Win from China’s spending spree on crude oil stocks

China Investment Corp. (CIC) continues to catch investors’ attention by making a number of big purchases in the resource sector, including crude oil stocks. CIC is the Chinese government’s “sovereign wealth fund.”

Sovereign wealth funds have been around since the 1950s. They are state-owned investment funds that are usually financed by an economic surplus. Many Middle Eastern sovereign wealth funds, for example, are financed by state oil revenues. CIC is directly funded by the Chinese government, largely with U.S. dollar reserves accumulated through exports.

An aggressive move into the oil sands

On Wednesday, May 12, 2010, CIC announced that it will enter into a new joint venture with Penn West Energy Trust (symbol PWT.UN on Toronto). Penn West is one of the trusts we cover in our Canadian Wealth Advisor newsletter. (See below for further details on this safety-conscious oil and gas producer.)

Under the deal, CIC will pay $817 million for a 45% stake in Penn West’s oil-sands properties in the Peace River area of Alberta. The fund will pay $312 million up front, and $505 million to develop these properties. CIC will also pay $435 million for a 5% interest in Penn West.

This is CIC’s first investment in crude oil stocks that operate in the oil sands. (Although Chinese state-owned oil company Sinopec recently bought a 9.03% stake in the massive Syncrude project from ConocoPhillips [symbol COP on New York]).

However, the fund has made a number of large resource investments, including crude oil stocks. In 2009, it bought roughly 11% of Kazakh oil and gas company JSC Kaz Munai Gas Exploration Production. That move followed two other resource investments: $1.9 billion U.S. in PT Bumi Resources, a large Indonesian thermal-coal producer, and a 15% stake in the Noble Group, a Hong Kong-based commodities trader.

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Canadian investors, especially subscribers to our Successful Investor newsletter, will remember CIC’s purchase of 101.3 million shares of another favourite of ours, Teck Resources (symbol TCK.B on Toronto) for $17.21 each in July 2009. That gave CIC a 17.5% stake in Teck, which has gone up 76.5% since the deal.

Penn West’s high-quality assets make it attractive to foreign investors

It’s easy to see why Penn West caught CIC’s attention: it’s North America’s largest oil and gas trust, and it is focused on increasing its oil production. Penn West produces an average of 170,164 barrels of oil equivalent per day (weighted 60% to oil and 40% to natural gas).

The trust plans to expand production this year by spending $700 million to $850 million on capital projects. That’s up from $688 million in 2009. Moreover, Penn West will devote 75% to 80% of these funds toward its oil projects.

CIC will likely make more investments in Canadian crude oil stocks

CIC’s commodity investments stand out from the approach many other sovereign wealth funds are taking, especially those from the Middle East. Many of these funds have taken a more conservative line since the financial crisis caused steep losses in their portfolios.

CIC, by contrast, didn’t suffer big losses in the downturn. That’s because it chose to stay mostly in cash in 2008. Now it is enjoying an advantage over other sovereign wealth funds as it moves in lockstep with the Chinese government’s goal of securing access to natural resources, specifically oil and gas.

That’s good news for Canadian investors, because Canada’s vast energy reserves and political stability make the country a natural place for Chinese investment.

For our full analysis of Penn West and other resource investments appropriate for safety-conscious investors, you should subscribe to our Canadian Wealth Advisor newsletter. Click here to learn how you can get one month free when you subscribe today.