Cnooc Warns of $1.2 Billion Loss Amid Oil Sands Writedown

Cnooc Warns of $1.2B 1H Loss
  • Company expects first loss since Hong Kong listing in 2000
  • Long Lake oil sands operation in Canada idled this month

Cnooc Ltd., China’s biggest offshore oil and gas producer, projected about $1.2 billion in first-half losses, flipping from a profit a year ago, as it took a charge on its Canadian oil sands assets. Shares fell in Hong Kong on Friday.

The Beijing-based company expects to report a loss of about 8 billion yuan ($1.2 billion) for the first six months of the year, compared with profit of 14.7 billion yuan in the same period in 2015, the company said in a statement to the Hong Kong Stock Exchange on Thursday. It would be Cnooc’s first half-year loss since 2000 when it began trading, according to data compiled by Bloomberg.

Cnooc shares in Hong Kong pared some losses after falling as much as 3.2 percent to HK$9.25. The stock was down 2.3 percent to HK$9.34 as of 11:16 a.m., compared with a 0.9 percent slide in the city’s benchmark Hang Seng Index.

The Beijing-based company may pay a special dividend despite a half-year loss, Morgan Stanley analysts including Andy Meng, said in an e-mailed statement. “Thanks to Cnooc’s competitive cash cost and strategy to reward shareholders, we think the company is highly likely to pay a special dividend in the first half despite the loss.”

Cnooc has been very aggressive in paying out dividends to keep shareholders happy. The company paid 20.4 billion yuan in dividends in 2015, even though it only made 20.2 billion yuan in annual profit.

Crude and Impairment

Cnooc’s expected loss is attributable to the further decline in crude prices during the six-month period, as well as impairment and provisions on oil and gas assets, including oil sands in Canada, the company said in the statement.

“As a pure upstream player, Cnooc is too tied to oil prices and has no refining exposure to hedge against low prices,” Tian Miao, an analyst with policy researcher North Square Blue Oak Ltd., said by phone. “Cnooc paid too much for Nexen’s oil sands assets, so they have to write down some of it as the current price leaves no chance for the expensive operations to turn a profit.”

Brent crude, the global benchmark, averaged about $41 a barrel during the first half of the year, down roughly 30 percent from the same period in 2015. Cnooc issued its warning the same day that Royal Dutch Shell Plc reported its lowest quarterly earnings in 11 years and missed estimates by more than $1 billion as a mix of lower energy prices, weaker refining margins and production halts weighed on Europe’s largest oil company.

Long Lake

Cnooc decided earlier this month to idle part of its Long Lake oil-sands operation in Alberta after an explosion in January in the project’s upgrader, capping five years of problems that cemented the site’s reputation as one of the most troubled developments in the region. The company said in January that its total output this year would fall for the first time since 1999 and that capital spending would be capped at 60 billion yuan.

Long Lake has never reached its production capacity and has been plagued by accidents, including workers’ deaths, explosions and pipeline spills. The operation experienced cost overruns and under-performance before Cnooc gained complete ownership when it paid about C$15 billion ($11.4 billion) in 2013 for Nexen Energy. The unit also contended with a pipeline leak last year and a wildfire in May that forced production offline.

“Low oil prices damage the economics of high-cost production, such as oil sands, resulting in another impairment at Cnooc,” said Lu Wang, a Bloomberg Intelligence analyst in Hong Kong. The state-owned company reported a 2.75 billion yuan writedown in March when it posted a 66 percent drop in 2015 profit.

Excluding the charge, Sanford C. Bernstein & Co. expects the company to post a first-half loss of 50 cents per barrel of oil equivalent, or about 750 million yuan, analysts led by Neil Beveridge wrote in a note Thursday.

“Stripping out impairments however, we see results in line with our expectations and hence not a surprise,” the analysts wrote. “Investors should continue to buy on the dips.”

About two-thirds of the nearly 1.37 million barrels of oil equivalent a day the company produced in the first quarter came from China, according to a presentation on its website. Canada accounted for less than 4 percent of the total.

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