China National Offshore Oil Corp. (CNOOC) (NYSE:CEO) (SEHK: 0883) reported a fall in half yearly net profits by almost 19 percent. CNOOC Limited (NYSE:CEO) also announced plans to slash dividends by 40 percent to compensate for the $15 billion acquisition of Nexen Inc. (TSE:NXY), a Canadian oil company.

China national offshore

Net profit for the half year ending in June, dropped to 31.87 billion renminbi, or $5.01 billion, from 39.34 billion renminbi a year earlier, and was below the analyst’s estimates of 34.2 billion renminbi.  Revenues for the period declined 5 percent to 118.27 billion Yuan. Two tax items recorded substantial increases from last year, one was taxes other than income tax, which was up 65 percent, and the other was corporate profit tax, up from 24.4% to 29.5%. According to the management, the corporate rate is high, due to a change in tax regime in Nigeria. One encouraging sign was that it achieved slightly better than the historical average in drilling successful wildcat and appraisal wells. For the half year period it drilled 10 and 18 successful wildcat and appraisal wells respectively, against historical averages of 8 and 12 over the past four years.

The bid for Nexen Inc. (TSE:NXY), which holds reserves of oil sands and shale gas globally, by China’s leading offshore oil producer, is the most expensive foreign takeover bid by any Chinese company up till now. “My view is the market will be split in the second half,” said Simon Powell, head of Asian oil and natural gas research at the Hong Kong brokerage firm CLSA. “Those who think the Nexen deal will go ahead and is a good thing, will think that 2013 is going to show good earnings per share growth,” and added “Those who don’t, won’t.”

If the deal with Nexen Inc. (TSE:NXY) goes through, it will not only boost CNOOC Limited (NYSE:CEO)’s 2013 production and earnings, but also increase its proven reserves by 30 percent and production by 20 percent, which as of now has only nine years’ worth of reserves, one of the lowest figures among global oil majors. The Nexen Inc. (TSE:NXY) deal will not only boost CNOOC, but will help China to gain technology and the operating experience in extracting potentially huge bitumen, heavy oil, and shale oil resources at home. This will ultimately help the country to quench the rising oil demand and minimize the expensive oil imports.

Chairman Wang Yilin, said on the deal with Nexen, “Upon the closing of the transaction, the company will become a truly global oil and gas exploration and production company with a balanced resources portfolio and important presences in the world’s major oil and gas production areas.”

Like various other oil producers around the world, CNOOC is also facing problems to up the production and cut costs, as it jumps on to comparatively costly development of unconventional resources, like Canadian oil sands and deep waters in the South China Sea and the Gulf of Mexico. Therefore it becomes more all more important for CNOOC to clinch the Nexen deal.

Bank of America Corp (NYSE:BAC) notes:

We do believe that offshore China may exhibit 10-15% production growth in 2014 and 2015, contributing meaningfully to CNOOC’s bottom line. However, as an investment catalyst, this may prove pre-mature. In the short run, we believe the possible integration issues with Nexen and relatively slow production growth in 2013 will continue to be investor concerns.

BoFa also has some interesting pictures on discoveries by the company:

CNOOC discovers in south china sea