China’s largest offshore energy explorer CNOOC Ltd. (CEO: 165.09 -2.87 -1.71%)said yesterday that it is in the concluding round of talks with the U.K. explorer Tullow Oil to develop three oil blocks (1, 2 and 3A) in Uganda’s Lake Albert basin.Tullow has a 50% ownership in two of these blocks and 100% in the third. It was in the process of obtaining the Ugandan government’s nod to purchase the remaining 50% interest in the first two blocks from U.K.-based Heritage Oil. The government has conditionally approved the purchase plan, as per Bloomberg.
Tullow estimates that about 1.5 billion barrels of oil are still undiscovered in the basin and has been searching for partners to develop these fields, which need an investment of approximately $5 billion. Tullow has selected CNOOC and Total SA(TOT: 48.055 +0.595 +1.25%) as potential partners for this development. Both CNOOC and Total submitted their development plans to the Ugandan government in March.
While domestic initiatives continue, CNOOC is also exploring various international upstream projects to cope with the rising demand of the world’s second-biggest energy consumer. Notably, CNOOC has set a target of 22−27% production growth for 2010.
On a separate note, CNOOC had formed a 50:50 joint venture with Argentina’s oil and gas producer Bridas Energy Holdings in March for a consideration of approximately $3.1 billion. While we initially thought the deal to be a prudent step, we are now concerned about the challenging Argentine tax regime.
Though the company’s underlying valuation remains sound on the back of its premium assets portfolio, excellent execution strategy and unique position as a pure oil player, the stock’s performance is not very impressive. In the last two weeks alone, CNOOC ADRs fell more than 5%.
The company’s positives have already been reflected in its valuation as CNOOC ADRs currently trade at 11.9x 2010E, a significant premium to the industry average of 8.1x.
With oil prices hovering in the mid-70s (lower than the Street consensus, which was estimated in the 90s earlier this year), an upswing in the company’s cost pattern and low-return foreign endeavors, we believe that the performance of the stock will again run into rough weather. We have an Underperform rating for CNOOC ADRs and recommend investors to go for attractively valued peers such asSinopec (SNP: 79.60 -1.98 -2.43%).
With oil prices hovering in the mid-70s (lower than the Street consensus, which was estimated in the 90s earlier this year), an upswing in the company’s cost pattern and low-return foreign endeavors, we believe that the performance of the stock will again run into rough weather. We have an Underperform rating for CNOOC ADRs and recommend investors to go for attractively valued peers such asSinopec (SNP: 79.60 -1.98 -2.43%).
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