EUR 850.00 For Business Accounts Only

Morningstar | CNOOC’s Robust 2018 Results Affected by Impairment Provision; Raising FVE to HKD 14.50

No-moat CNOOC’s 2018 net profit was up 114% year over year to CNY 52.7 billion, underpinned by a 28% jump in realized oil price and the firm’s cost-cutting efforts. Stripping out impairment provision of CNY 5.4 billion related to certain exploration and evaluation assets in North America, the results were above our expectation. We increase our fair value estimate to HKD 14.50 per share (USD 186 per ADR) from HKD 13.70 (USD 176) after taking into account the latest results and stronger production growth going forward. We think CNOOC’s shares are fairly valued at this level as the stronger results have been largely priced in. We expect oil prices to fall in the longer term and our midcycle Brent oil price forecast of USD 60 per barrel is unchanged.

The firm’s all-in cost has continued to decrease for five consecutive years to USD 30.39 per boe (USD 32.54 in 2017), an impressive record. In particular, average depreciation, depletion and amortization per boe dropped 17% year over year largely attributable to increase of reserve by optimizing the development plan. That said, we note that operating expenses per boe rose 2% year over year to USD 8.07 due to appreciation of the Chinese yuan. We are expecting CNOOC’s all-in cost to increase at a CAGR of 1.3% during our explicit five-year forecast period and we believe the firm will remain competitive even in a low oil price environment.

CNOOC’s 2018 net oil and gas production was 475 million barrels of oil equivalent, or boe, up 1% year over year and is in line with its target. Meanwhile, forward guidance remained the same as its 2019 strategy preview, with production target of 480-490 million boe, 505-515 million boe and 535-545 million boe in 2019, 2020 and 2021, respectively. In addition, 2019 capital expenditure target will be between CNY 70-80 billion. Management also reveals a long-term target of boosting production to 2 million barrels per day by 2025 from about 1.3 million in 2018.

We believe both production and spending targets are achievable as the firmer oil price provides sufficient incentives for management to accomplish its plan. Furthermore, production should also be supported by more domestic and overseas reserves as CNOOC increases its exploration activities and enhances exploration efficiency. CNOOC’s reserve life has been extended to 10.5 years in 2018 from 10.3 in 2017, reversing the trend of falling reserve life over the past few years. Meanwhile, full year 2018 dividend of HKD 0.70 per share was in line with our expectation and implies a decent dividend yield of about 5%.