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Oil & Gas Investments Bulletin

Keith Schaefer
editor@oilandgas-investments.com
www.oilandgas-investments.com

Oil & Gas Investments Bulletin for October 26th, 2009

East and West Think Differently About Oil, Harvest Energy Buy-out Shows

Thursday's buyout of Harvest Energy Trust by the Korean National Oil Company (KNOC) typifies the difference on how the East and West are looking at oil.

And it's as simple as supply versus demand.

Big investors in the East are concerned about their supply of oil. Investors in the West are more concerned about the lack of demand.

In an October 18 research note, Goldman Sachs echoed this theme, explaining that China cannot produce enough oil to meet their domestic needs, and will need to consistently acquire foreign reserves.

The Goldman analysts who authored the report also say that in their opinion, China's growth and infrastructure build out will continue for many years. And so nervous investors in Europe and North America who are fretting about a collapse in China and oil prices will be miss the boat on oil stocks.

The report stated: "China-based investors focused on supply side of our bullish view as opposed to demand in sharp contrast to most investors in US and Europe we meet with that are focused on demand uncertainty as opposed to oil supply…Given that China is emerging as an economic super power at a time of limited oil supply growth, we think it is likely to lead to the country adding to its SPR (Strategic Petroleum Reserve) continuously for many decades to come."

Oil bulls are quick to point out that China only used 2.2 barrels of oil per person in 2008, versus the 23.3 barrels used in the USA.

Supply versus demand. East versus West. And with oil at US$80, it looks like the Eastern philosophy is winning out.

There is another huge benefit to national oil companies (NOCs) buying oil assets, and it is this: they get to spend their large currency reserves in US dollars into an asset that basically hedges against the greenback's decline. Asian countries like China and South Korea run a large trade surplus with the US. They then use those excess dollars and buy US Treasuries, the largest, the most liquid, and the most transparent investment vehicle in the world.

But the US dollar is moving steadily down, eroding value for Treasury buyers. So instead, they diversify and buy hard assets like Canadian oil companies such as Harvest Energy Trust.

Harvest's stock was a huge laggard compared to its peers, because of the high debt levels in the company. But KNOC didn't care about that - not with South Korea running a trade surplus of $5 billion in September alone.

KNOC's $4.1 billion bid values Harvest at $77,700 per flowing barrel of production, which is almost exactly the average for the energy trust valuations in BMO Nesbitt Burns coverage universe this week. (Peters & Co. out of Calgary called it $63,000 after removing value for Harvest's downstream assets.)

Regardless, it was a 47% premium over what western investors thought it was worth. How typical.

Oil & Gas Investments Bulletin
Keith Schaefer
editor@oilandgas-investments.com
www.oilandgas-investments.com

The service we endeavor to provide is to analyze and clarify the nature and potential of certain North American junior oil and gas producers, and identify those situations where the market either misunderstands the nature of the company or assigns unduly optimistic or pessimistic success odds to the company. Keith Schaefer is not a registered investment dealer or advisor. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer to buy or sell the securities mentioned, or the giving of investment advice. Oil and Gas Investments is a commercial enterprise whose revenue is solely derived from subscription fees. It has been designed to serve as a research portal for subscribers, who must rely on themselves or their investment advisors in determining the suitability of any investment decisions they wish to make. Keith Schaefer does not receive fees directly or indirectly in connection with any comments or opinions expressed in his reports. He bases his investment decisions based on his research, and will state in each instance the shares held by him in each company.