China Energy Industry

Beware the “economic fundamentals” of politically-backed companies

(March 19, 2014) A corruption scandal in China involving the country’s largest, state-backed oil companies has some analysts talking about a “buying opportunity”, but investors would be right to proceed with caution.

by Brady Yauch for Probe International

An ongoing corruption scandal in China that has engulfed some of the country’s largest state-owned oil companies is being touted as a buying opportunity by some, but investors would be right to be cautious when betting on government-backed companies.

In an article for Seeking Alpha, Nicholas Pardini, a “contrarian…hedge fund manager” says that the corruption allegations facing senior management at state-owned China National Offshore Oil Corporation (CNOOC) “may hurt investor confidence, but they do not diminish the economic fundamentals or the financial health of the company.”

But what Pardini doesn’t consider is that the very public push by Chinese leaders to tackle corruption could – if taken far enough – severely shake up the protected oil industry, which currently works as an oligopoly made up of three, state-backed companies. If that happens, the “economic fundamentals” that make companies like CNOOC an attractive investment may no longer hold true.

In a country like China, where political and economy are one in the same, “economic fundamentals” can’t be separated from “political support.” Take away one and other the falls as well.

Corruption Scandal Creates A Buying Opportunity For CNOOC

 Summary

  • CNOOC is among the emerging market oil majors that is near mulit-year lows despite high oil prices.
  • Corruptions scandal amongst management and China hard landing concerns have hurt stock price, but not core business.
  • Stock is trading at bargain P/E and oversold technically, so buying opportunity is coming shortly.

Read the full article here.

Brady Yauch is an economist at Probe International

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