CNOOC Limited (CEO) and French company TOTAL SA (TOT) have signed a contract with Britain’s Tullow Oil PLC to acquire three Ugandan exploration blocks, after the deal was delayed by a tax dispute. The deal costs a cumulative $2.9 billion for CNOOC and TOTAL to buy a third of the share each from the British oil producer. The investments made by these oil giants in the oil-rich Lake Albert Rift Basin would bring into focus the importance of Uganda as an upcoming exploration destination.
Per the agreement, CNOOC, TOTAL and Tullow will each hold 33.3% stakes in Exploration areas 1, 2 and 3A in the Lake Albert Rift Basin. China’s third-largest oil producer by capacity, CNOOC intends to pay $1.467 billion in cash for its interest in the area and expects the deal to be completed in the first half of 2011. However, the agreement is pending Ugandan as well as Chinese government approvals and other customary closing conditions.
Lake AlbertBasin is considered to be one of the most prospective basins onshore Africa. More than 1 billion barrels of oil has been discovered since 2006 and companies expect oil production to exceed 200,000 barrels per day across the basin by 2015.
Upon completion of the deal, all three companies will secure approval from the Ugandan government for the development of the license areas through a $10 billion planned agenda. The program comprises the construction of a refinery and a pipeline connected to the Indian Ocean.
The agreement has been held up for a year over tax matters with the Ugandan authorities. The dispute also involved Tullow’s previous purchase of Heritage Oil PLC’s stake in the licenses.
The latest deal is indicative of CNOOC’s strategy of accelerating its international business. We believe that the company’s entry in the Lake Albert Rift Basin will prove beneficial as the venture is expected to become one of the largest oil and gas developments onshore Africa in recent years. This will further augment the company’s long-term growth profile through intensive exploration and development programs with its partners in the next 3-5 years.
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. However, we remain Neutral on TOTAL shares and the company currently retains a short-term Zacks #3 Rank (short-term Hold rating).
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