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A Chinese Stock with International Projection

April 30, 2014 | About:

Chinese regulation is well known for being particularly different than western. For starters, the idea of free unregulated economic activity does not apply. Government authorities are pretty jealous about who profits from national resources. For example, companies in the oil and gas industry have faced constant pressure to keep prices down. Some political analysts may brand this behavior as popular policies. Yet others will defend the approach as a safeguard against multinational exploitations.

Regardless of preferences, both interpretations highlight the effect of government participation on the guidance of the economy. In consequence, Chinese companies find limits to their profits and geographical presence. With a gas boom on the way, and the possibility to do business abroad, CNOOC (CEO) is positioned to make some serious progress. Some gurus also found it attractive.

Strong Production, Weak Perspective

For fiscal year 2013, CNOOC reported net production reached 411.7 million barrels oil equivalent, up 20.2% year-over-year. Throughout the year seven new projects came on stream, and 18 new discoveries were made, while the reserve replacement ratio climbed to 327%, taking net profits to $9.03 billion. Most important for the business model, the acquisition and integration of Nexen continues to advance smoothly, as improvements in health, safety and environmental indicators improve steadily.

Financial institutions have not struck a clear verdict on CNOOC. While some have rated the stock “Buy,” others preferred to push for a “Neutral” rating, and even “Reduce.” Either way, there is a clear tendency for downgrading the stock since the beginning of 2014. In all, five institutions forwarded a negative outlook for the company, while only two have improved the rating, as Zacks reiterated a “Neutral” rating. Moreover, the target price has also suffered along the way, seeing a $40 reduction in comparison with the figures proposed around mid-2013.

Besides hitting a historical record for reserve replacement ratio, CNOOC announced that the Company has recently made a mid-sized natural gas discovery Bozhong 22-1 in Bohai. Also, the company has recently made a new mid-sized gas discovery Lingshui17-2, which indicated the first breakthrough on the independent deepwater exploration in Qiongdongnan Basin of South China Sea. Last, a company subsidiary has signed an agreement with a unit of BG Group (BG) on the proposed Prince Rupert LNG terminal on Canada’s west coast.

This Time, Is the Right Time

For 2014, CNOOC will at a net production in the range of 422 million to 435 million barrels of oil equivalent, including approximately 69 million barrels of oil equivalent as a result of the acquisition of Nexen. Also, 7 to 10 new projects are expected to come on stream. Most important, an extensive exploration program will be carried out, to acquire approximately 26.7 thousand kilometers of 2-Dimensional and 19.4 thousand square kilometers of 3-Dimensional seismic data to strengthen the deepwater exploration. Additionally, management plans to drill roughly 155 exploration wells.

The key growth catalysts for CNOOC is found in a significant capital injection for upstream activities in the next five years. Moreover, investment started in 2012 delivering higher than expected growth in 2013 thanks to the successful discoveries and drilling activities in China and Uganda. The integration of Nexen will be completed in 2014, compounding the profits seen during 2013. Last, the company holds a premium assets portfolio, excellent execution strategy, unique position as a pure oil player and potential transactions in the merger and acquisition space.

Currently trading at 8.1 times its trailing earnings, CNOOC carries a 71% discount to the industry average. It pays $2.9 in quarterly dividends, representing a 4.06% annual yield. Today, Sarah Ketterer (Trades, Portfolio) is the guru tracked by GuruFocus with the largest position after several purchases done throughout 2013. Peter Lynch would approve of her actions, and continue recommending to purchase the stock at this time. Additionally, the Chinese government is supporting the company’s abroad business. And it is a good time for acquiring the stock for a long-term position.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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