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Cnooc Stock Arcs to New High

THE WALL STREET JOURNAL: Cnooc Stock Arcs to New High

“Four years ago, the Australian government blocked an effort by Shell to take control of Woodside on grounds it wasn’t in the national interest and limited Shell to a 34% stake. Analysts assume a takeover by Cnooc would run into similar obstacles.” Lack of Unocal Strain Cheers Investors, but Old Problems Linger

August 15, 2005; Page C12

BEIJING — Its attempt to purchase Unocal has failed and its expansion strategy appears stuck.

So why is Cnooc performing so well on the stock market?

The share price of China’s No. 3 oil and natural gas producer touched an all-time high last week, closing Friday at HK$6.05 (78 U.S. cents) on the Hong Kong stock exchange. The stock has been buoyed by soaring crude-oil prices and by the removal of uncertainty surrounding Cnooc’s $18.5 billion bid for Unocal, analysts say. Cnooc withdrew the bid this month amid fierce opposition in the U.S. Congress, paving the way for rival bidder Chevron to acquire the El Segundo, California, oil company.

Cnooc stock also trades as American depositary shares on the New York Stock Exchange, and on Friday they similarly set an all-time high, with their close at $77.43.

While Cnooc’s withdrawal has made its stock more attractive in the short term (at least now it won’t have to strain its balance sheet trying to digest a company of almost equal size, say investors), the Chinese oil company faces the same basic dilemma that led it to risk so much money for Unocal in the first place; namely, its oil production isn’t increasing as fast as some investors had hoped, but its opportunities to grow through acquisitions are few and, to many investors, unduly risky.

William Blair& Co., a Chicago fund-management firm, sold its stake in Cnooc in July when the oil company was still trying to buy Unocal. Fund manager David Merjan, who oversees $11 billion in investments for William Blair, said he first became wary when Cnooc’s growth in oil production slipped earlier this year. But the enormous sum Cnooc put on the line for Unocal convinced him that the company was willing to place too high a premium on acquiring new oil fields.

“With their organic growth flagging and the company going on the acquisition trail, it just wasn’t so attractive anymore,” says Mr. Merjan.

While all of China’s oil companies are enjoying a rise in their share prices, some analysts see a more promising alternative in PetroChina, China’s largest oil producer measured by reserves. While PetroChina also is seeking to expand overseas in an unfavorable global environment of high oil prices, it can afford to be choosier than Cnooc in selecting its targets, these analysts say. It is larger, richer, and has expertise in on-shore oil and gas production — an area offering more opportunities for consolidation than Asian off-shore oil fields, which are Cnooc’s domain.

These analysts add that, unlike Cnooc, PetroChina has the advantage of owning so-called downstream businesses in China, such as refineries and sales outlets for gasoline, diesel and petrochemicals used by manufacturers. Such businesses hold a long-term promise of serving China’s booming economy and, as a quirky byproduct of Chinese government controls on refined oil products, actually stand to become more profitable if global oil prices decline.

To be sure, numerous analysts favor Cnooc to gain the most ground in its share price, of China’s three big state oil companies (the third being Sinopec) so long as global oil prices continue rising. That is because Cnooc’s business is focused almost purely on producing oil and natural gas, allowing it to avoid the problems PetroChina and Sinopec face with Chinese price caps on refined products.

Still, PetroChina would appear a better hedge for investors who aren’t so sure oil prices will remain high, says Scott Weaver, a Taipei-based oil industry analyst with Macquarie Securities. “PetroChina we prefer in one sense because even if oil prices decline, it is still in a very good position to expand and leverage off of its downstream businesses,” says Mr. Weaver, who nonetheless recommends all three Chinese oil companies to investors at current valuations.

Cnooc’s failed bid for Unocal is unlikely to curb the Chinese company’s aspirations to grow through acquisitions. But it doesn’t appear to have many good options, analysts say. Many of Asia’s best oil and gas prizes are owned by oil companies in countries that harbor the same desire for long-term energy security as China, and therefore would be reluctant to sell. One oft-cited possibility is Woodside Petroleum, an Australian oil and gas company with huge gas reserves off the coast of Western Australia. But four years ago, the Australian government blocked an effort by Shell to take control of Woodside on grounds it wasn’t in the national interest and limited Shell to a 34% stake. Analysts assume a takeover by Cnooc would run into similar obstacles.

“Unocal would have been a very good fit for Cnooc,” says Mr. Weaver of Macquarie. “I think it is difficult to find a company that has all the features that Unocal offered.”

Write to Matt Pottinger at [email protected]

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