5 Energy Stocks From China and India With Upside

NEW YORK (Karvy) -- Stocks like China Petroleum & Chemical (SNP) and PetroChina (PTR) from China and Oil India Limited, Oil and Natural Gas Co. and Reliance Industries from India are stocks to watch in the energy space as crude oil prices reached $90 a barrel earlier this month.

Emerging economies such as China and India are sustaining oil demand, given the flat scenario in most of the developed countries. Wood Mackenzie, the independent energy and metals research consultant firm, suggests that both diesel and gasoline demand in China is growing 8% annually. In India, diesel and gasoline are growing at 7% and 11%, respectively.

In fact, during the past decade, energy needs in China and India have doubled with the countries becoming the second- and fourth-largest consumers, respectively.

Global oil demand is expected to breach the peak levels reached in 2007, according to Wood Mackenzie. Global oil demand in 2010 is likely to reach an annual average of 86.7 million barrels a day (mbd) and grow further to 88.1 mbd in 2011. Worldwide, oil demand is poised to grow by 2.5 mbd in 2010, one of the largest growth rates on record, according to the consulting firm.

Reliance Industries is the largest private-sector company operating in segments like petrochemicals, refining, and oil and gas.

The company posted strong results for the second quarter ended Sept. 30, driven primarily by higher refinery throughput and gas production volumes. The company's net revenue increased 23% year over year, operating margins expanded 94 basis points, and net profit rose 28% year over year during the quarter.

Reliance's refinery utilization is expected to remain high at around 109%, while gross refining margins are likely to improve over the next six to12 months to $9 to $10 a barrel. However, polymer margins are likely to shrink during the second half of fiscal 2011 due to the addition of around 12.6 million metric tonnes (MMT) of new low-cost ethylene capacity in the Middle East and South East Asia in 2010.

Further, the company expects to sustain oil and gas production in the KG basin at current levels at least over the next three to four quarters. However, the company's spate of shale gas acquisitions in the U.S. adds a net 11.8 trillion cubic feet equivalent of hydrocarbons to RIL's portfolio and to earnings beginning in 2012-2013.

The stock is trading at a price to earnings of 15.5 times its estimated 2012 earnings and 8.2 times on enterprise value per earnings, before interest tax depreciation basis.

Oil and Natural Gas Co. is a Fortune 500 company and is the largest energy explorer in India.

ONGC's total crude oil production in the second quarter ended Sept. 30 improved 3.3% year on year to 6.85 million metric tonnes. The increase is attributable to higher output from Cairn India's fields, in which the company holds participating interests. Besides, gross crude realizations increased by 12% year on year to $80 a barrel. Production from the Carabobo project in Venezuela is expected to start in 2013.

The company's balance sheet is strong with cash and cash equivalents amounting to around $6 billion to $6.5 billion. The company is proposing a follow-on public offer after January 2011 as the government plans to divest a 5% stake in the company, thereby increasing the liquidity in the counter. Management may also consider a 2-for-1 stock split and a 1:1 bonus issue, ahead of the follow-on offer.

ONGC is likely to perform strongly in the upcoming quarters on the back of gas price hikes and deregulation of petrol and diesel prices. The stock is trading at 10.5 times its estimated 2012 earnings.

PetroChina is a China-based oil and gas producer and distributor.

The steady recovery in the macro economy is stimulating consumption growth in the downstream fields. During the third quarter, average daily sales of petroleum products reached 0.33 million tonnes -- the highest achieved in any single quarter.

Realized crude prices reached around $72 a barrel, up 45% year over year, a major driver for third-quarter earnings. Realized gas prices reached $3.74 per million cubic feet, up 10%, following gas price hikes since June 1. Overall, exploration and production accounted for about three-fourths of the company's revenue, with gas contributing 10%. Any price reforms for natural gas would be positive for the stock.

The company owns more than 70% of India's crude oil and natural gas reserves, which augurs well in the long term. Analysts upgraded earnings by 7% and 10% for 2010 and 2011, respectively. The stock is trading at 14 times its 2011 earnings.

Oil India Ltd. is the state-run oil major engaged in the business of exploration and production of crude oil and natural gas, transportation of crude oil, and production of liquefied petroleum gas..

Oil India reported net profit growth of 13% year on year, higher than analysts' estimates. The increase over the previous quarter was largely on account of lower subsidy payments and higher gas revenue as Oil India enjoyed the benefits of higher gas prices after the government almost doubled gas prices to $4.2 per million British thermal unit (MmBtu), effective June 1. The higher subsidy share payout to downstream oil companies will likely be an overhang on the stock over the next few quarters.

The second quarter of fiscal 2011 saw oil production at 6.9 million barrels of oil equivalent, showing a 3% year-on-year growth as production returned to higher levels after a shutdown resulted in reduced oil volumes during the first quarter.

The company is trading at 11.5 times its estimated 2012 earnings with probable upsides to accrue due to reforms in retail fuel pricing, new discoveries, and possible overseas acquisitions.

China Petroleum & Chemical, also known as Sinopec, is a China-based integrated oil and gas and chemicals company.

Sinopec, China's largest refiner, owns eight of the top 10 refineries in the country. With the government's new refined oil pricing mechanism, effective since the end of 2008, Sinopec's refining business has turned around after years of losses. Although rising international crude oil prices may hamper refining margins, analysts expect limited downside, given the moderate crude oil price projection of $90 per barrel for 2011.

Puguang Gas Field, which began operations in December 2009, reported annual production and transportation capacity of around 12 billion cubic meters, which could be a key growth driver over the next three years.

Total capacity could reach 15 bcm per year after production begins in the Yuanba block by 2012. Management expects production from Puguang's main block to continue for more than 20 years.

Other triggers include upstream asset injections from its parent company, China Petrochemical Co. appreciation of the renminbi, and changes to its refined product pricing mechanism. Te stock is trading at around eight times its estimated 2010 earnings, at a 30% discount to its closest peers.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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