Energy & Resources

Going onshore

CNOOC eyes Western retreat after A-share return


CNOOC eyes Western retreat after A-share return

When CNOOC launched its bid for Canada’s Nexen, a decade ago this July, Chinese companies were riding a wave of international expansion using M&A to to acquire new technologies and grow their asset base overseas. The company’s chairman Wang Yilin told the Financial Times at the time that Hong Kong and New York-based shareholders could rest assured: there would be no clash between their interests and CNOOC’s state masters.

The following year, the company’s $15 billion all-cash bid was accepted by the Canadian government, catapulting CNOOC into the record books with China’s largest overseas acquisition on record. Beijing was happy because the deal bolstered the country’s energy security, expanding CNOOC’s production by a fifth and its proven and probable reserves by a third.

It turned out to be a high water mark in more ways than one. In 2014, oil prices began plunging after the US rapidly expanded shale gas production. The subsequent 70% oil price decline, over the space of two years, meant that CNOOC could not uphold all of its commitments in the deal, including a promise to retain all of Nexen’s Canadian staff.

Then came the increasingly fraught geopolitical mood of recent years. This month, Reuters reported that CNOOC is planning to sell all of its US, Canadian and British assets, fearful of further Western sanctions after being placed on the US entity list in 2021 because of its drilling in disputed areas of the South China Sea.

A source told Reuters that Sino-US tensions are making life difficult. “Assets like Gulf of Mexico deepwater are technologically challenging and CNOOC really needed to work with partners to learn, but company executives were not even allowed to visit the US offices,” the source stated. The Canadians do not seem that upset to see it go. As one of the most liked online comments under a Canadian Broadcasting Corporation article put it: “Good riddance, they should never have been allowed to buy our assets in the first place if they weren’t willing to abide by our rules.”

Geopolitics also pushed CNOOC off the New York Stock Exchange late last year. However, it has made up for its departure from one market by listing on another this month – the Shanghai Stock Exchange, raising Rmb28 billion ($4.36 billion), or Rmb32 billion if the greenshoe is exercised. That made it the second biggest A-share IPO this year after China Mobile, another state-controlled heavyweight that was forced to delist from the NYSE.

CNOOC climbed 44% on its trading debut in Shanghai on April 21. As of Thursday, it is still trading above Rmb15, or more than 50% higher than its offering price. Yet the secondary listing has not enabled CNOOC to close the valuation gap with its shares that are already listed in Hong Kong, which closed below HK$11 on Thursday. 

Until geopolitics really started to bite in late 2020, China’s biggest offshore oil and gas company tracked its comparables very closely. However, whereas ConocoPhillips has seen its forward price-to-book value rise 47% from 1.79 times to 2.63 times since December 2020, S&P Global Market Intelligence data shows that CNOOC’s own has expanded by 22% from 0.63 times to 0.77 times over the same period.

There is a consensus among financial analysts that CNOOC is undervalued if traditional metrics are taken into account. DBS analyst Ho Pei Hwa says that, “CNOOC is our preferred proxy to ride the oil price rebound given its world-class execution and cost control.” A focus on cost control is often cited as one of CNOOC’s strongest calling cards, as Morgan Stanley analyst Jack Lu also points out, citing a 65% surge in the price of Brent oil  compared to a 12% hike in CNOOC’s costs.

Where will CNOOC go next? The company says it is keen to develop assets in Latin America and Africa to fulfil China’s energy security targets. It has a 2025 target to produce two million barrels of oil equivalent per day. It also plans to spend 5% to 10% of annual capex to build out its offshore wind portfolio.

Chairman Wang says that CNOOC isn’t interested in acquiring assets from Western companies suddenly keen to sell down their commercial exposure in Russia, on the grounds that it is “too early” to do the business. However, Bloomberg reports that CNOOC, Sinopec and CNPC are all considering a joint bid for Shell’s 27.5% stake in the Sakhalin-2 project, which is majority owned by Gazprom and located in the Sea of Okhotsk just north of Japan.

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