Your Best Play on Oil's Move to Asia

Your Best Play on Oil’s Move to Asia

by | published April 12th, 2017

I don’t usually do this, and it’s doubtful I ever will again. But Asia is quickly becoming the center of global oil demand, and it’s crucial that investors know how to profit. I recently showed my premium Energy Advantage members just how to do that – and they’re already up almost 15%. But this shift is changing energy markets so fundamentally, I had to show this recommendation to you too.

Our entry back into a range of U.S. oil and natural gas investments is awaiting the sluggish return of a workable production balance.

High-yield (i.e. junk) energy bonds now yield more than 20%, which is simply unsustainable.

And with oil trading in the $50s per barrel in New York, there will be another round of bankruptcies and consolidations in the sector.

This shakeup will make for some explosive plays.

But the current action remains on the demand side – which right now means Asia, where demand is concentrating.

In fact, the consumption of both energy as a whole and crude oil in particular are moving strongly to the continent.

Consistent indicators and analyses point toward this remaining the dominant trend for at least 20 years, if not more.

By the time we reach the next decade, India will be Asia’s main “energy dynamo.” But for now, China remains the primary driver in the region’s demand.

And that brings us to our newest play…

We’re Adding the World’s Largest Refiner Back to the Portfolio

Today we’re moving back into China Petroleum & Chemical Corp. (SNP), also known as Sinopec Limited.

It’s already up almost 10% in the last month alone, but this latest uptick signals more than simply an improving outlook.

As the largest refiner and oil product distributor in Asia, as well as a government favorite, the environment is much better than when we last held it.

For one thing, Sinopec has become more of a regional player. That not only buttresses the company’s outlook as Asia as a whole spiking on the demand side, it also allows this central player the option of cross-border hedging.

For another, as a recipient of significant support from Beijing, Sinopec has the additional leverage (provided by the authorities) necessary to overcome local regulatory and pricing bumps.

And then there are the great bottom line considerations…

These Two Numbers Alone Make Sinopec a Buy

SNP has been receiving a number of analyst upgrades over the past several weeks. There are several figures I could turn to here to show the company’s prospects, but one stands out above the rest…

The relationship between Sinopec’s market cap, around $90 billion, and its roughly 1.2 billion outstanding shares.

The company’s market cap is the single best reflection of its existing assets, working capital, and revenues.

And with both market cap and shares outstanding being high, individual shares end up being far less volatile.

Put simply, there are too many shares out there (and the company is too valuable) for any one event or trader to noticeably move the share price.

Given that stability, the stock should perform better than smaller companies that are not as well situated.

Of course, any investor interested in Sinopec must first deal with the sound-bite mantra repeated by way too many pundits: “The Chinese economy is cooling off.”

As usual, this “scare factor” approach is based on a skewed view of what’s going on…

Energy is More Important in China than Ever

Economic expansion takes place in cycles; it’s hardly a uniform acceleration.

In fact, if it was a straight line up, this heated rise would not be desirable, as it would quickly lead to inflation and downward pressure on the domestic currency.

Now, energy needs are an endemic part of economic life, especially in a country like China. Those needs dictate the foundation of government policy, and are a main force shaping Beijing’s foreign posture.

Just look at China’s recent acquisitions of fields and production in other countries, including a $1.3 billion deal for Texas oil fields and a $7.3 billion deal for Swiss oil explorer Addax Petroleum.

Or think about the “One Belt, One Road” plan (also known as the “New Silk Road”), which will see China spend an estimated $4 trillion to $8 trillion on transportation and energy infrastructure across Asia, and beyond.

One of the goals is to secure alternative energy supply lines in case China’s ports ever come under a naval blockade.

And don’t forget the broader flashpoints, such as China’s contest with its neighbors over the South China Sea and the huge oil and gas reserves hidden underneath it.

In other words, energy dictates much more than simply percentage points in GDP. There, the Chinese picture remains quite positive.

If anything, energy is likely to expand its economic impact over the next several years.

And that makes Sinopec more important to the overall Chinese outlook than it has ever been.

Combine that with analyst market upgrades across the board, the prospect for protection of the stock price on the downside, and cash flow providing a healthy 4.33% dividend yield, and it’s time for us to move back in.

Editor’s Note: This isn’t the only revolutionary change in world energy that Kent is tracking. He also just released a new set of briefings on a new super-fuel – one gallon of which could get you from New York to L.A. and back seven times. In fact, this “crystal fuel” is 1,693 times more powerful than the gasoline that runs your car. Now, the mainstream investment media aren’t even talking about it yet, but it could make early investors huge short-term gains. Click here for details.

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  1. Christine jacoby
    April 29th, 2017 at 14:33 | #1

    I am curious your opinion on BP Oil stock- I inherited and wonder if safe to keep portfolio with majority in it.

    Thank you.

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