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On Aug 21, 2013, we downgraded our recommendation on CNOOC Ltd. (CEO - Analyst Report) to Neutral from Outperform, based on the company’s lukewarm first half 2013 performance. This Chinese offshore pure play oil and gas exploration and production (E&P) company currently carries a Zacks Rank #2 (Buy).

Why the Downgrade?

Headquartered in Hong Kong, CNOOC is one of the three oil companies in China and ranks among the leading independent oil and gas E&P companies of the world. The company is a dominant producer of offshore crude oil and natural gas and engages in the exploration, development, production as well as sale of crude oil, natural gas and other petroleum products.

CNOOC also has a strong growth profile, exclusivity in the offshore China region and attractive liquefied natural gas investments. Also, we are encouraged by the company’s focus on revenue growth through asset acquisitions.

CNOOC’s average realized oil price decreased 10.9% year over year to $104.20 per barrel in the first half of 2013. Realized gas price also decreased 3.7% to $5.68 per thousand cubic feet (Mcf) from the year-ago level.

The Chinese offshore giant was able to counter the volatile oil price environment on the strength of its higher production. While we continue to be positive on the long-term growth options for CNOOC, the loss of price realization momentum and absence of catalysts make us apprehensive in the near term. 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. Realized prices could fall further going forward, thereby affecting the company’s revenues, earnings and cash flow.

Other Stocks to Consider

There are other stocks in the sector that appear more rewarding in the near term. Among these Carrizo Oil & Gas Inc. (CRZO - Snapshot Report), Abraxas Petroleum Corp. (AXAS - Snapshot Report) and Oiltanking Partners, L.P. (OILT - Snapshot Report) are expected to perform impressively over the next few months and carry a Zacks Rank #1 (Strong Buy).

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