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China's CNOOC open to acquisitions, but treads cautiously after Nexen

(Platts)
Updated: 2016-08-29 10:22
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    China's top offshore oil and gas producer CNOOC said Wednesday that it was scouting around for potential acquisition opportunities, although a climate of low oil prices was making it difficult to agree on price and close deals.

    At the same time, CNOOC is optimistic that its purchase of Canadian producer Nexen would turn out to be a lucrative asset in the future, even though the current cost of running it is high.

    "We are still looking for good M&A opportunities globally, but we will be more cautious after Nexen," joint company secretary Li Jiewen told S&P Global Platts on the sidelines, while the company announced its half-yearly results. "It is still hard for asset buyers and sellers to agree to a deal price currently."

    CNOOC bought Nexen for about $15.1 billion in early 2013, one of the largest overseas acquisitions by a Chinese company. "We are confident in its future if we control the costs well," said CNOOC's chairman Yang Hua, adding that the difficult situation they faced in managing costs was "temporary."

    Its 58,500 b/d Alberta oil sands upgrader in Canada has been shut since mid-July after a series of accidents and will be moved into winter preservation, or cold stack, mode without a planned date to resume operations.

    In addition, the Long Lake business would transition to a steam-assisted gravity-drainage-only operation in the interim.

    As a result, CNOOC's oil and gas output from Canada dropped 40% year on year to 6.3 million barrels of oil equivalent in H1 2016, according to the company's interim results.

    It also pushed down the company's overseas oil and gas output by 2.9% year on year to 81.5 million boe in H1. Oil and gas output from North America, except Canada, also fell 12.9% to 12.1 million boe.

    "The oil sands is a piece of long-term asset with a life of 30-50 years and is one of the biggest oil reserves with some hundred billion barrels," Yang said. "We should not calculate its value in a short period -- like a few months or in one to three years."

    The company's assets in North America include shale oil and gas projects in Eagle Ford and Niobrara, as well as deepwater projects in the Gulf of Mexico -- Stampede and Appomattox.

    "Today, shale gas obviously is not generating great returns in North America ... $2/MMBtu from Henry Hub is not a good price," Yang said, but added that it was an indication that one needs to be cautious while allocating capital expenditure for shale business in North America.

    CNOOC said in its 2015 annual report that operator of shale projects had slowed development activities because of low prices, which would lead to a fall in output in the short term.

    DOMESTIC OUTPUT

    In the domestic segment, CNOOC reported a 2.4% year-on-year rise in oil and gas production to 160.1 million boe in H1 2016. Crude and liquids production accounted for 140.6 million barrels because of higher output from Bohai and the Western South China Sea, Li said.

    However, domestic natural gas production slipped 7.3% to 116 Bcf in H1, despite both government and oil companies pushing development of gas projects. Gas output from overseas assets also declined 4.2% year on year in H1.

    "Natural gas is believed to play an important role globally, as well as in Asia and China in a long run. So natural gas is our long-term strategy," Yang said.

    "Compared to the past, even in one to five years, growth will be slower in some regions. But nevertheless, we still are confident in terms of developing natural gas," he said, adding that the company is lucky to have gas reserves, with recovery rates of 60%-80%, more than double the recovery rate of oil at 20%-40%.

    CNOOC's total oil and gas output was 241.5 million boe in H1, edging up 0.6% from the same period last year. But on a boe/d basis, production was unchanged from last year's 1.33 million boe/d.

    SHARP LOSSES

    Li said CNOOC is keeping its production target for the whole year unchanged at 470 million-485 million boe, which is lower compared with 495.7 million boe in 2015. The lower target was set because of a cut in capital expenditure.

    The company reported a net loss of Yuan 7.74 billion ($1.16 billion) in H1. It was not surprising to analysts as its business revolved mainly around the upstream sector, while oil prices remained weak. It was the sharpest loss posted since the company was listed. Its net profit in H1 2015 was Yuan 14.73 billion.

    CNOOC attributed the loss to a 34.5% reduction in the realized price of oil, which was at $37.70/b during the first six months. In addition, impairment charges on certain oil and gas assets, including oil sands assets in Canada, also contributed to the loss.

    But analysts said CNOOC's performance remained positive. "Firstly, cost cutting was exceptional with opex [operational expenses] down 22% and capex down 33%," Bernstein said in a research note.

    The company achieved six new discoveries and 20 successful appraisal wells in China over the first six months, including the successful appraisal of Kenli 16-1 well, with a test flow of 312 b/d and crude oil density of 0.88. It had also drilled six successful appraisal wells in Brazil, Algeria and Gabon.

 

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