On Jan 14, 2013, we upgraded the Chinese energy giant CNOOC Ltd. ( CEO - Analyst Report ) to Outperform. The company’s premium assets portfolio, excellent execution strategy, unique position as a pure oil player and potential transactions in the merger and acquisition space are the key drivers of its growth.

Why the Upgrade?

The Chinese company believes that it will be able to maintain a 6–10% compound annual production growth rate over the next five years backed by various organic and inorganic measures.

CNOOC has made significant progress in its scheduled project agenda. The recent successful oil fields commissioned include the Panyu 4-2/5-1 oilfield adjustment project, the Panyu 4-2/5-1 oilfield project, Weizhou 11-2 and Weizhou 6-9/6-10 − in two different plays in China. These projects bear evidence to its constant efforts to upgrade its portfolio and enhance shareholder value.

During the third quarter of 2012, the company made 8 successful appraisals. The company confirmed Kenli 9-1 as a mid-sized (with 30-50 million tons of oil in place) and Dongfang 13-2 as a large-sized gas discovery (holding about 30–80 billion cubic meters of gas in place) in west South China Sea. Both fields will take 3–5 years to come online.

Further, CNOOC’s purchase of Nexen Inc. ( ) for approximately $15.1 billion in cash received approval by the Minister of Industry, Canada, in December 2012.The deal will enhance CNOOC’s proven reserves by 30% and will help it to expand its holdings in Canada. Moreover, the purchase of Nexen will make CNOOC the operator of the largest oil field in the U.K. and the biggest contributor to Forties Blend crude − Buzzard.

The National Development and Reform Commission of China’s approval of the development plan for Penglai 19-3 in December 2012 is an indication of the early commencement of operations on the field that is expected to augment the company’s earnings going forward.

Other Stocks to Consider

Besides CNOOC, other stocks in the oil and gas sector that are currently performing well include Sunoco Logistics Partners L.P. ( SXL - Analyst Report ) and Royal Dutch Shell Plc ( RDS.B - Snapshot Report ) . Both companies carry a Zacks Rank #1 (Strong Buy).