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Chinese state-owned company CNOOC Ltd. (CEO - Analyst Report), along with Australian partner Exoma Energy announced that they are moving ahead with their joint venture called Galilee, with the exploration of the seventh well in its program – Nora-1.

The companies spud the well in the Galilee Basin, about 93.2 miles northwest of Longreach, Queensland, using the EDA Rig-2 in ATP 991P.

The drilling of the well is a part of the exploration program shared by CNOOC and Exoma, under which they would drill 22 wells to estimate and evaluate the coal seam gas, conventional oil and shale oil and gas resources in the acreage that spans 10.425 square miles of the Eromanga and Galilee Basins.

CNOOC, through an initial investment of about A$50 million, controls 50% stake in five of the Galilee Basin – ATP 991, 996, 999, 1005 and 1008. The remaining interest is held by Exoma.

CNOOC is one of the three leading oil companies in China and one of the largest independent oil and gas exploration and production companies of the world.

Last week, the company reported results for the first half of 2012, with net profit declining 19% year over year to 31.869 billion yuan (US$5.04 billion), or 0.71 yuan per share ($11.23 per ADS), due to rising costs and lower output (exchange rate: 1.00 yuan = US$0.1581, 1 ADS = 100 shares).

Total revenue in the period was 118.27 billion yuan (US$18.70 billion), down 5.1% from the year-earlier level. Oil and gas sales were 95.66 billion yuan ($15.12 billion), down 1.4%.

We expect CNOOC to be proactive on exploration investments in the coming quarters. The company is characterized by premium assets portfolio, excellent execution strategy, unique position as a pure oil player and potential transactions in the merger and acquisition space.

However, we remain skeptical in the near term due to oil and gas price volatility, rising popularity of unconventional energy, the loss of production momentum and absence of catalysts. Hence, we foresee limited upside potential for the stock and maintain our Neutral recommendation on it.

CNOOC, which recently inked a deal to purchase Canadian energy producer Nexen Inc. , currently, holds a Zacks #3 Rank, which is equivalent to a short-term Hold rating.

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