China's largest oil and gas publicly-traded company, CNOOC (CEO) , is considering selling parts of its U.S.-based oil assets in the Gulf of Mexico amid escalating trade wars with the U.S. Although, according to a Reuters article, it does not intend to fully exit the U.S. market, where it holds significant stakes in two deepwater projects. To us, this is a signal that even U.S. energy assets have become less of a priority for China as they seek to reallocate capital elsewhere, like recent discoveries in Guyana.
The assets are held by its Canadian subsidiary, Nexen. Nexen holds equity interest in two Gulf of Mexico projects; it also holds working interests in onshore shale assets in Texas, Colorado and Wyoming, which are operated primarily by Chesapeake Energy (CHK) : Eagle Ford (~27% working interest and ~150,000 net acres in South Texas) and Niobrara (~12% working interest and ~120,000 net acres in Colorado and Wyoming). The shale assets are primarily shale oil with some shale gas. CNOOC, however, does not intend to sell stakes in producing oil assets in the Gulf of Mexico, which includes a 25% interest in Hess Corp's (HES) Stampede development and a 21% stake in Royal Dutch Shell's (RDS.A) Appomattox development.
We think that the main driver for this exit is the recent success in Guyana, where CNOOC is partner of a consortium led by Exxon Mobil Corp (XOM) . XOM had a large oil discovery at the Stabroek block offshore Guyana which could recover more than 4 billion barrels of oil.
Although this will be challenging for the industry in the short term, it is an opportunity for large American companies like Anadarko Petroleum (APC) , EOG Resources (EOG) and Occidental Petroleum (OXY) to acquire assets and rebalance their portfolio. It comes on the back of other large international oil and gas concerns exiting current holdings of U.S. assets, like BHP Billiton (BHP) and Reliance Industries (RLI) .
Over the last decade, companies like Chesapeake Energy (CHK) and Pioneer Natural Resources (PXD) were the beneficiaries of cheap foreign capital looking to "pay-to-play", taking a large portion of drilling costs in exploratory assets for an exchange in working interest. However, this land-grab-and-sale is over, since the collapse of crude oil prices in 2014-2016 -- and is not a "show me the money" story, as production has peaked and shale producers need to focus on efficiencies and reserve replacement.
According to President Trump claims, the U.S. may be losing in the trade with China, however, it is also losing on equity performance, as CEO stock has rallied 32% for the year, significantly outperforming oil majors like ExxonMobil, Chevron (CVX) and the Energy Select Sector SPDR ETF (XLE) , which are almost flat for the year. Only one of CNOOC's partners, Hess Corp (HES) has outperformed the Asian player, with HES shares up 50% for the year.
To the detriment of U.S. trade negotiations, Canada enjoys better relationships with China, given the Nexen stake. Nexen is a major player in the Canadian oil sands, with significant land holdings in northern Alberta. Nexen has an interest in more than 300,000 acres in the Athabasca region.