China’s dominant producer of offshore crude oil and natural gas, CNOOC Limited (CEO) reported stellar 2010 results on the back of record production growth and high crude oil prices.
CNOOC reported 2010 earnings of 1.22 yuan per share ($18.00 per ADR), substantially above 0.66 yuan per share ($9.65 per ADR) in the prior year. However, full year 2010 earnings fell marginally short of the Zacks Consensus Estimate of $18.23 per ADR.
Production
CNOOC achieved an all-time high total net production of 328.8 million barrels of oil equivalent (MMBoe), up an impressive 44.4% from the year-ago level. Of the total production, 80.1% was oil and liquids. The production growth can be credited to projects that came online since 2009 and contribution from existing as well as new fields.
In 2010, oil production jumped nearly 42% year over year to 263.4 million barrels, while the company’s gas volume surged 59.1% to 379.6 billion cubic feet (Bcf) from the year-ago level of 238.5 Bcf.
Management remains optimistic about 2011 production volume and reiterated its annual production target of 355–365 MMBoe for 2011, up 8–11% year over year.
Price Realization
The company’s average realized oil price increased 28% year over year to $77.59 per barrel, while its realized gas price grew 6.5% to $4.27 per thousand cubic feet (Mcf) from the year-ago level of $4.01 per Mcf.
Costs
All-in cost was $24.76 per Boe in 2010, up 11.4% from the year-earlier level of $22.23 per Boe. In particular, operating costs were down 9.5% year over year, largely due to economies of scale for higher production, whereas depletion, depreciation and amortization (DD&A) expenses increased 21.0% to $11.68 per Boe from $9.65 per Boe in 2009. The increase in DD&A was essentially due to new projects that were constructed under the cost inflation.
Capital Expenditure (Capex)
CNOOC spent approximately $5.071 billion as capital expenditures, representing a decrease of nearly 19% from the 2009 level, mainly on account of cost savings through efficiency and delays in certain development projects.
The company budgeted capex of $8.77 billion for 2011, representing a year-over-year increase of approximately 73%, with most of money allocated to more developmental programs rather than exploration. CNOOC outlined fourdevelopment projects that are scheduled to come on-stream in 2011 and 15 projects under construction.
Financials
Despite strong 2010 merger and acquisition activity, including PAE in Argentina, Eagle Ford & Niobrara, cash balances remained high at 39.6 billion yuan (US$6.0 billion). The company paid total dividend of 15.9 billion yuan (US$2.3 billion) in 2010.
Our Take
The recent upswing in CNOOC’s performance reflects its solid balance sheet, premium assets portfolio, excellent execution strategy, unique position as a pure oil player and potential transactions in the merger and acquisition space. CNOOC’s 2010 reserve replacement ratio of 202% was the highest since 2003 and above its target of 100%.
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, mainly from the existing projects.
In a favorable oil price environment, the Chinese offshore giant performed brilliantly both in terms of production growth and cost control measures. The company also mentioned that it will be proactive on exploration investments. However, CNOOC did acknowledge that rising costs are an issue for the oil and gas industry.
We remains positive on CNOOC’s ability to expand its unconventional oil and gas assets, following its second deal with U.S. based Chesapeake Energy Corporation (CHK).
We maintain our long-term Outperform rating on CNOOC ADRs. The company currently holds a Zacks #2 Rank, equivalent to a short-term Buy rating.
CNOOC LTD ADR (CEO): Free Stock Analysis Report
CHESAPEAKE ENGY (CHK): Free Stock Analysis Report
Zacks Investment Research
