Cnooc Sets 2014 Output Target Lower Than Five-Year Goal

Cnooc Ltd., China’s biggest offshore oil and gas producer, dropped the most in more than two years in Hong Kong as two analysts downgraded the stock after its forecast for output growth fell short of target.

Cnooc shares fell 6.3 percent to HK$13.08, the biggest fall since October 2011, at the close in Hong Kong. The benchmark Hang Seng Index gained 0.5 percent.

The Beijing-based explorer will produce 422 million to 435 million barrels of oil equivalent, or a 5.6 increase from a year earlier, it said in a statement to the Hong Kong stock exchange yesterday. The company produced 412 million barrels of oil equivalent in 2013, including 61 million barrels from Canada’s Nexen Inc.

Cnooc, which bought Nexen for $15.1 billion last year in China’s biggest overseas acquisition, maintained its 6 percent to 10 percent average annual production growth target from 2011 to 2015 with the proviso that key offshore projects start on time later this year or early next, Chief Executive Officer Li Fanrong said at a press conference in Hong Kong yesterday. Nomura Holdings Inc. and Sanford C. Bernstein analysts downgraded the stock after the output projection.

The production estimate “clearly implies significant organic productivity declines from existing mature fields, forcing Cnooc to have to rely on Nexen’s higher cost projects overseas for long term growth,” Gordon Kwan, the regional head of oil and gas research at Nomura in Hong Kong, said in an e-mailed research note today.

Rating Cuts

Kwan cut his rating on Cnooc to reduce from buy and his price target by 7 percent to HK$13.

Cnooc will seek to cut operating costs at Nexen’s Canadian projects in the next few years by improving management efficiency and adopting new technologies, Li said, without elaborating. Nexen’s oil sands and shale gas reserves in Canada give Cnooc resources to achieve sustained growth in the future, he said.

Neil Beveridge, a Hong Kong-based analyst at Bernstein, called Cnooc’s 2014 production guidance “a significant disappointment” that fails to deliver sufficient production growth and control costs. Bernstein downgraded Cnooc to market perform from outperform and cut its 2014 price target by 20 percent to HK$16.

Twenty two analysts rate Cnooc a buy, eight a hold and three sell, of the 33 who track the company, according to data compiled by Bloomberg.

Cnooc shares have dropped 19 percent in the past year, compared with a 2.4 percent decline in the benchmark Hang Seng Index.

New Projects

As many as 10 new projects will start in 2014. Capital spending will climb as much as 33 percent to 120 billion yuan ($19.8 billion) from a year earlier, of which 54 percent will be in China, 19 percent on Nexen and 27 percent on overseas projects other than Nexen, the company said in yesterday’s statement.

“We have looked at our projects one by one, and believe the goal could still be achieved if things go ahead as planned,” CEO Li said. Circumstances outside Cnooc’s control such as bad weather or construction delays may prevent some projects from starting on time, he said.

The explorer may be able to meet its stated 2011 to 2015 growth target as long as it can deliver results next year, Wu Fei, an energy analyst at Bocom International, said in an e-mailed research note today. Cnooc’s production has to grow at about 21 percent in 2015 to achieve its five-year target, Wu said.

Optimistic Outlook

“After strong capital expenditure in the past few years, we are still optimistic on the company achieving its five-year target by 2015,” Wu said. Bocom raised its target price for Cnooc stock by 10 percent to HK$15.30.

Cnooc’s production dropped 1 percent in 2011 and increased 3.4 percent in 2012, according to data compiled by Bloomberg. Its 2013 production, excluding Nexen, increased as much as 3.8 percent to 351 million barrels, according to Bloomberg calculations. Its 2013 target was 338 million to 348 million barrels.

China Oilfield Services Ltd., a unit controlled by Cnooc’s parent China National Offshore Oil Corp., may benefit from the increase in capital expenditure as Cnooc is a key customer, according to Nomura’s Kwan. The unit’s shares have advanced 45 percent in the past year. The stock climbed 1.9 percent to HK$23.75 in Hong Kong today.

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