Royal Dutch Shell Plc  .com Rotating Header Image A Look at CNOOC

By Toby Shute – August 31, 2007
I’ve given PetroChina (NYSE: PTR) plenty of virtual ink around here lately, but it’s not the only exciting Chinese E&P story. CNOOC (NYSE: CEO), as a pure play on upstream offshore oil & gas activity, is also an interesting name, and with the release of the firm’s first-half results, I have occasion to dive into the company’s operations.

First-half production rose 4.5% to just more than 470,000 BOE per day. This growth, which slightly outpaced PetroChina’s pump-up, came entirely from natural gas — oil production was essentially flat. Oil prices, on the other hand, were decisively down, and that cut into revenues by roughly 7%. After factoring in higher exploration and operating expenses, as well as a windfall profit tax, net profit came in 11% lower than last year.

The big growth in gas output slightly shifted CNOOC’s product mix from 84% oil last year to 80% this year, but the company is still very oil-oriented. Given that mix, I’m surprised to see the gas-heavy players that CNOOC identifies as its peer group. A comparison to prodigious producers like Apache (NYSE: APA) and Devon (NYSE: DVN) seems bound to come up short, no?

Well, in terms of production growth, sure, but CNOOC shows up remarkably well in terms of its cost structure. It even edges out low-cost dynamos like XTO Energy (NYSE: XTO) and EOG Resources (NYSE: EOG). Of course there’s no breakout of finding costs, because CNOOC wouldn’t show up as favorably, but I’m still impressed by its low per-barrel operating expenses.

Offshore players have to shell out a lot more for exploration, thanks in part to soaring dayrates on semisubmersible rigs. The availability of deepwater rigs, or lack thereof, is one of the greatest cost pressures that CNOOC will face over the next several years. With a success rate below 70%, the firm is going to have to drill a lot of wells in order to organically add reserves on a regular basis. Unless, that is, it can make better use of state-of-the-art seismic and controlled source electromagnetic data. But that’s a story for another day.

© 2007 Universal Press Syndicate

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