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Morningstar | CNOOC’s 2019 Strategy Preview Reveals Higher Output Targets; Shares Fairly Valued

We increase no-moat CNOOC's fair value estimate to HKD 13.70 per share (USD 176 per ADR) from HKD 13.20 per share (USD 170 per ADR), largely due to higher production targets guided by the firm. Our midcycle Brent oil price assumption is unchanged at USD 60 per barrel, and we think CNOOC is currently fairly valued as we do not expect significant upside in oil prices going forward.

According to the firm’s 2019 business strategy, 2018 oil & gas output is around 475 million barrels of oil equivalent, or boe, and this is within our expectation. While CNOOC’s target output of 480 million-490 million boe in 2019 is in line with guidance of 485 million boe in 2018’s strategy presentation, production forecast for 2020 is raised to 505 million-515 million boe from 500 million boe. More importantly, 2021’s target of 535 million-545 million boe represent a commendable output growth of 5%-7% from midpoint of 2020’s target. We believe these targets are achievable given CNOOC’s long pipeline of projects, with six new projects coming on stream in 2019. In particular, recoverable resources in the Stabroek Block in Guyana has increased to more than 5 billion boe currently from 3.2 billion boe in early 2018, further sustaining CNOOC’s production growth in the long run and will contribute to the firm’s reserve life.

Meanwhile, the company indicated that capital expenditure in 2018 is about CNY 63 billion, 5% above our forecast but below its full-year guidance of CNY 70 billion-80 billion. Management will keep 2019 target at CNY 70 billion-80 billion and we are comfortable with our 2019 forecast of CNY 73.5 billion, which lies at the lower end of the guidance range, given the firm’s track record of underspending. We note that spending in China consists of 62% of the capital expenditure (versus about 50% in the past) as management believes that feasibility of domestic projects is better with more promising returns.

We believe there are enough incentives for management to achieve the target given China’s plan to improve energy security.

On the other hand, the firm is exploring opportunities in the offshore wind power industry given the low-carbon development trend in global energy industry. We think this venture should have some synergies with the firm, given its experience in offshore operations. While no exact numbers are given, the firm ensures that the investment will have acceptable returns. CNOOC has entered into an offshore wind power project in Jiangsu Province in January 2019. We do not expect meaningful earnings contribution from the wind power segment in the near term given it is still in the nascent stage and is relatively small.