Chinese offshore giant CNOOC Ltd. (CEO) reported its third quarter 2010 results. Total revenue in the third quarter was 38.9 billion yuan ($5.74 billion), up 68.3% from the year-earlier level. Out of the total revenue, more than 91% came from oil and liquids sales. The robust results were driven by solid production growth and strong oil price realizations.

CNOOC achieved a total net production of 88.7 million barrels of oil equivalent (BOE), an increase of 48.8% from the year-ago level. Of the total production, 79.4% was oil and liquids. The production growth can be credited to projects that came online in the recent times and to the contribution from existing fields.

The company’s average realized oil price increased 9.3% year over year to $74.15 per barrel, while its realized gas price was $3.96 per thousand cubic feet, almost same as the previous year.

In the third quarter, 5 new projects came online and 5 wells were appraised successfully. CNOOC expects its 2010 net production to exceed its annual production target and achieve 319–329 million BOE.

CNOOC spent approximately 8.19 billion yuan ($1.2 billion) as capital expenditures, representing a decrease of 27.2% from the year-earlier quarter, mainly due to the combination of cost savings through efficiency and delay in certain development projects.

Based on the company’s rich resource base, CNOOC has created a solid foundation for future growth. The company believes that it will be able to maintain a growth rate of 6%–10% CAGR over the next five years.

We consider CNOOC’s recent purchase of one-third of Chesapeake Energy’s share in the Eagle Ford Shale play as a favorable move as the region is liquid-rich and has potential exploration upside. We also believe that CNOOC will gain experience from Chesapeake in terms of technology and experience in shale oil and gas, which would be a long-term catalyst for growth.

While continental shelf offshore China and deepwater South China Sea remain the company’s core areas for future growth, we believe that international projects and acquisitions will also play an important role. Our long-term recommendation for CNOOC is Outperform while the company has a short-term Neutral rating with the Zacks #3 Rank (Hold).

 
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