They’re all from China..

China North East Petroleum (NEP)

• Independent Chinese oil and gas explorer operating four proven oilfields from PetroChina (PTR), the Jilin fields. It has a 20 year licensing deal for PetroChina’s Jilin Qian’an Oil Fields and guaranteed offtake and no marketing cost or accounts receivables risk.
• The first ten years PTR receives 20% of the produced oil as royalties, the second ten years this increases to 40% (but this is already reflected in all the numbers)
• Since PTR Jilin has done the 3D seismics, 100% of wells drilled have found oil
• NEP receives engineering and training assistance from PTR which allows NEP to acquire knowledge, experience, and cashflow to enable it to apply the knowledge elsewhere.
• PetroChina will award new development leases. PetroChina’s cost structure is higher than small independent companies like China North for the smaller fields. PetroChina is looking for partners with track-record and especially since the acquisition of Tiancheng, China North is very well positioned to receive new business from PetroChina. That became clear during a C.K. Coopers & Equities magazine investment converence on the 17th of September, when China North was only one out of two private companies invited to submit development bids for such fields in the last 6 years.

Metrics

• 25.85M shares outstanding
• Insiders own 31.2%
• Profit and operating margins 33.6% and 64%
• Cash 33.16M
• Debt 12.4M
• Operating cas flow 29.25M Leveraged free cash flow 13.76M (year to date)
• A single analyst expects sales for this year $63.4, 2010 $116.
• Profit 77 cent per share for this year (78-81 cent per the company) , $1.20 for 2010
• 5.4M barrels proven reserves
• On Dec 14, the company’s subsidiary Tiancheng (acquired in Sept.) signed a contract with PetroChina to drill 30 new wells
• In total, 60-70 new wells will be drilled in 2010
• Oil production almost 700,000 barrels from 284 wells

What we like

• Expanded strongly through difficult year
• Strong balance sheet, good operating metrics
• Buying Tiancheng, the largest private driller diversifies and exposes NEP to PetroChina developing new oilfields
• 100% of wells drilled have found oil
• Very low cost producer (Northern China)
• Very cheap with respect to balance sheet, operating margins, growth prospective. The company looks likely to be in the very early stages of establishing itself as one of the first strongly growing independent oil and gas producer, explorer and service company in China
• Possible upside through oil price (the analyst $1.20 estimate is based on $65 oil. $80 per barrel would raise that to $1.50), increased production, increasing proven reserve position, acquisition, new development leases

What we don’t like

• Uhh…
• Ok then, royalty payments to PetroChina set to double
• Techically still overbought

Technically

• Despite today’s sell-off, it’s still somewhat overbought
• However, considering the short and long-run potential we do not expect any major sell-off (bar some calamity), so we think it’s a good idea to start accumulating.