Asian energy firms get a buy rating from Merrill Lynch

Asian energy firms get a buy rating from Merrill Lynch
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First Published: Fri, Dec 14 2007. 12 16 AM IST

Oil rush: An ONGC oil drilling platform at Bombay High, India’s biggest offshore oil field. Increasing demand for energy has motivated the company to raise its exploration budget.
Oil rush: An ONGC oil drilling platform at Bombay High, India’s biggest offshore oil field. Increasing demand for energy has motivated the company to raise its exploration budget.
Updated: Fri, Dec 14 2007. 12 16 AM IST
Hong Kong: Asian energy stocks are the best performers in the region in 2007, as the price of crude oil climbed above $99 (Rs3,900) a barrel. They’re still worth buying, Merrill Lynch & Co. said.
PetroChina Co., which overtook Exxon Mobil Corp. as the world’s largest company this year, is cheap relative to earnings prospects, said Stephen Corry, an investment strategist at Merrill’s private banking unit, which oversees $1.8 trillion worldwide. Oil services companies such as Malaysia’s KNM Group Bhd will benefit from increased exploration activities, he said. “Energy as a whole is a good sector to be in,” Corry said. “If you believe that oil prices are going to be higher for a long time, then this is the place to be.”
Asian energy shares have outperformed global peers owing to record profits among Chinese and Indian producers, which are benefiting from demand in the world’s fastest growing major economies.
Oil rush: An ONGC oil drilling platform at Bombay High, India’s biggest offshore oil field. Increasing demand for energy has motivated the company to raise its exploration budget.
That demand has motivated energy companies such as PetroChina and rival Cnooc Ltd to expand oil and gas output while Oil and Natural Gas Corp. (ONGC), India’s biggest explorer, is raising its exploration budget.
Merrill has “buy” recommendations on PetroChina, China Petroleum and Chemical Corp., the country’s biggest refiner, and ONGC. The investment bank assigns Singapore-based Keppel Corp., the world’s largest maker of oil rigs, the same rating.
Best performing stocks
The MSCI Asia Pacific Energy Index has climbed 70% this year, making it the best performing of the MSCI Asia Pacific Index’s 10 industry groups. The energy measure’s advance beats a 31% gain by the corresponding gauge in the US and a 6% increase by European energy stocks.
Three years of outperformance has valued the Asian energy index at 19 times estimated earnings, more than the 14 times for the US and 11 times for the MSCI Europe Energy Index.
Earnings per share of the 48 companies on the MSCI’s energy benchmark are estimated to rise 7.6% this fiscal year from last year, surpassing a 2.8% gain in the US and a 0.8% drop in Europe, according to data compiled by Bloomberg.
“I do prefer Asian names,” said Don Gimbel, who holds shares of Cnooc among the $1.8 billion he manages at New York-based Carret & Co. “The reason for picking Asia over the rest of the world is obvious. That’s where demand is.”
New reserves
PetroChina’s Hong Kong-listed shares are valued at 16 times 2007 profit, more expensive than Exxon’s 13 times. Even so, the Chinese company’s earnings this year are estimated to grow about 10% from 2006, greater than its US rival’s 7%. PetroChina has been adding new reserves at an average annual rate of 5% for the past three years, company figures show. That’s a faster pace than Exxon, Royal Dutch Shell Plc. and BP Plc., the world’s largest oil companies by sales. “I definitely think that among the oil producers, PetroChina is still very cheap,” said Corry, who on 10 July deemed Pakistani stocks “inexpensive”. The Karachi Stock Exchange 100 Index gained 4.8% since then, more than the MSCI Asia Pacific measure’s 1.3% advance.
Shares of Cnooc, China’s biggest offshore oil producer, climbed 76% this year. The company will increase production by as much as 11% annually over the next few years, chief financial officer Yang Hua had said on 27 November.
Oil prices
ONGC reported record second quarter profit in October. The state-run oil producer plans to increase exploration spending by 5.4% in the fiscal year starting April, chairman R.S. Sharma has said.
These expansion plans and profits have unfolded in a year where New York oil futures climbed 44%, set for the biggest gain since 2002, amid concern global oil supplies were insufficient to feed demand. China’s crude oil imports rose for a 13th month in November, government figures on Wednesday showed. India imports almost three-quarters of its energy needs.
Crude oil futures rose to a record $99.29 a barrel on 21 November. The contract for January delivery was recently at $94.09. Oil futures have risen 54% this year. “The supply of crude is falling worldwide, but the demand for oil is going up,” said Puru Saxena, chief executive of Puru Saxena Ltd, a Hong Kong-based fund manager. “We’ve invested our clients’ money in energy.”
The increase in exploration activities bodes well for earnings of companies such as Malaysia’s KNM, which makes pipe systems, reactors, storage tanks and other equipment for the oil and gas industry.
KNM may buy an unidentified rival for 2 billion ringgit (Rs2,375 crore), the Star newspaper reported on 7 December. In response, the company said it was looking for acquisitions, although negotiations had not been finalized. KNM shares have surged 223% this year, compared with a 29% increase in the benchmark Kuala Lumpur Composite Index.
Singapore’s Keppel, whose shares surged 51% this year, said last month a unit won a $780 million contract to build four jackup rigs for Rowan Companies Inc., a US oil and gas driller.
“Energy stocks should go a lot higher given the oil prices and where they’re heading,” Saxena said. “We’re likely to see a re rating.”
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First Published: Fri, Dec 14 2007. 12 16 AM IST