Thursday’s ETF To Watch: China Energy ETF

by on August 19, 2010 | ETFs Mentioned:

Although many industrialized nations have seen growth levels slow to a crawl, some emerging markets have begun to pick up the slack and continue to expand at impressive rates. Despite a ‘slowdown’ in China, the country’s economy is still expected to grow by 9.2% this quarter and between 8% and 8.5% in the fourth quarter. These growth levels have allowed the world’s most populous country to overtake Japan as the second biggest economy with a national GDP of $1.3 trillion. This growth has put tremendous pressure on the country to ramp up oil and gas production in order to make sure the economy runs smoothly and that growth is not interrupted in order to preserve social order in the still relatively poor nation.

One of the most important companies in China’s energy puzzle is the China National Offshore Oil Corp, or CNOOC as it is usually known. While the company is controlled by the government, which makes up 70% of the shareholders, the firm does have shares traded in both Hong Kong and New York. As its name suggests, the company has a heavy focus on offshore oil production and exploration activities, and has begun to expand beyond the shores of China into both LNG facilities as well as operations in Africa and South America (including a stake in a field off the coast of Argentina in its bid to become a world player on the oil market). These new developments could help the company grow production levels despite weakness in the global economy and lackluster oil demand [also read Definitive Guide To China ETFs].

Although the economy and oil usage growth rates are slowing down considerably, Cnooc is still expected to report impressive increases in first-half profit. Analysts expect the company to show that net income rose 85% from a year earlier to 23 billion yuan ($3.4 billion). “What marks Cnooc from its rivals is strong production growth,” said Wang Aochao, UOB-Kay Hian’s head of China energy research in Shanghai. “We may not see 25 percent increases in production every year, but the company forecasts output could be rising up to 10 percent a year by 2015, which is impressive.” [see What's Fueling The China Energy ETF?]

With this critical earnings report due, the Global X China Energy ETF (CHIE), which allocates about 12% of assets to Cnooc, should be active in Thursday trading. In addition to the big weighting to Cnooc, CHIE also has big holdings in China Petroleum & Chemical Corp (11%) and PetroChina Co. (11%) which both look to be heavily impacted by the oil giant’s earnings report and outlook for the rest of the year.

CHIE charges an expense ratio of 65 basis points and has lost 7.4% so far in 2010, comparable to other energy focused funds which have sunk on moderating demand for oil in light of the global economic slowdown. However, CHIE has managed to gain about 3% over the past month and could continue to soar higher if Cnooc offers the markets a rosy outlook for the future [also see Energy ETFs: Six Very Different Ways To Play].

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Disclosure: No positions at time of writing.