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High Oil Prices Hurt CNOOC? Really?

Posted March 28, 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." — Stephanie Grimmett

by Stephanie Grimmett

Baltimore – (TFN): If you haven’t noticed, it’s time to get out of CNOOC (CEO: NYSE). 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.

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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.

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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.

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Posted by Stephanie Grimmett · Filed Under Oil and Energy 

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