China's CNOOC seen fairly valued, cut to 'neutral' from 'buy'

Goldman Sachs said it has downgraded CNOOC, the Hong Kong-listed arm of China National Offshore Oil Corp, to "neutral" from "buy" as it now views the stock as fairly valued given its recent sharp gains.

Shares in CNOOC have risen 84.2 percent since April 20, when Goldman put the company on its "buy" list, compared with a 45.6 percent increase in the Asia energy sector.

The brokerage said it regards CNOOC as fairly valued at its current price and any re-rating would depend on "the emergence of various catalysts."

Goldman Sachs analyst Kelvin Koh said he still prefers CNOOC among the large-cap Chinese oil majors because, being a purely upstream company, it has the highest oil price leverage among peers.

CNOOC's shares, up 30 percent since August 25, have benefited more than PetroChina, up 19 percent, and Sinopec, up 10 percent, from record oil prices, with the stock hitting multiple new highs in the last month.

In midday trading, CNOOC was down 18 cents or 1.4 percent at 12.28 Hong Kong dollars.

PetroChina was 12 cents or 0.9 percent lower at 13.68 dollars.

Investors also sold oil stocks after oil prices pulled back from their highs over the week with concerns having eased about possible supply disruption in the Gulf of Mexico.

However, analysts expect oil prices to remain strong in the near-term on supply concerns in the US, a disappointing production hike by the OPEC and geopolitical tensions in the Middle East. According to industry estimates, global crude prices are expected to average 67 US dollars in 2007, after hovering around 62-63 US dollars in the first half.

Goldman's Koh also said CNOOC has one of the best production growth outlooks, at an average of 15 percent between 2007 and 2009, among global integrated oil producers. The high growth rate should be sustained beyond 2009 because of recent discoveries such as Egina in Nigeria and Jinzhou 25-1, offshore China, he said.

CNOOC shares may be driven up further on account of an upgrade in potential Egina reserves, an announcement of potential reserve size for Jinzhou 25-1, any other significant discoveries in offshore China, and approval for a potential A-share listing, said Koh.

(1 US dollar = 7.80 Hong Kong dollar)