Ahead of the quarterly results, we recommend an Outperform rating for CNOOC Ltd. (CEO) ADRs with the Zacks #1 Rank (Strong Buy). The recent upswing in CNOOC ADR performance (up more than 12% in the last three weeks) reflects the company’s solid balance sheet, premium assets portfolio, excellent execution strategy, unique position as a pure oil player and potential transactions in the merger and acquisition space.
We believe CNOOC’s recent acquisition of Eagle Ford Shale acreages from Chesapeake Energy (CHK) is a long-term growth strategy as the return metric of this deal is more attractive than the company’s earlier acquisition of stake from Bridas Energy. We also believe that CNOOC will gain experience from Chesapeake in terms of technology and experience in shale oil and gas, which would be a long-term catalyst for growth.
While China is desperately searching for energy worldwide, CNOOC’s recent acquisition of Eagle Ford Shale acreages is appreciable. Though we believe that value for the transaction will not be reflected in the near term, long-term benefit is probable as the Eagle Ford region is liquid-rich and has potential exploration upside. CNOOC has been active in balancing reserve and production growth. In addition, its strong cost-control measures will assist in maximizing shareholder value.
While the company is active in the South China Sea, its overseas production is gaining momentum with significant upside potential. Based on the company’s rich resource base, CNOOC has created a solid foundation for future growth. We believe that the company is on track to achieve its targeted growth rate of 6%-10% CAGR over the next five years.