The Senkaku Islands are a remote group of uninhabited and undeveloped islands in the East China Sea.
These islands have little commercial or military value. In fact, they are considered so inconsequential that they have been used as practice targets for military training sessions.
Then why are Japan, Taiwan, and China suddenly embroiled in a very public dispute over ownership of this group of these seemingly worthless islands?
That’s because they sit astride rich fishing waters and, more importantly, potentially gargantuan reserves of natural gas. Whoever owns these islands will own the internationally recognized drilling rights for up to 12 miles from land.
Troubled Waters Create a Ripple Effect
In whose hands will the Senkaku Islands — called the Diaoyu Islands by the Chinese — end up? Tensions are flaring up as the battle for this resource-rich area intensifies.
Last week, the Japanese Coast Guard fired water cannons on 40 fishing boats and eight coast guard vessels from Taiwan.
In China, outbreaks of venomous anti-Japanese protests have erupted. Japanese businesses throughout China have been vandalized, fire-bombed, sabotaged and looted.
Panasonic, Honda, Nissan, Toyota, Mazda, Mitsubishi, Yamaha, Komatsu, Hitachi, and Canon all closed Chinese-based plants. In Japan, retailers Aeon, Fast Retailing, Ryohin Keikaku, and Seven & I Holdings closed stores.
Meanwhile, China’s Vice Minister of Commerce, Jiang Zengwei, has publicly encouraged Chinese consumers to boycott Japanese goods.
Perhaps the worst incident was the senseless beating of a 51-year-old Chinese man just because he was driving a Toyota Corolla. The man is now paralyzed and unable to speak.
Japan isn’t the only country having maritime boundary disputes with China. The Chinese are also in disputes with Vietnam, the Philippines, Malaysia, Brunei and Indonesia over portions of the South China Sea.
But make no mistake: All these disputes are over billions of dollars of oil and natural gas deposits that lie in the bottom of the oceans in question.
The Expected Winner in the China Seas
Resource Wars: Investors
Within this reality is an opportunity for you to make money — lots of money — by investing in the companies that are capitalizing on those rich maritime energy reserves.
The best one of all may be China National Offshore Oil Corporation (CEO), better known as CNOOC. In fact, it may be the best energy company in the world … period.
CNOOC may strike a bell for you. Many Americans know it best for the outrage it generated when it offered $18.5 billion to buy Unocal, the ninth-largest energy company in the world, in 2006.
Even without Unocal, CNOOC is the king of the Chinese oil and natural gas business with 37,000 employees. Its main operations are off the coast of China — the Bohai Bay, Western South China Sea, Eastern South China Sea, and East China Sea. It also owns interests in oil and gas properties in Indonesia, Australia, Canada, Morocco, Nigeria, and Myanmar.
Headquartered in Beijing, CNOOC is the state-owned oil exploration company that has the overall responsibilities for the exploration and development of oil and gas resources in offshore China.
More importantly, it is the ONLY company authorized to enter into production-sharing contracts with foreign energy companies.
This is key because it allows CNOOC to shove the risk and expense of exploration onto its foreign partners while enjoying all the financial rewards.
China’s Natural Gas Push
A byproduct of China’s rapid growth is its staggering amount of pollution. In fact, the smog is so thick in most large Chinese cities that I wouldn’t even consider spending the extra money for a room with a view.
The pollution is so bad that parents routinely make their children wear protective face masks to keep from breathing the filthy air.
The World Bank estimates that 16 of the world’s 20 most-polluted cities are in China. The biggest air-pollution culprits are coal-fired power plants, which supply two-thirds of China’s energy.
That’s why China’s government has pledged to increase its use of natural gas … and why the state-owned CNOOC stands to benefit.
Numbers You Can Love
Get this: CNOOC has delivered an average 26.3% return on equity over the last seven years. To put that in perspective, the average return on equity for U.S. companies over the same time period was 12%, making CNOOC’s figure more than double the U.S. average.
Plus, CNOOC has grown its profits at an impressive 25% annualized rate over the last seven years.
Despite that growth, CNOOC is trading for only nine times earnings and has a PEG ratio of 0.59. A PEG ratio is a company’s price-to-earnings ratio divided by its annual EPS growth. A ratio below 1.0 generally signals an undervalued company. So, at 0.59, CNOOC looks significantly undervalued.
Another reason to like CNOOC: It pays $3.48 per share a year in dividends. That dividend has been increased by an average of 18% a year over the last seven years. It has done so with a dividend payout rate of only 35%, leaving plenty of room for appreciation and future dividend increases.
CNOOC trades right here on the NYSE as an American Depository Receipt, or ADR, so it is as easy and cheap to buy as ExxonMobil (XOM).
Now, I’m not suggesting you rush out and buy CNOOC tomorrow morning. As always, timing is everything, and I really can’t give you a buy signal … that’s reserved for The Asian Century members.
Make no mistake, though. All that fighting going on in the oceans surrounding China is because of the extremely valuable natural gas reserves buried at the bottom of those ocean floors. And CNOOC is the company best-positioned to profit from its extraction.
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