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Raja Mukherji, Taosha Wang
Energy self-sufficiency has almost unanimously declined across Asia in the last decade, and the region’s energy appetite can only expand over the secular horizon as these economies continue to develop and standards of living rise. To meet increasing demand, many Asian oil and gas companies have not only become frequent buyers of foreign assets, they have also regularly tapped the international capital markets to meet their financing needs. Credit investors may find numerous opportunities in Asia’s energy sector among high-quality companies with strong state support, solid fundamentals and a constructive outlook. That said, rigorous bottom-up credit research is key to identifying risks and attractive valuations.Mounting energy shortages across AsiaExcept for Australia, which has considerable hydrocarbon reserves, most major Asian economies have seen energy self-sufficiency decline over the past decade (see Figure 1). Japan has the most pronounced energy shortage: The world’s third-largest economy is also the largest importer of liquefied natural gas (LNG), the second-largest coal importer and the third-largest oil importer. China and India have reasonable levels of natural resources, but domestic demands have rapidly outgrown production. And Southeast Asian countries such as Malaysia and Thailand are endowed with rich natural gas reserves, but still import oil to satisfy domestic consumption needs.
In the context of high energy prices, regional shortages and growing consumption, most Asian countries have increased support to their NOCs. Korea, for example, has codified sovereign support into the “KNOC Act,” which offers direct government guarantees on KNOC’s debts and allows regular government subsidies. In Malaysia, Petronas derives its powers from the Petroleum Development Act of 1974, which vests in the company the “entire ownership in, and the exclusive rights … of exploring, exploiting, winning and obtaining petroleum whether onshore or offshore of Malaysia.”Nevertheless, investors must be wary of the risks associated with business models that are highly dependent on sovereign support. Execution risks of aggressive mergers and acquisitions activities are certainly high. Most of Sinopec’s overseas acquisitions, for example, are performed via China Petrochemical Corp., the 100% state-owned parent company. The parent company then spends considerable time and resources to “de-risk” the assets before it injects a select few into its listed subsidiary, China Petroleum & Chemical Corp. Regulatory headwinds may also present significant challenges. Fiscal uncertainties in India have certainly set limits to its fuel subsidy program and cast valuation overhangs on the country’s state-owned oil companies. Investment implications We expect more Asian oil and gas companies to tap the bond market going forward, and more often. Many will likely use the proceeds to finance their overseas acquisitions and ongoing capital needs, as well as to refinance their shorter-tenor bank debt. In light of the secular trends of energy shortages and greater overseas acquisitions, Asian governments note the critical strategic importance of their oil and gas companies, and offer them strong sovereign support. In evaluating these investment opportunities, we scrutinize the bond structure to gauge the degree of sovereign shareholder support. We also rely on rigorous bottom-up credit research to assess risks and identify best candidates within the sector. Our general preference is for companies with large upstream assets and limited regulatory headwinds in the downstream segment. Finally, we evaluate the companies based on their standalone credit strength and ability to access alternative sources of funding. We are finding select opportunities in the Asian energy sector attractive due to both major regional trends and company-specific factors.
Past performance is not a guarantee or a reliable indicator of future results. Investing in the bond market is subject to certain risks, including market, interest rate, issuer, credit and inflation risk. Commodities contain heightened risk including market, political, regulatory and natural conditions, and may not be suitable for all investors. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Sovereign securities are generally backed by the issuing government. Obligations of U.S. government agencies and authorities are supported by varying degrees, but are generally not backed by the full faith of the U.S. government; portfolios that invest in such securities are not guaranteed and will fluctuate in value.
References to specific securities and their issuers are not intended and should not be interpreted as recommendations to purchase, sell or hold such securities. PIMCO products and strategies may or may not include the securities referenced and, if such securities are included, no representation is being made that such securities will continue to be included. Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice. Investors should consult their financial advisor prior to making an investment decision.
This material contains the opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P. and Pacific Investment Management Company LLC, respectively, in the United States and throughout the world. ©2013, PIMCO.
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