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CNOOC's Project Backlog, Assets Portfolio to Drive Growth - Analyst Blog

On Jun 26, 2015, we issued an updated research report on CNOOC Ltd.CEO .

CNOOC's growth will be augmented by significant capital injection for upstream activities over the next five years. The company believes that it will be able to maintain a 6-10% compound annual production growth rate over the next five years backed by various organic and inorganic measures. The Chinese oil major also intends to invest RMB70-RMB80 billion in 2015 to achieve its targeted growth rate. The company's production in 2014 increased 5.1% on the back of robust overseas performance and steady performances by the already operational oil and gas fields. Contribution from the latest projects and new development wells also added to the improvement.

CNOOC has made significant progress in its scheduled project agenda. At the beginning of the year, the company's first large-scale deepwater gas field Liwan 3-1 successfully delivered its first production. This signified a new breakthrough for the company's deepwater oil and gas field development.

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 gives CNOOC access to start drilling in 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.

As is the case with other exploration and production companies, results for CNOOC are directly exposed to oil and gas prices, which are inherently volatile and subject to complex market forces.

Moreover, the price of crude tumbled more than 50% since June due to an oversupply of the commodity 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 don't expect the company to generate considerable earnings for its shareholders. We also remain concerned as CNOOC's extensive natural gas exposure raises its sensitivity to gas price fluctuation.

We believe CNOOC's growth will be augmented by significant capital injection for upstream activities over the next five years. The startup of projects like the Panyu 4-2/5-1 and the Liuhua 4-1 are in its agenda. However, any delay in the commissioning of these projects will likely drag earnings and increase costs.

Stocks to Consider

CNOOC currently carries a Zacks Rank #3 (Hold). Better-ranked players from the same space are Transmontaigne Partners L.P. TLP , China Petroleum & Chemical Corp. SNP and LRR Energy, L.P. LRE . All these stocks sport a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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