Bloomberg: Asian Energy Stocks Worth Buying, Merrill Lynch Says (Update2)

By Darren Boey

Dec. 13 (Bloomberg) — Asian energy stocks are the best performers in the region in 2007, as the price of crude oil climbed above $99 a barrel. They’re still worth buying, Merrill Lynch & Co. says.

PetroChina Co., which this year overtook Exxon Mobil Corp. as the world’s largest company, 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,” Hong Kong- based Corry, 37, said in an interview. “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.

That demand has motivated energy companies such as PetroChina and rival Cnooc Ltd. to expand oil and gas output while Oil & Natural Gas Corp., India’s biggest explorer, is boosting its exploration budget.

Merrill has “buy” recommendations on PetroChina, China Petroleum & Chemical Corp., the country’s biggest refiner, and on India’s Oil & Natural Gas. 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 percent 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 percent gain by the corresponding gauge in the U.S. and a 6 percent 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 U.S. 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 percent this fiscal year from last year, surpassing a 2.8 percent gain in the U.S. and a 0.8 percent 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, which climbed 37 percent this year to yesterday, are valued at 16 times 2007 profit, more expensive than Exxon’s 13 times, Bloomberg data show. Even so, the Chinese company’s earnings this year are estimated to grow about 10 percent from 2006, greater than its U.S. rival’s 7 percent.

Beijing-based PetroChina has been adding new reserves at an average annual rate of 5 percent 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 July 10 deemed Pakistani stocks “inexpensive.” The Karachi Stock Exchange 100 Index gained 4.8 percent since then, more than the MSCI Asia Pacific measure’s 1.3 percent advance.

Shares of Cnooc, China’s biggest offshore oil producer, climbed 76 percent this year. The company will increase production by as much as 11 percent annually over the next few years, Chief Financial Officer Yang Hua said on Nov. 27.

Oil Prices

India’s Oil & Natural Gas on Oct. 30 reported record second- quarter profit. The state-run oil producer plans to increase exploration spending by 5.4 percent in the fiscal year starting April 2008, Chairman R.S. Sharma said on the day.

These expansion plans and profits have unfolded in a year where New York oil futures climbed 44 percent, 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 yesterday showed. India imports almost three-quarters of its energy needs.

Crude oil futures rose to a record $99.29 a barrel on Nov. 21. The contract for January delivery was recently at $94.09. Oil futures have risen 54 percent 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.”

KNM, Keppel

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.

“Oil services is definitely the sector with the secular long-term growth,” said Merrill’s Corry, who joined the investment bank in 2002. “There’s going to be a continuation of a search for oil.”

KNM may buy an unidentified rival for 2 billion ringgit ($599 million), the Star newspaper reported on Dec. 7. The company said in response it was looking for acquisitions, though negotiations had not been finalized. KNM shares have surged 223 percent this year, compared with a 29 percent increase in the benchmark Kuala Lumpur Composite Index.

Singapore’s Keppel, whose shares surged 51 percent this year, said on Nov. 2 a unit won a $780 million contract to build four jackup rigs for Rowan Companies Inc., a U.S. oil and gas driller.

Oil services companies are among the shares that fund manager Saxena is invested in, as well as those of PetroChina.

“Energy stocks should go a lot higher given the oil prices and where they’re heading,” he said. “These oil stocks valuations should be a lot higher. We’re likely to see a re- rating.”

To contact the reporter on this story: Darren Boey in Hong Kong at [email protected]

Last Updated: December 13, 2007 02:05 EST