CNOOC, China’s oil darling, posts disappointing results

When they announced their annual results last week, the overarching theme this year for Chinese state-owned oil companies was prudence, cost controls and efficiency.

CNOOC Ltd, the smallest and traditionally the most nimble of the three companies, however, disappointed in both earnings and organic growth last year and also drew flak for its failure to cap ballooning upstream costs.

Once the darling of equity analysts because of the company’s pure upstream focus — refining and LNG operations are held by its parent CNOOC Group — CNOOC Ltd has struggled to keep pace with expectations in the last year.

Its 2013 production was up 20% year on year to an average 1.13 million b/d of oil equivalent, on the back of a near doubling in foreign output to 408,219 boe/d. Net profit for 2013, however, slid over 11% to Yuan 56.5 billion ($9.1 billion).

Without the acquisition of Canada’s Nexen acquisition — which closed in February 2013 — its reserves replacement rate was just 119% last year, compared with 188% in 2012. Despite touting a number of “adjustment” or enhanced recovery projects, the company, which is the monopoly offshore operator in China, saw its domestic production decline 1.6% year on year to 719,726 boe/d.  In particular, oil output in the Bohai Bay, which is its largest production base, fell 5% from 2012 to 392,329 b/d last year, the lowest level since 2009.

Exploration expenses surged nearly 90% year on year to $2.76 billion, with dryhole expenses ballooning 79% to $1.15 billion. On a per barrel basis, a significant increase in the costs was a result of the Nexen addition.

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While pledging to hone in on efficiency and costs this year, CNOOC failed to show any credible and concrete measures to achieve this, beyond saying it would focus on research and more work in the unconventional space to bring down exploration and development costs.

Its capital expenditure is targeted for Yuan 105-120 billion, up to a 30% increase from Yuan 92.4 billion last year, which itself had been a 54.3% rise over 2012.

Contrast this with rivals Sinopec or China Petroleum and Chemical Corp, and PetroChina, which both announced rare cuts to their capital spending plans this year, saying they would prioritize quality of assets over quantity.

Operationally, CNOOC’s project execution has also been less than stellar, with three of the 10 projects that were announced to be starting up in the 2013 timeframe missing their targets.

Chief executive Li Fanrong had said in January that project schedules were highly dependent on weather, operational issues and getting timely government approvals. But these issues are not unique to CNOOC or Chinese companies.

“CNOOC management simply do not get the new realities of the commodity cycle we are in”, Bernstein Research said, adding that the company’s costs “are simply out of control”.

CNOOC got some reprieve this week when its partner, Canada’s Husky Energy, announced first gas from the $6.5 billion Liwan gas project. CNOOC represents the state with a 51% interest in the project, which could reach a gross 500,000 Mcf/d by 2017.

Liwan has been a much-lauded project in the last decade as it was a significant discovery made in the deepwater Pearl River Mouth Basin in the South China Sea, proving that there was some potential in the frontier area offshore China. Since then, however, hopes have dwindled as deepwater drilling by CNOOC’s foreign production sharing contract partners has resulted in undesirable results or dry wells.

It is also unclear if CNOOC remains committed to the deeper waters off China following the Nexen acquisition. Nexen is busy focusing on other projects, including a new Canadian LNG export terminal at Grassy Point near Prince Rupert in British Columbia.

Company management maintain that Nexen is invaluable to medium and long-term growth, even if it contributes to higher costs. It also asked for patience last week as it tries to institute a culture of reform internally.

The market has so far shown little patience. Following the results announcement on Friday, the company’s stock in Hong Kong — it is also listed in Toronto and has American Depository Receipts in the US — opened at HK$11.90/share on Monday, down 3.4% from Friday’s close, and continued sliding throughout the day to finish at HK$11.66/share.

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  1. John Kingston at March 31, 2014 10:50 am

    The costs issues are vexing everyone, Yen Ling. One analyst I know points out that some CapEx is being calculated on a basis of $100-plus Brent, but the curve out to when some of these projects are going to become reality is far less than that. The logical step instead, if a company thinks the price is going to be that high in the future, is simply to buy the curve 4-5 years out. But that’s not what oil companies do.


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