Nexen costs eat into CNOOC profit
Offshore oil and gas producer posts surprise 11.4pc decline in net income after Canadian deal
CNOOC posted a disappointing profit for last year as it booked huge increases in exploration and depreciation costs, including a disproportionally large amount from Canada's Nexen that it bought at a big premium early last year.
The state-backed firm, China's dominant offshore oil and gas producer, reported a net profit of 56.46 billion yuan (HK$71 billion), down 11.4 per cent from 2012, and 10.9 per cent less than the 63.4 billion yuan average estimate of 29 analysts polled by Bloomberg.
"CNOOC is a company which used to surprise to the upside, now every announcement appears to surprise to the downside," said Sanford C. Bernstein senior analyst Neil Beveridge in a note. "This was a truly shocking result from the company on almost every level ... costs are simply out of control."
Total operating cost per unit of output surged 26 per cent to US$45 a barrel of oil equivalent, while average oil selling price fell 5.3 per cent to US$104.60 a barrel.
Exploration expenses surged 89.3 per cent on the back of Nexen's acquisition, increased exploration in deepwater regions in China, and a write-off of shale oil and gas assets in North America due to unfavourable results.
According to chief executive Li Fanrong, of the eight billion yuan exploration cost increase, half came from Nexen, and part were historical costs in last year's books.
Nexen supplied 14.8 per cent of CNOOC's output last year, and accounted for 19.6 per cent of its proved oil and gas reserve at the end of 2013. It contributed only 1.1 billion yuan of profit.
Last year Nexen met its production target for the first time in 14 years, Li said.
Asked if the US$15 billion acquisition, at a 61 per cent premium to the market price, still represents good value, chairman Wang Yilin said: "Its acquisition was valuable and brought strategic value [to CNOOC]."
Assets depreciation, depletion and amortisation expense soared 71.6 per cent, due to Nexen's acquisition, higher output of more expensive-to-extract shale oil and gas in North America, a technical service contract in Iraq and the commissioning of new projects in offshore China.
Li said CNOOC will work on cutting costs at Nexen, especially in unconventional oil and gas projects like oil sands, without giving any targets. Nexen's main projects are in North America and the North Sea in Europe.
"We will work on changing its management culture, so that it will become more profit-oriented," he said. "But we can't expect to yield results overnight."
Despite some analysts' doubting if CNOOC can meet even the low-end of its target to raise output by an average annual rate of 6 to 10 per cent between 2011 and 2015, Li said it is feasible given it has more than 20 projects under development.