China National Offshore Oil Corporation (“CNOOC”), the parent company of CNOOC Limited (CEO), signed amended production sharing contracts (PSCs) with Chevron Corporation (CVX) and BP Plc (BP) for three deepwater blocks 42/05, 64/18 and 53/30 in South China Sea. These deals were signed by CNOOC following Devon Energy Corporation’s (DVN) withdrawal from the South China Sea deepwater oil projects.
 
In 2005 and 2006, CNOOC had signed three PSCs with Devon, which were approved by the Chinese government, for the above mentioned blocks. Subsequent to the amendment, Chevron has agreed to buy a 59.18% interest in block 42/05 and full ownership in blocks 64/18 and 53/30 from Devon in the exploration phase, while BP will acquire the remaining interest of Devon in block 42/05.
 
Located in Baiyun Sag of the Pearl River mouth basin in eastern South China Sea, Block 42/05 holds 6,939 square kilometers area. Blocks 64/18 and 53/30 are located in the Qiong Dong Nan Basin in western South China Sea covering 7,712 and 6,313 square kilometers, respectively. The water depth in the acreages covering three blocks range from 300 meters to 2,000 meters.
 
CNOOC Limited will hold as much as a 51% interest if commercial discoveries are made in the three blocks, while Chevron will act as the operator during the exploration period.
 
We believe this deal affirms the company’s commitment for future growth in offshore China and deepwater South China Sea, which will help it to maintain 6–10% CAGR over the next five years. We also remain positive on the company’s solid balance sheet, premium assets portfolio, excellent execution strategy and unique position as a pure oil player.
 
China’s biggest offshore energy producer, CNOOC intends to increase production by as much as 28% to 290 million barrels this year. In the first half, production increased more than 40% from the year-earlier period to a record level of 149 million barrels of oil equivalent (MMBoe), driven by the start-up of new fields in Bohai Bay and the South China Sea.
 
However, we expect more acquisitions going forward in the absence of any potential exploration prospect. Moreover, the company does not have significant exposure outside China. We are also concerned about profit margins from the company’s acquired projects due to increasing costs and a high tax regime.
 
We have a Zacks Rank of #3 (short-term Hold recommendation) for CNOOC ADRs.
 
BP PLC (BP): Free Stock Analysis Report
 
CNOOC LTD ADR (CEO): Free Stock Analysis Report
 
CHEVRON CORP (CVX): Free Stock Analysis Report
 
DEVON ENERGY (DVN): Free Stock Analysis Report
 
Zacks Investment Research