The Perfect Energy Play: CNOOC

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 |  About: CNOOC Limited (CEO), Includes: APC, APU, CNQ, COP, CVE, CVI, CVX, EC, HAL, HFC, HP, MRO, NOV, NS, PBR, RIG, SLB, SNP, SSL, STR, SU, TSO, VLO, WFT, XOM
by: Alex Rasmussen

In my previous article I made a bullish case for the energy sector. Building on that, I recently completed a detailed comparison of various mid/large cap energy stocks. The list includes all sorts of companies: the majors, foreign, E&P, and also some companies in the oil and gas service industry. It does not include companies that are not in some way tied to the price of oil and natural gas.

In this market environment, individual investors should be seeking companies with predictable growth prospects, a history of execution, a suitable margin of safety, and preferably a dividend.

The table below is organized as follows:

EPS Rating: I use this IBD proprietary measure to judge the consistency and quality of previous earnings growth rates. It represents the percentile compared to the available market universe (80 = 80th percentile)

Price to Earnings and Price to Book: I needed to include these two common metrics recommended by Benjamin Graham. Whether it be a GARP or value strategy, the companies I invest in cannot be trading at a big premium to either. Green is good, yellow mediocre, and red bad.

SMR Rating: This is also an IBD figure. It is a composite score that sales trends, profit margins, and return on equity. A = top 20%, outperforming more than 80% of other stocks. B = next 20%, C = next 20% (and so on).

EPS Growth Trend: I used this as my own score of longer term earnings consistency. The EPS rating only includes 5 years worth of data, whereas I reviewed all available filings. A company may have a great EPS rating but a poor EPS growth trend score, and vice-versa.

Forward Dividend Yield: Green indicates that it yields more than US 10 years, yellow is less and red is no dividend.

Here are the results:

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EC, CEO, HAL, SSL, CVX, XOM, and SNP look good. They all have at least 4 greens. On the other hand, CVE should be considered a speculative investment, with 5 reds.

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CNOOC (NYSE:CEO) is the clear winner, returning over 750% during the past decade.

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I was surprised to see CNOOC underperform year to date. This is the market's reaction to China's new resource tax reform. It has now been established that oil and natural gas sales will be taxed 5% to 10% nationwide. This is both an attempt to transfer profits from the state-owned companies to provincial governments, and a recognition of the immense profitability of these firms.

The street has brought CNOOC to a valuation well below its historical average, its prospects, and its competitors. Another reason I like it over the Exxons and Chevrons of the world is simple: market cap. CNOOC is currently a $78 billion company whereas the latter two are consistently over $300B and $200B respectively.

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The above technical chart confirms my belief that the current downtrend is running out of steam. An appropriate entry depends on your individual portfolio and your view on recession likelihood. In any case, a buy at these levels is justified.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CEO over the next 72 hours. All figures are as at October 11. The opinions presented here are solely my own and not reflective of the investment strategy of any employer, past or present.