We are maintaining our Neutral rating on CNOOC Ltd. (CEO), based on its strong revenue growth and significant asset acquisitions, partially mitigated by unstable oil and gas fundamentals.
Headquartered in Hong Kong, CNOOC is one of the three oil companies in China and among the leading independent oil and gas exploration and production companies of the world. The company is a dominant producer of offshore crude oil and natural gas and engages in the exploration, development, production as well as sale of crude oil, natural gas and other petroleum products.
In the third quarter of 2011, CNOOC reported total revenue of 46.52 billion yuan ($7.27 billion), up almost 23% from the year-earlier level. Out of the total revenue, more than 92% came from oil and liquids sales, which amounted to 42.90 billion yuan ($6.68 billion), up nearly 24%. The results were driven by strong oil price realizations.
Over the last few months, the company made considerable developments in its scheduled project agenda. CNOOC acquired Canadian oil sands operator OPTI Canada Inc. for a total consideration of $2.1 billion and took over 33.3% undivided interest in Chesapeake Energy Corporation‘s (CHK”>CHK) Niobrara project in the Eagle Ford Shale play. We believe that these acquisitions will expand the company’s global exposure.
CNOOC also has a strong growth profile, exclusivity in the offshore China region and attractive liquefied natural gas investments. The participation of its parent company in China United Coal Bed Methane Company Ltd. is a potential positive for CNOOC Ltd. as it will help it to concentrate deeply on unconventional gas resources.
However, these positives are somewhat negated by the unpredictable oil and gas prices, which are inherently volatile and subject to complex market forces. Realized prices could differ significantly from our estimates, thereby affecting the company’s revenues, earnings and cash flow.
CNOOC lowered its 2011 production guidance by 7% to 331-341 million barrels of oil equivalent. Delays in the approval of the Pan America acquisition and restarting Penglai 19-3 B & C operations are the main reasons for the cut.
Additionally, the company’s future prospects are closely linked with the successful completion of its growth projects, which in turn, might be adversely affected by operational hindrances, cost inflations and overruns and delays in completion.
CNOOC currently holds a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months.
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