Money Morning Mailbag: Rising Global Energy Demand Is Providing Key Investor Opportunities

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Energy companies reported robust third-quarter profits this week in another sign that rising global energy demand is something investors can't afford to ignore.

Exxon Mobil Corp. (NYSE: XOM) reported yesterday (Thursday) its third-quarter net income rose 55% from a year earlier to $7.35 billion, or $1.44 a share – the biggest jump in six years. Royal Dutch Shell PLC (NYSE ADR: RDS.A, RDS.B) reported its third-quarter profit rose 18% from the year before, noting it's in a "delivery window for new growth," and ConocoPhillips (NYSE: COP) said its third-quarter profit more than doubled.

"Global oil demand implications have continued to surprise to the upside," Barclays Plc (NYSE ADR: BCS) analysts wrote in an Oct. 20 note to clients.

Money Morning Chief Investment Strategist Keith Fitz-Gerald addressed the importance of energy industry investing earlier this week on a Fox Business Network appearance.

"I think investors want to concentrate on those trends that are virtually unstoppable, things that literally have trillions of dollars behind them – infrastructure and energy being the two dominant ones on the planet," Fitz-Gerald said in an interview with Fox's Stuart Varney.

Increased global demand for oil and energy resources is not only boosting company profits, but is also what's been pushing China to invest billions of dollars globally in oil and natural gas opportunities.

China's state-owned energy company China National Offshore Oil Corp. (CNOOC) (NYSE ADR: CEO) on Oct. 10 announced it would pay $1.08 billion for a 33% stake in Chesapeake Energy Corp.'s (NYSE:CHK) Eagle Ford shale acreage in Southern Texas. CNOOC planned to invest an additional $1.08 billion by paying 75% of Chesapeake's drilling and completion costs in coming years, allowing Chesapeake to tap hard-to-extract shale gas deposits and boosting its weak balance sheet.


The deal prompted the following letter from a reader concerned with China's eager global energy plays and how they will affect the United States' energy situation.

How can we continue to speak of energy independence and national security goals and ignore the announcement of a $2 billion Chinese venture involvement with one of our nation's largest independent oil and gas companies (Chesapeake) in a major domestic South Texas oil development?  The Chinese join Indian and Korean government ownership in the very U.S. resource we claim to need to develop for the sake of our security.

I question why, other than industry news, there is no press mention of the direction we are heading.  With China loaded with our debt, why is there no question being asked regarding them coincidentally beginning to acquire ownership in onshore U.S. resources?

– Mark W.; Austin, TX

Fitz-Gerald, who has followed China's oil and gas trends, says that while certain elements within our government are probably aware of China's actions, for the most part they are ignoring the striking economic impact. This ignorance is why there is little media coverage on the future consequences of foreign companies snagging U.S. onshore resources.

"In the broad sense of things, our government is blissfully ignorant of the larger game that's being played out here. In some ways, they don't know the game has already started," said Fitz-Gerald. "On the other hand, China realizes what's at stake, and they are actively taking steps to ensure that they have their own resource demands met, not just in the next two years, but 10 or even 20 years down the road. The Chinese have saved trillions of dollars for a rainy day and now they're spending it."

The strategic moves being made by China's state-run oil companies are strengthening the Asian nation's global energy position. Should the trend continue, the United States could find itself bargaining with a new controller of worldwide oil prices.

"Logically, for most Americans, this is going to be terrifying because for the first time in history we might find ourselves at a point where the energy we desperately need is controlled by a party other than OPEC – and a party with whom it's too late to negotiate," said Fitz-Gerald.

But while deals like Chesapeake's might alarm Americans, they can also bring profitable opportunities to U.S. energy companies – and investors.

"Deals like this one are a precursor of things to come," said Fitz-Gerald. "We'll see many more just like this, all over the world. But, it's not a bad thing, either, because the smarter companies that do tie up with the Chinese entities will use Chinese money for further development, further exploration, and the generation of future profits that go right to the bottom line."

Investors should offset their consumer pain with gains in their portfolios. Getting positioned for energy industry profits – while it may not be able to save our country's energy needs – will provide some relief when oil prices soar and the United States finds itself with little negotiating power.

"Savvy investors know that if the Chinese are interested in something, we better be interested, too," says Fitz-Gerald. "When it comes to profits, investors need to be involved – just like these companies need to be involved with Chinese entities."

(**) Money Morning editors reserve the right to edit responses for grammar, length and clarity when posting on our Web site. Please include your name and hometown with your email.

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