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We reaffirmed our Neutral recommendation on Chinese offshore pure play oil and gas exploration and production (E&P) company, CNOOC Ltd. (CEO - Analyst Report), on May 9, 2013. Riding on growth in production volumes, the company reported robust numbers in the first quarter. The company holds a Zacks Rank #1, which is equivalent to a short-term Strong Buy rating.

Why Maintained?

Headquartered in Hong Kong, CNOOC is one of the three oil companies in China and 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.

In the first quarter of 2013, CNOOC reported total revenue of 56.18 billion yuan ($8.95 billion), up approximately 14% from the year-earlier level. The upside came primarily from growth in production volume.

CNOOC achieved net production of 93.6 million barrels of oil equivalent (MMBoe), up approximately 17.3% from the year-ago level. The growth was mainly attributable to the production contribution from the acquisition of Nexen Inc, the new oil and gas projects, the resumption of Penglai 19-3 oil field and the overseas projects. Overseas production and steady performances by the already operational oil and gas fields also aided the increase.

CNOOC also has a strong growth profile, exclusivity in the offshore China region and attractive liquefied natural gas investments. Also, we are bullish on the company in the near term owing to its strong revenue growth and significant asset acquisitions.

Over the longer run, however, these positives will likely be somewhat negated by unpredictable oil and gas prices, which are inherently volatile and subject to complex market forces. Realized prices could differ significantly from our estimates, thereby affecting the company’s revenues, earnings and cash flow.

Additionally, the company’s future is closely linked with the successful completion of its growth projects, which in turn, might be adversely affected by operational hindrances, cost inflations and overruns and delays in completion.

Other Stocks to Consider

There are other stocks in the sector that also appear rewarding. These include EPL Oil & Gas, Inc. , Dawson Geophysical Company (DWSN - Snapshot Report) and SM Energy Company (SM - Analyst Report), which are expected to perform impressively over the next few months and carry a Zacks Rank #1 (Strong Buy).
 

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