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Cnooc, Reliance May Be Better Bets Than Shell, Bernstein Says

Bloomberg

By Dinakar Sethuraman

July 20 (Bloomberg) — Shares of Cnooc Ltd., PetroChina Ltd. and Reliance Industries Ltd. offer better growth prospects than international oil companies and may continue to command a price premium, Sanford C. Bernstein said.

Chinese and Indian oil and gas companies trade as a group at 10.4 times estimated 2010 earnings compared with 8.5 for international oil companies, Neil Beveridge, an analyst at Bernstein, said in a report today.

“As oil prices increase over the next two years, it is likely that the Asian premium will expand,” Beveridge said.

Crude oil for August delivery traded at $64.03 a barrel in New York at 12:07 p.m. in Singapore, having gained 44 percent this year. Bernstein has forecast oil to average $80 a barrel in 2010 and $100 in 2011. The faster earnings growth of Asian stocks is driven by strong domestic fuel demand, higher production and reserve growth and global expansion, it said.

Bernstein rated Cnooc, PetroChina and Reliance as “outperform” with price targets of HK$9.8, HK$6.1 and 2,400 rupees respectively. Reliance rose 57 percent this year to 1,937 rupees. PetroChina gained 28 percent in the same period to HK$8.69, and Cnooc jumped 38 percent to HK$10.

By contrast, Exxon Mobil Corp. has fallen 14 percent this year, ConocoPhillips dropped 18 percent and Royal Dutch Shell Plc declined 15 percent.

Asian oil companies will have average production growth of 5 percent compared with an average of 1 percent for international companies, Beveridge said in the report.

Higher Returns

Faster production growth has been accompanied by higher relative returns, with the average return on capital employed over the last five years at 21 percent for the Asian majors, compared with 14 percent for their global counterparts, the report said.

Chinese and Indian companies may invest as much as 80 percent of their cash flows in developing oil and gas areas versus 40 percent for their Western competitors. International companies have repurchased equity and increased dividends while Asian oil and gas producers have reinvested at higher rates within the business, the report said.

“Investors who have held Cnooc and Reliance Industries have experienced an increase in share price of 200 percent since the start of 2004,” the report said.

To contact the reporter on this story: Dinakar Sethuraman in Singapore at [email protected].

Last Updated: July 20, 2009 00:27 EDT

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