Topic: Energy Stocks

Win with the Chinese spending spree on commodity investments

China Investment Corp. (CIC) has caught a lot of investors’ attention recently with a string of big purchases of commodity investments in the resource sector. 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 impressive string of commodity investments

Last Wednesday, CIC bought roughly 11% of Kazakh oil and gas company JSC Kaz Munai Gas Exploration Production for $939 million U.S. The move follows two other recent commodity 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 conglomerate and commodities trader, for $850 million U.S.

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Canadian investors, especially subscribers to our Successful Investor newsletter, will remember CIC’s purchase of 101.3 million shares of Teck Resources (symbol TCK.B on Toronto) for $1.7 billion in July. That gave CIC a 17.5% stake in Teck.

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 last year. Now it is enjoying an advantage over other sovereign wealth funds as it moves in lockstep with the Chinese government’s goal of securing long-term access to natural resources, specifically oil and gas.

Canada’s political stability makes it a natural for Chinese commodity investments

CIC’s interest in the oil and gas sector is good news for Canadian investors. That’s because Canada’s vast energy reserves and political stability make the country a natural place for Chinese commodity investments.

In the current Canadian Wealth Advisor, we take a close look at two oil and gas trusts, Enerplus Resources Fund (Toronto symbol ERF.UN) and Pengrowth Energy Trust (Toronto symbol PGF.UN), that could benefit from heightened Chinese investment in Canada’s energy sector.

Enerplus is one of North America’s largest oil and gas trusts. It continues to build a well-diversified portfolio of properties and balances these between low-risk, conventional assets and higher-risk endeavours, such as oil-sands development. The company is also actively seeking to recover gas from shale formations. This leading-edge technique is not without risk, but these areas are typically larger than regular gas formations, and last longer.

Pengrowth produces oil and natural gas in western Canada and off the coast of Nova Scotia. The trust has seen falling revenue and cash flow in recent months, but its debt is reasonable. It has also skilfully used hedging contracts to lock in selling prices that are much higher than today’s prices. These factors put Pengrowth in a strong position to prosper with an economic rebound.

While China Investment Corp. may not invest in Enerplus and Pengrowth directly, its interest in oil and gas highlights the Canadian resource sector’s profit potential. For resource investments well suited 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.

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