Earlier this morning, CNOOC (NYSE:CEO), China's top offshore producer of oil and natural gas, reported results that should make investors cautiously explore the possibility of adding shares to their portfolios.
CNOOC, the only Chinese oil company allowed to enter contracts with international oil players to explore the areas of China's coast (which allows it, at no cost, to acquire a 51% stake in any successful discovery), announced that revenue for the first half of 2006 came to roughly $6 billion, a 43% increase over last year's period. (For currency translation purposes, $1 = 7.974 yuan.) Growth has been driven by a 7.4% gain in production volume, higher realized oil and natural gas prices (up 42% and 7.6%, respectively), and a 59% jump in marketing revenue.
Net income growth was pretty impressive as well, weighing in at $2.04 billion, slightly ahead (3%) of Street expectations and representing a 38% jump from last year's first half. That said, I never like to see income gains trail revenue growth. It's usually a sign of margin weakness, and that was indeed true in this case. A quick look at CNOOC's results shows that its net margin had fallen from 36% to 33.6%, primarily due to a 53% increase in operating expenses (not helped by a $249 million windfall tax) and a 241% increase in financing costs.
While this decline in margins isn't a deal breaker in terms of making a positive investment decision about CNOOC, it does make me more cautious, especially since rival PetroChina (NYSE:PTR) was able to increase its margins despite being hit by the same windfall tax. Heck, even Sinopec (NYSE:SHI), more a refiner than an exploration and production company, was able to increase its margins in the E&P business.
All in all, I believe that shares of CNOOC will probably reward investors in the long term, but I continue to favor PetroChina as the premium play in China's oil sector.
For more oily Foolishness:
Check out our suite of newsletters with a 30-day free trial.
Fool contributor Will Frankenhoff does not own shares in any of the companies mentioned above. The Fool has a disclosure policy.
