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SCMP Reporter

It is not often that analysts turn poetic when talking about the stocks they cover; but that has happened with CNOOC, which has been something of a rags to riches story on the Hong Kong stock market in recent months.

Waxing lyrical, HSBC oil analyst Gordon Kwan hailed CNOOC as 'so young, so strong, so beautiful'.

It is easy to see why the stock has Mr Kwan swooning. CNOOC has a monopoly on the rights to all oil discoveries made in China's vast territorial waters which are 'twice the size of the oil-rich Gulf of Mexico', according to Mr Kwan, meaning the company is 'born with a silver spoon'.

Some kids born into wealth become wastrels but not a bit of it with CNOOC. Many in the company's senior management have cut their teeth with Western oil majors and have built a lean and mean exploration and production machine in CNOOC.

The company pulled in an impressive profit of US$1.2 billion last year, meaning each one of CNOOC's 1,200 employees generated a profit of $1 million.

Part of the case for buying onshore rivals PetroChina and China Petroleum & Chemical Corp (Sinopec) has come from their programmes to aggressively slash bloated payrolls. PetroChina has 450,000 employees and Sinopec 500,000.

With CNOOC, investors were buying the finished corporate article, Mr Kwan said.

'This is already a first class petroleum company with performance metrics which compare to companies like Exxon,' he said. 'But it is selling at Third World prices.'

CNOOC would give the highest average return on equity, 25 per cent, of any oil major over the next four years, he said.

While CNOOC does some of its own exploration work, part of its attraction is that multinationals are panting to drill in promising Chinese waters in the hunt for new oil and gas sources. It cost CNOOC nothing to allow them to do so yet it had the right to take as much as 51 per cent of the proceeds from any find, Mr Kwan said.

Despite its gilded monopoly status, CNOOC had a difficult birth. An attempt by Salomon Smith Barney to take it public in October 1999 in a HK$8.46 to $9.61 range flopped.

It finally made it to market in February with an offering price of $5.95. It has been growing on investors ever since, climbing steadily to reach a closing high of $8.45 on Wednesday. It closed on Friday at $8.

Naturally a part of that has come from oil prices staying high for longer than anybody expected after almost tripling last year. After regaining its muscle in the last year or so, the Organisation of Petroleum Exporting Countries may turn the screw further by cutting production at a meeting on June 5.

HSBC is expecting Brent crude to average US$25 this year, down only slightly from $28 last year.

Mr Kwan last week raised his 12-month price target for CNOOC from HK$8.80 to $11.80. The price is likely to receive a boost from Morgan Stanley Capital International's announcement on Saturday that it would be added to China benchmarks.

Not everyone, however, still thinks CNOOC is a buy.

ING Barings last month reiterated its 'hold' rating and posted a $6.67 price target, 16.62 per cent down from Friday's close.

The gloomier view from analyst Connie Lee is based on the expectation that the oil price will fall to US$22 a barrel, while this year sees the end of CNOOC's five-year holiday on profits tax.

Those factors led Ms Lee to forecast earnings would fall 37 per cent this financial year from last year.

Other analysts shared Mr Kwan's bullishness on the stock over the long term but said it might have come too far, too fast for now.

Tung Tai Securities associate director said Kenny Tang Sing-hing said: 'Players should buy it at HK$7.50 to $7.80. The target price is $10 in the next six to nine months.'

DBS Securities is also taking a cautious line, warning CNOOC can no longer be considered cheap. Last week it downgraded the counter to 'market perform'.

Analyst David Yue pointed out it was trading on a 20 to 50 per cent premium to PetroChina and Sinopec, according to differing yardsticks, fully reflecting its superior fundamentals.

Production growth of only 3.3 per cent announced in last week's first-quarter results meant it was tough for the company to meet its full-year target of 8 per cent, Mr Yue said.

Graphic: cnoo21gbz



Analysts gush over CNOOC