Is CNOOC the Leanest and Cleanest of China’s Big Three Oil Majors?

Is CNOOC the Leanest and Cleanest of China’s Big Three Oil Majors?

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On September 7 Chinese National Offshore Oil Corporation (CNOOC), the smallest of three Chinese state-owned oil majors and its largest offshore oil driller, announced that it had signed a production sharing contract (PSC) and deal with Smart Oil Investments who will survey and explore in the shallow waters (five to 15 meters water depth) of Bohai Bay, offshore China. The area agreed upon, Block 05/31, covers 270-square kilometers (100-square miles).

Per the terms of the deal, Smart Oil will conduct 3D seismic data survey and drill exploration wells in the block during the exploration period. All expenditures will be borne by Smart Oil, while CNOOC has the right to participate in up to 51% working interest in any discoveries in the block.

The deal comes just two months after CNOOC announced that it made two new exploration discoveries, Bozhong 8-4 and Kenli in Bohai, with an estimated 146 million barrels of oil in place.

The Bohai Bay Basin, located in northeastern China offshore Beijing, is the country’s oldest oil-producing offshore zone and holds the bulk of proven offshore reserves in China, according to the US Energy Information Administration (EIA).

Also in July, CNOOC signed a PSC with BP for deepwater Block 54/11 in the Pearl River Mouth Basin in the South China Sea (SCS). However this PSC is in deepwater with depths of 370-2,300 meters and covers a total area of 4,586 square kilometers. The BP deal was the 200th PSC between CNOOC and foreign firms.

However, around 85% of Chinese oil production capacity is still located onshore, while offshore exploration and production (E&P) activities have focused on the Bohai Bay region, the SCS (particularly the Pearl River Mouth Basin), and, to a lesser extent, the East China Sea due to rival claims between Japan and China.

Albeit, CNOOC’s proactive offshore drilling activities has caused The Street to take notice. Last month, investment research firm Zacks said that CNOOC, which is traded on the New York Stock Exchange (NYSE), has a strong growth profile, exclusivity in the offshore China region and attractive liquefied natural gas (LNG) investments.

Zacks said it is also encouraged by the company’s focus on revenue growth through asset acquisitions. However, Zacks still downgraded CNOOC to Neutral from Outperform, based on what it calls the company’s lukewarm first half 2013 performance due to a volatile oil price environment. CNOOC’s average realized oil price decreased 10.9% year over year to $104.20 per barrel in the first half of 2013. Realized gas prices also decreased from the year-ago level. Zacks did add however that it continues to be positive on long-term growth option for CNOOC.

However, activities from hedge fund managers are often a better gauge for what’s going on with a company. Two weeks ago, Insider Monkey (an insider trading and hedge fund data company) said that eleven of the hedge funds they track were bullish on CNOOC for the third quarter, a change of 21% from a quarter earlier.

Insider trading is an even more telling sign of what could be going behind the scenes. After all, these traders have much coveted non-public information not available to the masses. Usually insider trading is executed by high-level executives in the know, so its information worth following. In CNOOC’s case, over the last 180-day time period the company has seen zero unique insiders buying, and zero insider sales, at least according to Insider Monkey.

Taking a look at top corporate management also provides valuable decision-making information for would-be investors, analysts and pundits, particularly looking at a company’s CEO, president and other executives. However, this is easier said than done, especially in China. While US firms are more open to public scrutiny, that’s not the case in China, especially its state-owned enterprises (SOE).

A cursorary look at CNOOC’s top management yields little, other than the usual biographical background information. It should be noted that the company’s executives are experienced and savvy oilmen who are also top Chinese Communist Party (CCP) officials, which is the case with CNPC and Sinopec also.

A look at CNOOC’s recent deals, particularly its recent $15.1 billion acquisition of Canadian energy company Nexen gives clues about CNOOC’s decision making process and corporate culture from the top down but still fails to give a glimpse of what’s happening behind the scenes or indicates if anything unusual is taking place.

CNOOC’s past indiscretions

To date, CNOOC has mostly remained above the radar as far as corruption scandals are concerned, but at least two incidents have given the company problems recently. One came on October 14, 2010 when former CNOOC president Jiang Xizhao was “handed his walking papers” as Caixin Online describes it, and was later detained by customs police.

Caixin said the dispute centered around the question of whether billions of yuan should be paid to the local customs department. The story never gained much attention in international media and apparently was quietly resolved.

Gaining more media attention were accusations of insider trading by the US Securities and Exchange Commission (SEC) against a Hong Kong-based firm, Well Advantage, owned by Zhang Zhirong, a prominent Hong Kong businessman with close ties to CNOOC as CNOOC worked to close the Nexen deal last year. Though the case was a source of embarrassment for CNOOC and also China, Well Advantage agreed to pay more than $14 million to settle the charges and the CNOOC-Nexen deal finally went through while the company salvaged its reputation.

Leanest and cleanest?

Jan Mayen with Chinese Investment Tracker said that CNOOC is thought to be “the leanest and cleanest of the Chinese oil giants, and seldom makes news for corruption incidents and other peculiar business practices, at least compared to the average SOE.”

If Mayen is right, and in light of President Xi Jinping’s anti-graft crackdown that already has China Mobil and CNPC squirming in nervous anticipation amid investigations and executive resignations, what (if anything) will Beijing find going on behind the scenes of its number three oil major, CNOOC?

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