The Zacks Analyst Blog Highlights: CNOOC Ltd., Nexen Inc., Tractor Supply, Home Depot and Lowe's

Jul 25, 2012, 09:30 ET from Zacks Investment Research, Inc.

CHICAGO, July 25, 2012 /PRNewswire/ -- announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include CNOOC Ltd. (NYSE: CEO), Nexen Inc. (NYSE: NXY), Tractor Supply Company (Nasdaq: TSCO), The Home Depot Inc. (NYSE: HD) and Lowe's Companies Inc. (NYSE: LOW).


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Here are highlights from Tuesday's Analyst Blog:

CNOOC in $15B Int'l Takeover Deal

Chinese energy giant CNOOC Ltd. (NYSE: CEO) has cut a deal to purchase Canadian energy producer Nexen Inc. (NYSE: NXY) for approximately $15.1 billion in cash. The deal, the country's biggest foreign takeover so far, reflects the international land grab trend among the Chinese energy companies.

Deal Details Per the agreement, CNOOC will buy all the outstanding common shares of Nexen at $27.50 per share, representing a premium of 61% to its closing price on the New York Stock Exchange on July 20. The deal, which is expected to be wrapped up by this year-end, requires approval by two-thirds of Nexen's shareholders as well as approvals from regulators, including those in the U.S.

China's third-largest oil company, CNOOC, expects to fund the acquisition with its existing cash resources and outside financing. It also added that Nexen's debts of about $4.3 billion would remain outstanding.

Upon the successful completion of the deal, CNOOC will list its shares on the Toronto Stock Exchange. It will also retain Nexen's existing employees, and establish Calgary as its North and Central American headquarters. CNOOC also added that Nexen can terminate the deal and consider a better proposal, but in doing so, it will have to pay CNOOC $425 million as a breakup fee.

Buyer Benefits CNOOC's current production gives it only nine years worth of reserves that represents one of the lowest reserves among key oil companies in the world. The upcoming deal would raise CNOOC's proven reserves by 30% and will help it to vastly expand its holdings in Canada, where it has already spent about $2.8 billion since 2005. Moreover, buying Nexen would make CNOOC the operator of the largest oil field in the U.K. and the biggest contributor to Forties Blend crude − Buzzard.

China being the world's second- largest economy has a huge energy requirement. The acquisition of Nexen is in sync with the present strategy of CNOOC and other Chinese biggies to make a deeper international foray in order to meet domestic demand. Since the last two years, CNOOC has been bidding billions of dollars in overseas properties to increase its yield. The latest deal marks a major step in the company's goal to boost its output level by approximately 2.7% this year.

Strength of the Acquiree

Calgary, Alberta-based Nexen operates in western Canada, the Gulf of Mexico, North Sea, Africa and the Middle East, and has its biggest reserves in the Canadian oil sands. Apart from oil sands, Nexen remains dynamic in natural gas exploration in shale rock formations. It owns approximately 300,000 acres of shale-gas blocks in the Horn River Basin in British Columbia.

During the second quarter, Nexen's production before royalties averaged 213 thousand barrels of oil equivalent per day/MBOE/d (207 MBOE/d net of royalties). Production before royalties increased 4.4% year over year, and on a net-of-royalty basis, it grew 15%. The company had 900 million barrels of oil equivalent (MMBOE) of proved reserves and 1,122 MMBOE of probable reserves as of December 31, 2011.

Other Foreign Moves Last year, CNOOC completed the C$2.1 billion acquisition of OPTI Canada Ltd and achieved stake in a Canadian oil sands company and a share in Long Lake project. Back in 2005, the company made its first Canadian investment in which it paid C$122 million ($120.8 million) for a 16.7% stake of the private oil sand developer MEG Energy Corp.

However, the Chinese energy companies have moved more carefully after CNOOC's attempt to acquire U.S.-based exploration and production company Unocal for $18.5 billion was disappointed by a political backlash seven years back. The deal was rejected by U.S. lawmakers on fears of disturbing national security.

According to the International Energy Agency, CNOOC and other major state-owned Chinese energy companies made less than $2 billion worth of total acquisitions between 2002 and 2003. Notably, it jumped to nearly $48 billion in 2009 and 2010.

Rank & Recommendation We maintain our long-term Neutral recommendation on CNOOC. Also, the company currently retains a Zacks #3 Rank (short-term Hold rating).

Earnings Preview: Tractor Supply

Tractor Supply Company (Nasdaq: TSCO), a leading retail firm and ranch store brand, is scheduled to report its second-quarter 2012 financial results after the market closes on July 25, 2012. The current Zacks Consensus Estimate, for the quarter, is $1.39 per share and revenue is expected to be $1,302 million.

First-quarter 2012, a Synopsis

Tractor Supply's first-quarter 2012 earnings came in at 55 cents, surpassing the Zacks Consensus Estimate of 54 cents as well as the prior-year earnings of 24 cents per share.

Tractor Supply's first-quarter results benefited mainly from the structural improvements made over the years. This enabled the company to adjust its offerings to suit customer demand and to promptly respond to events, such as the early onset of spring in March 2012.

During the recession, Tractor Supply had suffered setbacks as buyers avoided big-ticket purchases, such as mowers, but recent quarters have seen an uptick in results. The company's impressive merchandising improvement strategy along with solid same-store sales trend resulted in double-digit top-line growth in revenues. Net sales in the quarter surged 22% to $1,020.4 million from $836.6 million in the prior-year quarter. Moreover, total revenue surpassed the Zacks Consensus Estimate of $1,002 million.

Guidance for 2012

Encouraged by strong first-quarter results, the company raised its 2012 earnings guidance range to $3.52 to $3.60 per share compared with its earlier forecast of $3.38 to $3.46 per share.

Moreover, net sales forecast for 2012 has also been raised to $4.61$4.68 billion versus the previous guidance of $4.56$4.66 billion. In 2012, same store sales are expected to register an increase of 4.0% to 5.5%, up from its prior forecast of 3% to 5%. Further, the company has planned to open 90 to 95 new stores during 2012.

Zacks Consensus                                                                                  

The analyst covered by Zacks expects Tractor Supply to post second-quarter 2012 earnings of $1.39 a share, higher than $1.23 delivered in the prior-year quarter. Currently, the Zacks Consensus Estimate ranges between earnings of $1.33 and $1.46 a share.

For 2012, the Zacks Consensus Estimate stood at $3.68 per share, higher than its previous fiscal earnings of $3.01 per share. The current Zacks estimate ranges between $3.58 and $3.75 per share.

Estimate Revisions Trend


We do not see any major estimate revisions at this point. Among the 19 estimates, one estimate for the second quarter revised upward while one moved in the opposite direction in the last 30 days. In the last 7 days, one estimates moved downward while none moved in the opposite direction.

For full-year 2012, 1 out of 21 estimates was revised downward while none moved in the opposite direction in the last 7 and 30 days.


The Zacks Consensus Estimate for the upcoming quarter inched down by a penny over the last 30 days. Some of the analysts believe that the company's second-quarter financial performance may disappoint due to drought and moderate consumer spending.

However, for 2012, most of the analysts remained constructive on the stock based on the company's growth prospects and kept their estimates intact, in the absence of any major news having a direct or an indirect impact on the estimates.

Surprise History

With respect to earnings surprises, Tractor Supply has topped the Zacks Consensus Estimate over the last four quarters in the range of 1.9% to 11.5%. The average surprise over the last four quarter remained at positive 5.1%.

Our Recommendation

Tractor Supply is the largest operator of farm and ranch stores in the U.S., a unique market niche that serves the lifestyle needs of recreational farmers and ranchers. The company's stores are strategically located in small towns, close to its target customers, providing it with a competitive edge over its rivals.

We believe that Tractor Supply has successfully tweaked merchandise assortment across its stores, which is in line with the prolonged economic downturn. The company has increased the proportion of less discretionary items, such as animal and pet-related products, while reducing shelf space for certain big-ticket merchandise, such as outdoor power equipment.

Moreover, in an effort to boost margins, Tractor Supply is expanding its portfolio of private label brands and is also focusing on direct sourcing. The company has set a long-term target of generating 25% of sales from private label brands and 13% from strategic direct sourcing. This provides a strong upside potential to the company.

However, the company operates in a highly fragmented industry and faces intense competition from larger retailers, such as The Home Depot Inc. (NYSE: HD) and Lowe's Companies Inc. (NYSE: LOW) as well as from independently-owned retail farm and ranch stores, privately-held regional farm store chains as well as cooperatives. Being in such a high competitive industry, Tractor Supply may find it difficult to execute and implement new business strategies, which in turn, may impact its operations adversely.

Currently, we are maintaining a long-term 'Outperform' recommendation on Tractor Supply. However, the company has Zacks #3 Rank implying a short-term Hold rating on the stock.

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