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Morningstar | CNOOC Reports Strong 1H Earnings on Higher Oil and Gas Prices; Shares Fairly Valued. See Updated Analyst Note from 24 Aug 2018

No-moat-rated CNOOC's first-half 2018 net profit of CNY 25.5 billion, up 57% year over year, was above our expectations after stripping out a loss of CNY 6.5 billion from its Argentinean joint venture on the peso depreciation. The robust results were mainly attributable to higher oil and gas selling prices and effective cost control. After incorporating our latest Brent oil prices and U.S. dollar exchange rate assumptions into our valuation model, our fair value estimate is raised to HKD 13.50 per share (USD 174 per ADR) from HKD 12.00 (USD 154). We think CNOOC is currently fairly valued with strength in oil prices largely priced in. Meanwhile, the firm declared an interim dividend of HKD 0.30, up 50% year over year. We think CNOOC's share price will be supported by the more than 5% dividend yield we project for full-year 2018.

CNOOC's oil and gas sales revenue increased 21% year over year to CNY 90.3 billion, underpinned by a 34% year-over-year jump in average oil selling price to USD 67.36 per barrel. In addition, average gas selling price rose 13% to USD 6.42 per thousand cubic feet. More importantly, despite industry cost inflation, the firm kept its all-in cost largely stable at USD 31.83 per barrel versus USD 31.74 a year ago, mainly due to lower depreciation, depletion, and amortization expenses as a result of change in production mix and increased reserve. We think CNOOC will remain cost-efficient (partly help by a weaker Chinese yuan) and profitable in the long run, even under our lower midcycle Brent oil price forecast of USD 60.

CNOOC's oil and gas output was flat year over year at 238.1 million barrels of oil equivalent, or boe, and this is in line with management guidance. We think CNOOC will achieve its full-year target of 470 million-480 million boe, supported by new projects coming on stream.

In the longer run, production growth should be supported by new overseas investment and increased exploration and development activities. The firm has made eight new discoveries in offshore China and overseas year-to-date.

Meanwhile, CNOOC's capital expenditure of CNY 21 billion in the first half is significantly behind the firm's full-year budget of CNY 70-80 billion. While management has kept its target unchanged and guided for accelerate spending in the second half, we have lowered our full-year projection to CNY 70 billion from CNY 75 billion.