NEW YORK (TheStreet) -- China North East Petroleum (NEP), a small crude oil exploration and production company, appears to be undervalued, but the company's uncertainties and risks mean value investors may want to steer clear.
As of the end of September, the company operated 292 wells in four fields, with a total of about 6.1 million barrels of proven reserves. China North East Petroleum's largest field (by far) is Qian'an 112, which holds about 5.8 million barrels of reserves. NEP holds a 20-year exclusive lease for this field with PetroChina (PTR).
All of China North East Petroleum's oil is sold to PetroChina's Jilin Refinery at the average daily rate for what Platts terms "sour, heavy Indonesian" crude. This price is lower than the more commonly stated West Texas and London Brent varieties.
In 2009, NEP purchased Tiancheng, which provides oil drilling services. Tiancheng has eight drilling teams utilizing eight rigs and drills on contract from PetroChina and other private oil companies. This unit gets paid based on the depth of each well drilled. This has been a nice addition for NEP. In the third quarter, Tiancheng actually contributed more revenue than oil sales ($10.1 million vs. $9.9 million, respectively), although it is a lower-margin business.Clearly there are a lot of things to like about the company. Higher oil prices seem here to stay. Aside from the recessionary period of late 2008 and early 2009, crude oil has consistently sold at above $60 a barrel since 2005. Increasing demand, more expensive extraction and inflationary concerns all are conspiring to maintain high prices for the foreseeable future. In China the situation is even more favorable, as oil demand is increasing by nearly 7.5% a year and the country is desperate to limit imports by finding more sources domestically. Revenue is set to grow almost 70% in 2010 due to crude prices being about 15% higher and because of the new drilling operations. Management has outlined its strategy to stockpile cash for major new field acquisitions in the near future. Tiancheng has additional drilling contracts under negotiation which should add to the top line. Certainly, there is no shortage of growth avenues.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV