January 7, 2002; Strong Gain in Lukoil a Favorable Omen

The Russian company, Lukoil, was the strongest gainer among large cap energy stocks in our coverage the first week of the year.  That is consistent with the idea that when the stock market does well and energy is quiet, stocks of energy companies in emerging countries may do relatively better. 

Our thesis on PetroChina that natural gas is going to be a big winner long term got an indirect boost from Royal Dutch management meeting with analysts in New York late last year.  Mr. Phil Watts reminded us how important it was for his company to be a major player in the conversion of Europe to the clean burning fuel.  As a result, Royal Dutch is keenly interested in being a partner in the development of natural gas in China. 

Building the natural gas infrastructure for China is a complicated undertaking.  Life for CNOOC Ltd is quite a bit simpler.  The best and brightest of international explorers take most of the risk and contribute their latest technology.  Discoveries are relatively close to market and rapid earnings growth for several years seems strongly predetermined.

Investors ask,  "How can you be confident in CNOOC's numbers?"  We answer,  "That's easy, their disclosures are audited by Arthur Andersen!"

We are confident that basic information is reported accurately.  We have a check on activity through the disclosures of CNOOC's partners.  What we may not know, as in the case of Enron, is whether important transactions are fully disclosed.  Contrary to Enron, CNOOC stock has a low McDep Ratio and low debt.  Thus, the stock has not been overhyped and overlevered to the point where management feels pressure to cheat.