China’s dominant producer of offshore crude oil and natural gas, CNOOC Limited’s (CEO) first quarter 2011 revenue jumped 59.1% year over year to 48,510.7 million yuan (US $7,376.3 million), mainly attributable to volume expansion.
Production
CNOOC achieved net production of 85.2 million barrels of oil equivalent (MMBoe), up 26.6% from the year-ago level. Of the total production, almost 81% was oil and liquids. The production growth can be credited to the high crude oil price.
The company’s gas volume swelled 35.1% to 96.7 billion cubic feet (Bcf) from the year-ago level of 71.6 Bcf, while its liquid production surged 25.1% year over year to 68.8 million barrels in the three-month period.
Price Realizations
The company’s average realized oil price increased 32.7% year over year to $99.98 per barrel, while its realized gas price grew 8.6% to $4.81 per thousand cubic feet (Mcf) from the year-ago level of $4.43 per Mcf.
Capital Expenditure
CNOOC spent approximately 6,402.4 million yuan (US $972.3 million) as capital expenditures, representing an increase of 10% from the year-ago level.
It was a busy quarter for CNOOC with five new finds and six successful appraisal well drillings offshore China. The Jinzhou 25-1 project offshore China also went off to an encouraging start. Other key projects are also on track.
Our Take
We remain optimistic on CNOOC as we believe the company’s performance reflects its 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%.
During the quarter, the company made significant development in its scheduled project agenda. CNOOC acquired a 33.3% undivided interest in Chesapeake Energy Corporation's (CHK) Niobrara project. Additionally, CNOOC and Tullow Oil plc entered into acquisition agreements for the latter’s one-third interests in each of Exploration Areas 1, 2 and 3A in Uganda. The deal is expected to be completed in the first half of 2011.
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 gave a commendable performance both in terms of production growth and cost control measures. The company also mentioned that it will be proactive on exploration investments.
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.
The company competes with China Petroleum & Chemical Corp. (SNP) and Petroleo Brasileiro (PBR).
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