Monday, October 4, 2010

Oil Demand in China Sparking Boon for Longwei Petroleum Investment Holding Limited, Can Energy Company Sustain Growth?

With the spike in demand for oil in China few energy companies have benefited more than Longwei Petroleum Investment Holding (NYSE AMEX: LPH) and this has paid off for shareholders who have seen their stock climb steadily over the past week accompanied by its above average trading volume.
A distinct advantage for LPH has been its efforts to concentrate their oil and gas operations exclusively in China. These operations, which include transporting, storing, and selling finished petroleum products, have established LPH as one of the largest oil and gas operations in China and put them on track for what could be significant growth.
That growth is being projected in large part because of China’s growing demand for oil and as CFO Michael Toups stated “As one of the largest oil and gas distributors in China, Longwei is a direct beneficiary of the long-term upward trend in oil consumption and vehicle use in China. Last year China became the largest new automobile market in the world, and a recent International Energy Agency report suggests that China may now also be the top global energy consumer as well. These immense outside developments, taken in conjunction with our strong internal growth, continue to substantiate our business model and underscore the attractiveness of our industry.”
The attractiveness of LPH appeared to be underscored by their announcement of select operating data earlier this week. In that announcement reported revenues of $39 million for the month of June, a 130% increase from the same month in 2009. For the fiscal year ending June 30, 2010 LPH reported total revenues of $339.4 million, a 72% spike from the $196.8 million in 2009 fiscal revenues and a 9.2% improvement upon the company’s earlier guidance that suggested revenues would hit $310.8 million for the year.
Accompanying their improved revenues LPH reported impressive gross profit numbers as well, generating $8.1 million for the month of June, a 138% increase from the same month last year. For their fiscal year LPH saw profits of $68.5 million, a 119% jump from their 2009 fiscal year profits.
As for the upcoming year LPH has been nothing but optimistic as they project sales to top $500 million for their fiscal year 2011, an optimism expressed by Longwei’s President and CEO Cai Yongjun who forecasted the growth saying “The outlook for our industry and economic environment is promising, as China’s rapid economic growth recently propelled it past Japan as the world’s second largest economy in terms of GDP. Coupled with China’s growing dominance in the automobile market and strong industrial growth in our operating region, Longwei is in an ideal position to capitalize on the boom in oil demand.”
Much of that optimism has been based on LPH’s new Gujiao storage facility in Shanxi Province, a storage facility that has a capacity of 70,000 metric tons. Because LPH is the sole licensed intermediary in Gujiao it enjoys a relative monopoly in the area, making it the only option for local wholesalers, fuel pump operators and the mining industry. Along with their Gujiao storage facility LPH has a storage facility in Taiyuan City, also in Shanxi Province, that is capable of storing 50,000 metric tons.
Of significant importance to LPH is the increase in industrial activity in Shanxi Province, suggesting the company is on solid ground as consumer needs continue to improve their financial standing. In addition to its dominant presence in Shanxi Province LPH also have the necessary licenses to operate and sell products throughout China, opening the door for further expansion in a growing market.
On Friday the International Energy Agency suggested that global oil demand would continue to climb this year, noting China’s demand remained strong.
While all signs point to LPH growth there are those investors who have opted to wait until the company files its 10K so that they can get a clearer picture. Getting that clear picture and forecasting predictions can be difficult for company’s operating in China as their sales prices and cost basis are largely dependent on regulations and price control measures instituted and controlled by the PRC government. LPH is also subject to uncertainty surrounding the price of crude oil, a factor that directly influences the company’s operations.
Having a clear advantage in one of China’s fastest growing provinces makes LPH an attractive company and while there are several factors that remain out of their control the company has, up to this point, followed a solid business plan that could soon make quite a few investors very happy.
LPH has a 50 day moving average of 2.11 and a 200 day moving average of 2.33 which can be seen in the chart below:
Technical Chart of LPH
Technical Chart of LPH
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