stake in Huiyuan to Coca-Cola, and with such a generous offer on the table, is in the perfect position to reap a war-chest-filling windfall for its Huiyuan shares. With that cash on hand, many analysts believe that Danone may seek a larger stake in WBD, if not an outright takeover.

Danone appointed its senior executive to WBD’s board in 2007.

Source: China Huiyuan Quenches Coca-Cola’s Thirst for Foreign Exposure, but Still Faces Regulatory Scrutiny

And we concur: The BRICs are four markets investors need to carefully consider as places to put some of their money.

That’s why we here at Money Morning developed “The BRIC Report,” a new feature in which we’ll periodically update you on the latest developments in each of the BRIC economies and stock markets, and highlight some BRIC-related companies you might want to look at.
In Part I of this report, we analyzed Brazil and Russia. Here in Part II, we examine India and China.

India Intrigue

Given that its stock market is down 23% this year, you’re probably surprised to hear that India is my favorite of the BRIC economies. Even worse: India’s torrid economic growth is throttling back a bit, and there are signs of a credit crunch.

But investors need to hear the proverbial “rest of the story.” You see: If India had no problems, its stock market would be trading at 40 times earnings – and not 18 times earnings, as it is now. In other words, India could well represent a “double” for investors with the courage to buy in now and stay the course.

Without a doubt India remains one of the world’s great long-term growth plays, and investors today are likely getting in on the ground floor of a major long-term bull market.

India’s economic growth was 9% in 2007, and will be around 8% in 2008, so the overall market seems reasonably valued at the current multiple of 18. If India can get its political and economic houses in order, it has some very real prospects for a couple of generations of rapid growth before living standards start to approach the West and growth rates slow.

In the short-run, however, there are some potential pitfalls to be aware of. The current Indian government, in office since 2004, is a coalition between the Congress Party, which had ruled India for most of the period since independence without any great success, and the anti-market Communists. Although Prime Minister Manmohan Singh is a moderate, the government has seen India’s economic emergence as an opportunity to fund favorite projects and social programs.

The budget for the current fiscal year (ending next March) proposes an 18% spending increase, and that’s after spending rose 24% last year. The state budget deficit (federal plus local) is around 7% of gross domestic product; in any kind of recession, that could easily spike to the 10% of GDP level at which deficits become difficult to finance.

There is hope on the horizon: An election is due in May 2009, at latest, and the center-right opposition is currently leading in the opinion polls. But wise investors know better than to base their investment plan on something as uncertain as that.

India’s other big problem is inflation, currently running at 8% per annum, which is higher than short-term interest rates. Higher commodity and energy prices have affected India as they have other countries; India’s position is made more difficult by the poverty of much of the population.

The Indian government has restricted exports of rice and has subsidized other foods and gasoline (the latter makes no sense socially since automobiles are largely owned by the middle classes).

Needless to say, these subsidies and restrictions make the budget deficit worse, and will pose an additional problem when they are lifted and newly unfettered consumer prices soar in response.

Growth has now acquired huge momentum, and any conceivable Indian government will do no more than slow it temporarily. Furthermore, the economics of the contracted-out customer support and manufacturing services that India has built into a national mainstay – in the era of globalization and the Internet – is so compelling that it will inevitably continue to produce huge profits for decades to come. The question is not:
“Should I invest in India?” It’s actually: “How can I afford to ignore India?”

And the answer is: You can’t.

Stocks to consider would include Infosys Technologies Ltd. (ADR: INFY), the Bangalore-based software giant, which seems pretty invulnerable to Indian or global recession and is selling at a fairly reasonable 19 times current earnings and 20 times next year’s earnings.

Another possibility is the pharmaceutical company Dr. Reddy’s Laboratories Ltd. (ADR: RDY), a major generic drugs manufacturer that can expect to benefit from the expiration of many U.S. pharmaceutical patents in the next five years, and carries a fairly reasonable forward P/E ratio of 23.

Finally, you might consider India carmaker Tata Motors Ltd. (ADR: TTM), whose shares currently trade at about 8.5 times earnings. In the luxury end of the market, Tata recently bought Jaguar and Land Rover from Ford Motor Co. (F). And at the bottom end, Tata has grabbed global headlines with its $2,500 Nano, a car that’s 40% cheaper than anything else on the world market.

Charged Up Over China

As we’ve pointed out repeatedly, China is a huge opportunity: It’s already the third-largest economy in the world after the United States and Japan, and it quite possibly could be the world’s largest by 2025. Its stated growth rate is even higher than India’s, although Chinese economic statistics are pretty suspect. Nevertheless, apart from the qualms raised by the Chinese market’s six-fold increase in 2006-07, and current high valuations, there are significant weaknesses that should not be ignored.

The two biggest: China’s banking system and its high rate of inflation.

China’s banks were for years used as a piggy bank for state-operated industries, many of them major money-losers and some that were technically bankrupt. Instead of the state recording budget deficits by subsidizing rubbish, the banks would lend the money to the bad companies, recording them as current loans. The result was a mountain of bad debt in the Chinese banking system. Back in May 2006, Ernst & Young estimated the bad debt had reached $911 billion (an estimate Ernst and Young was forced to withdraw; after all, they do have a substantial auditing business in that country!).

Encouragingly, Chinese authorities are beginning to attack this problem: An estimated $130 billion of the country’s $200 billion sovereign wealth fund has been used to recapitalize parts of the banking system. Since China has $1.68 trillion of foreign exchange reserves, and the bad debts are presumably still only $1 trillion or so, China does have the financial wherewithal to solve the problem. However, using FX reserves to recapitalize the banks would be highly inflationary, providing an almost 50% increase in the money supply.

That brings us to the next problem: Inflation, which is rising sharply. China’s official inflation rate for the year ending in May is 8.3%, but the actual inflation rate is believed to be much higher.

China’s yuan has been allowed to appreciate against the dollar to combat this, but the real need is for higher interest rates, which are still below the inflation rate. It seems inevitable that China will suffer some kind of tight money crisis, in which the banking system is recapitalized and inflation conquered, while the real economy suffers accordingly. However, such a crisis has appeared inevitable for several years now, and it hasn’t happened yet.

Whether or not China suffers a short-term crunch, its long-term prospects are excellent. Its stock market remains highly illiquid, since much of the market capitalization represents state controlled companies, of which only a small portion are publicly traded. Given the problems in the banking system, financial services should be avoided, while P/E ratios in many other sectors are far above what would be considered appropriate in the West. Nevertheless, with the 30% fall in the Chinese market since last November, there are now some bargains to be found.

• CNOOC Ltd. (ADR: CEO), China’s major international oil company, is selling at a P/E ratio of about 15. Most of its exploration activity is concentrated in China’s offshore region, but it also has operations in Australia, Indonesia and Africa. CNOOC is central to China’ search for oil resources, and critical to its future growth.
• Yanzhou Coal Mining Co. (ADR: YZC), China’s largest coal miner, is rapidly ramping up production to meet soaring worldwide demand for coal: China alone is commissioning one new coal-fired power station per week. Selling at 17 times current earnings but only 12 times forward earnings, Yanzhou is benefiting from soaring coal prices, as well as rocketing demand.

Both CNOOC and Yanzhou are major, state-controlled behemoths. For a venture into China’s true private sector, consider a look at a medium-sized company that is active in generic pharmaceuticals in what is potentially a huge market in China for such products. That company is Simcere Pharmaceutical Group (SCR). Its shares are currently trading at about 15 times current earnings.

[Editor’s Note: Part I of this “Special Report” ran both on Friday and yesterday.]

By Martin Hutchinson
Contributing Editor

Source: Special Report: Hit the BRICs for a Global-Investing Double Play

So this morning, I cornered our research director, Theo. I wanted to know if he thought staying out of stocks completely is the best way to go.

“There’s certainly a lot of pain in store for shareholders,” say Theo. “Growth, both economic growth and earnings growth, isn’t going to be favourable to the FTSE. But there will be companies that offer protection. Companies that continue to be profitable, especially those that operate in foreign markets which are still growing.”

Theo’s looking at the FTSE on a stock-by-stock basis.

“The important thing to remember is that you’re not buying the index,” he says. “You want to identify those shares that will buck the trend. Easier said than done… but I’m looking at some really exciting companies right now.”

One of the companies Theo’s looking at appears on this year’s Goldman Sachs (GS) conviction list of 20 companies the investment bank is bullish on.

Theo is putting together a report on this company, together with two other investments he believes will perform even in the sticky patch up ahead. On Monday I’ll tell you how you can get your copy…

Stay tuned!

Another stain on an increasingly damaged reputation…

“This is another nasty episode in the life of the City,” writes Tom Bulford. “Another instance where the word of investors has not proved to be their bond; another instance in which the interests of private investors have been trampled upon with utter disregard; and another stain on the increasingly damaged reputation of AIM.”

The Alternative Investment Market (AIM) can be a highly profitable place to invest. But it can also treat you like dirt if you don’t have your wits about you. Sadly, this has been the experience of shareholders in one small company this week.

Tom suspects there’s something underhand going on here… fund managers, having lost millions of their investors’ money, are blaming anyone and everyone of anything and everything. Rather than just admit they made a mistake…

Profiting from oil’s “5-year bottleneck”

China Oilfield Services, which is the listed entity of the China National Offshore Oil Corporation (CEO) (CNOOC), is to buy Norway’s Awilco Offshore for around $2.49bn.

Colleague Garry White calls this “a very savvy move”. You see, with the price of oil at record highs, there’s a real incentive for producers to get their hands on the stuff. But there’s also a problem. Not enough oil rigs.

“There are currently 21 drill ships under construction that can drill in water up to 12,500 feet deep,” says Garry. “And all but three of them have already been contracted for an average of about five years.”

The ongoing rig shortage is a factor that will impinge on the supply of oil. Which, of course, is great news for Garry’s oil portfolio…

How to stage an investment coup — without firing a shot

Simon Mann was sentenced to 34 years this week for his part in the attempted coup in Equatorial Guinea (the one that rally driver and navigator extraordinaire Mark Thatcher was mixed up in).

Profit Hunter’s Manraaj Singh has followed the story with interest. Because he has two shares in his portfolio that allow him to benefit from the very resources Mann and co were willing to risk life and limb for.

Find out how you can stage your very own ‘investment coup’ — without having to overthrow an African government to do it.

Until tomorrow

Ben Traynor

Source: FTSE Enters Bear Market