China’s Gone Bargain Hunting… and You Should, Too

by Trefis Team
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Submitted by Wall St. Daily using our Trefis Contributor Tool

You’ve likely heard that both oil demand and economic growth in China are slowing down.

Well, that’s true.

Yet China’s state-owned oil and gas behemoth, CNOOC Ltd. (NYSE: CEO), broke the bank this week, offering $15.1 billion for Canada’s Nexen Inc. (NYSE: NXY). That would make it the largest overseas acquisition ever made by a Chinese company.

So what gives?

Well, Chinese authorities understand that the pullback we’re experiencing is only temporary. In the long term, oil demand in China (and around the globe) is going to skyrocket – as are oil prices.

In fact, many energy stocks have been seriously beaten down, making now the perfect time to go bargain hunting.

CNOOC’s acquisition of Nexen is no exception.

At $27.50 per share, CNOOC’s willing to pay a 61% premium over Nexen’s Friday close.

That may sound like a lot. Especially considering Nexen’s stock has been hammered over the past year. It’s lost about one-third of its value, thanks to production delays in the North Sea and the slump in oil and natural gas prices.

But if you look at Nexen’s assets in Canada, the UK, West Africa and the Gulf of Mexico, you’ll see that CNOOC is acquiring reserves equal to 900 million barrels of oil equivalent – at a price of just $19.94 a barrel.

CNOOC recognized that Nexen’s assets are ripe with potential, and it scooped them up at a serious discount – a move that will pay off (big time) for the company in the long run.

What’s more, there are plenty of other opportunities like this one out there for the average investor.

Energy Stocks on the Bargain Rack

The key watchword in the energy market right now is “volatility.”

Indeed, natural gas prices are still very low, but they’ve surged nearly 50% since mid-April. And oil prices are bouncing up and down as traders try to balance weak demand with the prospect of additional stimulus.

With so much uncertainty, many energy companies (like Nexen) are undervalued.

Bloomberg recently pointed out that energy stocks are trailing the S&P 500 by 43 percentage points since March 2009, which has reduced valuations to 9.5 times 12-month earnings. That’s 28% below the S&P 500′s multiple of 13.3, and the biggest discount since September 2009.

Take Chesapeake Energy (NYSE: CHK) and Devon Energy (NYSE: DVN), for instance. Both stocks have been ravaged by plunging natural gas prices, and they’re currently trading at steep discounts…

Chesapeake’s current P/E ratio is a paltry 7.97, while Devon’s is 11.3. That compares to 16.8 for the industry average.

And they’re not alone…

  • ExxonMobil (NYSE: XOM) is currently valued at just 10.3 times earnings.
  • Oilfield service providers Halliburton (NYSE: HAL) and Baker Hughes (NYSE: BHI) are trading at multiples of 9.3 and 10.96, respectively.
  • Drilling companies Atwood Oceanics (NYSE: ATW) and Diamond Offshore (NYSE: DO) are trading at respective multiples of 10.3 and 10.83.
  • And CNOOC itself has a P/E of 7.82.

These are strong companies with good prospects. And while there are currently too many variables to predict which way they’ll trade in the short term, they’re safe long-term bets that should shoot significantly higher as natural gas and oil gain momentum.

It doesn’t hurt that companies like Exxon and CNOOC are also kicking out a nice dividend.

So if you have the mettle and focus to hold out for longer-term gains, don’t be afraid to place a bet or two on the players above.

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