China's state run E&P giant CNOOC
The stock was up on the news and CNOOC remains a popular play for investors looking for exposure to the thesis that China's demand for energy will only continue to rise in the coming years. CNOOC, after all, is selling directly into this market and it continues to replace its reserves at a better than 100% clip thanks to success with the drill bit and to a balance sheet rich with nearly $8 billion that enables it to make acquisitions.
Still, I'm not paying up for CNOOC at these prices and don't think you should either. The reason for this is that CNOOC's current valuation assumes that oil prices will be stable between $90 and $110 per barrel over the next 5 to 10 years. While that's certainly possible (and oil prices could even go higher), if you plug those same oil price assumptions in to models for other integrated giants such as ExxonMobil
Don't get me wrong: I'm not forecasting sustained high oil prices. Rather, I'm reasoning that since oil is priced globally, if you believe the assumptions the market is baking into CNOOC's valuation, you might as well apply them to the other oil plays and buy those instead. If you don't, then you shouldn't be buying CNOOC despite the fact that recent results show it performing better than its peers. Savvy investors might also consider the arbitrage opportunity here: Shorting CNOOC, which is priced for expensive oil, and buying one of the names that's priced for lower oil prices.
Tim Hanson is co-advisor of Motley Fool Global Gains. He does not own shares of any company mentioned. CNOOC is a Motley Fool Global Gains selection. Chevron and Total A. are Motley Fool Income Investor selections. The Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.