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We maintained our recommendation on CNOOC Ltd. (CEO - Analyst Report) at Neutral on Nov 12, 2013. The company’s performance, which reflects its premium assets portfolio as well as excellent execution strategy, positions it as a pure oil player with potential transactions in the merger and acquisition space. However, any delay in the commissioning of its projects is likely to pull down earnings and increase costs. CEO carries a Zacks Rank #3 (Hold).

Why Maintained?

CNOOC’s growth will be augmented by significant capital injection for upstream activities in the next five years. The company believes that it will be able to maintain a 6–10% compound annual production growth rate over the same time frame backed by various organic and inorganic measures and intends to invest $12 billion to $14 billion in 2013 to achieve its target growth rate. Contribution from the latest projects and new development wells also supported the increase. Moreover, revenues from the Iraqi Missan service contract will be a major growth driver this year.

CNOOC has made significant progress in its scheduled project agenda. During the third quarter, CNOOC made 5 discoveries and successfully completed the appraisal of 15 wells. Of these, Luda 5-2 North is a mid-sized new discovery and Kenli 9-5/9-6 proved to be a mid-sized oil and gas structure. These bear evidence to CNOOC’s constant efforts to upgrade its portfolio and enhance shareholder value.

In Feb 2013, CNOOC completed the acquisition of Canadian energy producer Nexen Inc. for approximately $15.1 billion in cash. The deal enhanced CNOOC’s proven reserves by 30% and helped it to vastly expand its holdings in Canada. Moreover, the purchase of Nexen made CNOOC the operator of the largest oil field in the U.K. and the biggest contributor to Forties Blend crude − Buzzard. The CNOOC bid marks the biggest Chinese takeover attempt so far.

However, the company’s prospects are closely linked to the successful completion of its growth projects, which in turn, might be affected by operational hindrances, cost inflation and overruns as well as delays in completion.

Other Stocks to Consider

While we prefer to remain on the sidelines for CEO, Zacks Ranked #1 (Strong Buy) stocks – SM Energy Company (SM - Analyst Report), Western Gas Partners LP (WES - Snapshot Report) and Abraxas Petroleum Corp. (AXAS - Snapshot Report) – could be good buying options for the short term.
 

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