Time to Get Out of CNOOC

If you haven't noticed, it's time to get out of CNOOC (CEO). The Chinese offshore oil and natural gas company is watching its profit margins dwindle with higher taxes and rising operating costs.

The company just reported a mere 1.1% growth in net profit for the past year, despite global energy prices high enough to send oil executives into orbit with sheer joy.

But if anything, China's windfall tax depressed its oil companies in this time of energy elation. The tax is leveraged on every barrel of oil local oil companies sell above $40, meaning every barrel of oil they sold in the last year. CNOOC paid nearly double the amount of taxes this year, from 3.98 billion in 2006 to 6.84 billion yuan in 2007.

High Oil Prices Cancelled by Higher Production Costs

The company isn't making more money on the oil it produced. And production only increased 2.6% in the last year because CNOOC had to shut down one of its fields, Liuhua, after a typhoon. New fields won't begin producing until later in 2008.

If it meets projections, CNOOC could see an 11% production increase this year. But that remains to be seen, and rising costs could cancel out much of the increased production in the next year. China's inflation is hitting the company hard and equipment and land rights are costing them more, as well.

We'll wait and see if the company can turn a higher profit in the coming year. In the meantime, sell CEO at current prices (about $150 per share, as I'm writing this). If you bought the stock when we recommended it around $86 in May of last year, this will give you a nice 75% (I'm rounding) gain on the play.

We may get back into the stock if it slides to a cheaper level in the next few months and things look better on China's domestic front. But unless the windfall tax is decreased, or oil suddenly falls below $40 per barrel again (and if that happens, I'm sure we'll be busy watching the simultaneous collapse of several industrialized countries instead of thinking about Chinese oil companies), I only see CNOOC's profit margins getting worse.

Disclosure: None

Comments

[VennData:]

The inflationary subsidy their government gives to oil can only be reduced in the future. That will not have positive medium term implications for this sector in the Chinese economy.

2008 Mar 31 08:48 AM

[Ames Tiedeman:]

Oil is going to 85 over the next 2 months. Then up to 120 this summer..

2008 Mar 31 01:50 PM

[Rick S.:]

If I was an in-and-outer with CNOOC I might follow your advice, Stephanie. I in China companies for the long term, not just in company growth/necessity but in China growth also. I know we're a dying breed--long term investors--but some of us are still around. So I'll hang on to my CNOOC.

2008 Apr 01 07:52 PM

[rxdx:]

That's nonsense. CNOOC is going to be back over 200 before the end of the year. Since Stephanie posted this, it's up 8%. Glad I didn't listen to this advice. Hold, do not sell or buy, China for the moment.

2008 Apr 07 03:28 PM

[Streetwalker:]

Unfortunately, this seems to be a simplistic analysis. It fails to give consideration to the business environment in which Chinese oil industry is running. Were there any other reasons behind the CNOOC's mediocre production increase given oil price was so high? Why was windfall tax? Was it a lasting effect or temporary? We can't come to conclusions with those important information missing.

2008 Apr 09 05:16 PM

[chinesepetti:]

Ms Stephanie, take your worthless american dollars out of cnooc, the sooner the better and buy yourself a few Iphones or citi Bank!

2008 Apr 13 04:12 AM

[silver-bullet:]

With P/E ratio at 1,698.33, I think the valuation is pretty darn rich. Granted this is a China stock, this doesn't grant them the right to print money like the US government. Remember - the Shanghai index dropped 40% yoy. What makes this company special?

2008 Apr 26 07:05 AM

[silver-bullet:]

Sorry, I got the high P/E ratio from Yahoo Finance:
finance.yahoo.com/q?s=...

I last checked Scottrade's P/E ratio for CEO, and it was in line with the one in this website, which is 17.6

2008 Apr 26 07:13 AM