Morningstar | Lowering CNOOC’s and PetroChina’s FVEs on Weaker Oil Prices; Bigger Buffers Needed to be a Buyer
Brent crude oil has fallen from over $70 a barrel in late April to about $61 today on the back of concerns on global demand amid the trade tension between the U.S. and China. We lower CNOOC's and PetroChina’s fair value estimates to HKD 14.30 per share ($183 per ADR) and HKD 4.70 per share ($60 per ADR, CNY 4.04 per share) from HKD 14.50 ($186) and HKD 5.10 ($65, CNY 4.38), respectively, after incorporating weaker near-term crude oil price assumptions in our valuation models. However, our midcycle Brent oil price assumptions are unchanged at $60. Given our muted long-term oil price outlook, we will wait for bigger buffers before turning into a buyer for both stocks. However, we believe the weak oil price outlook has been largely baked in current stock prices and we expect both stocks to be supported by their decent divided yields of more than 5%. A rise in geopolitical risk could lift short-term prices, but we believe the trend is likely to remain weak given the softer global demand outlook.The creation of a national pipeline company, or NPC, could be a catalyst for PetroChina because it allows the firm to realize the value of its oil and gas pipeline assets. However, we think the one-off revaluation gain (estimated at about CNY 32 billion) is only expected to raise its fair value estimate by about HKD 0.20 per share, because the sheer size of the company. We have yet to incorporate this gain into our fair value estimate. Our special report "Constraints in China's Natural Gas Sector Present Opportunities" provides an assessment into the potential value of the sale of its pipeline assets to the NPC.
On the other hand, we think there will be limited disposal gain for CNOOC given its upstream focus in the exploration and production of offshore oil and gas. However, the firm could still benefit from the creation of the NPC because it will have access to peers’ pipelines and create more business opportunities.
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