On Dec 28, 2015, we issued an updated research report CNOOC Ltd. CEO, one of the three leading oil companies in China and one of the largest independent oil and gas exploration and production companies of the world.
The price of crude has tumbled drastically since Jun 2014 due to a supply glut despite lackluster global demand. The price of crude is expected to remain low in 2015 as well. Since CNOOC produces a significant amount of oil, we do not expect the company to generate considerable earnings for its shareholders in the current scenario. We also remain concerned as CNOOC’s extensive natural gas exposure raises its sensitivity to gas price fluctuation.
Like other exploration and production companies CNOOC too faces high risk and capital intensiveness. Thus, the group's failure to make any commercial discoveries may affect its future operations.
CNOOC (BVI), a wholly owned subsidiary of state-owned Overseas Oil & Gas Corporation, Ltd., owns a 64.41% stake in CNOOC. The government of China will, therefore, have substantial influence over the decisions of the company. Moreover, the government may exercise its upper hand in prioritizing its interests above those of the shareholders.
Nonetheless, CNOOC’s growth is likely to be augmented by significant capital injection for upstream activities over the next five years. The latest project start-ups like the Panyu 4-2/5-1 and the Liuhua 4-1 also raise optimism. However, delay in the commissioning of these projects will likely drag earnings and increase costs.
Additionally, CNOOC believes that it will be able to maintain a 6–10% compound annual production growth rate over the next five years on the back of various organic and inorganic measures. The company also intends to invest RMB70 billion to RMB80 billion in 2015 to achieve its targeted growth rate. Contribution from the latest projects and new development wells should also add to the improvement.
Further, we remain positive on CNOOC’s performance, which reflects its premium assets portfolio, excellent execution strategy, unique position as a pure oil player and potential transactions in the merger and acquisition space. The production sharing agreement allows CNOOC to start drilling in the offshore Brazil-based Libra deepwater field, one of the major oilfields in the world. The minimum work plan of the project is expected to be completed by the end of 2017. The field is estimated to hold recoverable resources of about 8–12 billion barrels of oil. Moreover, the field might produce roughly 1.4 million barrels of oil per day during peak production, subject to some appraisal work. This is likely to prove beneficial for the company’s shareholders as it will optimize value from the project.
Zacks Rank and Stocks to Consider
CNOOC carries a Zacks Rank #5 (Strong Sell). Some better-ranked players from the energy sector are Energy Transfer Equity, L.P. ETE, ReneSola Ltd. SOL and Boardwalk Pipeline Partners, LP BWP. Each of these stocks sports a Zacks Rank #1 (Strong Buy).
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