(CEO) CNOOC Suffers on Steeper Prices

China’s dominant producer of offshore crude oil and natural gas, CNOOC Limited’s (CEO) first half 2012 net profit decreased 19% year over year to 31.869 billion yuan (US$5.04 billion), or 0.71 yuan per share ($11.23 per ADS), due to rising costs and lower output (exchange rate: 1.00 yuan = US$0.1581, 1 ADS = 100 shares).

Total revenue in the period was 118.27 billion yuan (US$18.70 billion), down 5.1% from the year-earlier level. Oil and gas sales were 95.66 billion yuan ($15.12 billion), down 1.4%.


CNOOC achieved net production of 160.9 million barrels of oil equivalent (MMBoe), down approximately 4.6% from the year-ago level. Of the total production, almost 79% was oil and liquids and the remaining 21% constituted natural gas. This underperformance was related to the overhaul of Penglai 19-3 oilfield production at Bohai, the scheduled maintenance and the divestiture of the ONWJ block in Indonesia.

The company’s gas volume dropped nearly 6% to 195.7 billion cubic feet (Bcf) from the year-ago level of 208.2 Bcf, while its liquid production fell nearly 4.7% year over year to 127 million barrels in the six-month period.

The company’s all-in cost for the first six months of 2012 was $34.60 per barrel, signifying a rise of 13.1% from the prior-year period.

Price Realizations

The company’s average realized oil price increased 8.1% year over year to $116.91 per barrel, while its realized gas price increased nearly 20% to $5.90 per thousand cubic feet (Mcf) from the year-ago level of $4.92 per Mcf.

Capital Expenditure

CNOOC spent US $3,867 million as capital expenditure, representing an increase of 71.9% from the year-ago level.

It was a busy first half for CNOOC with 10 new finds and 18 successful appraisal well drillings offshore China. The Qinhuangdao 29-2, Luda 21-2 as well as Luda 6-2 at Bohai,

Penglai 9-1 and Dongfang 13-2 were among them.

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 play and potential transactions in the merger and acquisition space.

During the first half, the company made significant developments in its scheduled project agenda. CNOOC has cut a deal to purchase Canadian energy producer Nexen Inc. (NXY) for approximately $15.1 billion in cash. Should the deal go through, it will be China’s biggest foreign takeover so far, reflecting the international land grab trend among the country’s energy companies.

The company made significant exploration development during the first half of 2012, mainly by gaining a mid to large sized new oil discovery and successful appraisal of a large oilfield in Bohai. CNOOC also expects 4 new projects to come online in offshore China in 2012. Based on the company’s rich resource base, CNOOC has created a solid foundation for future growth.

However, weak half yearly volume – owing to the deferral of production of Penglai 19-3 oilfield in Bohai Bay, expiry of Madura as well as sale of ONWJ in Indonesia – remains our concerns. The Penglai 19-3 field remains operated by U.S. major ConocoPhillips (COP) and the company has not yet received the government nod to reopen the oilfield in eastern China’s Bohai Bay.

Despite weak volumes, CNOOC believes that it will be able to attain a production target of 330–340 mm boe in 2012 on the back of various organic and inorganic ventures.

We maintain our long-term Neutral rating on CNOOC ADRs. The company currently holds a Zacks #3 Rank, equivalent to a short-term Hold rating.

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