Cnooc Retains Annual Output Target as Sales Slump on Lower Crude

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Cnooc Ltd., China’s biggest offshore oil and gas explorer, will keep its annual production target, undeterred by a 40 percent plunge in first-quarter sales.

Oil and gas sales dropped to 35.5 billion yuan ($5.7 billion) in the three months ended March 31 from 59.1 billion yuan a year earlier, the Beijing-based company said in a statement Friday to the Hong Kong stock exchange. Cnooc, which gets most of its income from oil and gas production, didn’t report profit for the period.

The revenue slump was expected as the Beijing-based explorer based its annual plan on a price of $60 a barrel, Chief Financial Officer Zhong Hua said Friday in a conference call.

“I don’t see any need to change our plans now,” Zhong said. The sales decline in the first quarter is “what we thought may happen when we adjusted our plan to low crude environment at the beginning of the year,” he said.

The explorer will produce 475 million to 495 million barrels of oil equivalent this year, compared with about 432 million barrels in 2014, it said in February. Output rose 9.4 percent to 118.3 million barrels of oil equivalent in the first quarter from a year earlier.

Cnooc’s average realized oil price fell 49 percent to $53.40 a barrel in the three months from $104.63 a barrel in the same period last year. Brent, the benchmark for half the world’s crude trading, has declined 43 percent in the past 10 months.

“Our sales numbers mimic that of crude oil declines,” Zhong said. “The sharp decline of crude was the key reason for our sales decline.”

Earnings Surprise

At its full-year results in March, Cnooc exceeded expectations with a 6.6 percent increase in profit, beating larger peers PetroChina Co. and China Petroleum & Chemical Corp. Analysts said effective cost control led to higher earnings.

The explorer’s annual profit may drop 62 percent to 22.9 billion yuan this year, according to the mean estimate of 24 analysts compiled by Bloomberg.

“While 2015 will be a challenging year, we expect further progress on lifting cost reduction with service industry deflation,” said Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein. “With a recovery in oil prices in the second half, we are confident Cnooc are on the right track.” Beveridge rates Cnooc stock outperform with a target price of HK$16.

Cnooc shares gained 2 percent to HK$13.12 before the first-quarter sales announcement. The stock has gained 26 percent this year, compared with a 19 percent increase in Hong Kong’s benchmark Hang Seng Index.

Royal Dutch Shell Plc’s $70 billion acquisition of BG Group Plc won’t have any impact on Cnooc’s global acquisition strategy, Zhong said. Cnooc is closely monitoring oil and gas businesses that have become available since the second half of last year when the oil slump began though no assets have been identified, he said.

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