Morningstar | Trimming CNOOC’s and PetroChina’s FVEs to Incorporate Lower Near-Term Oil Prices
We have refreshed the fair value estimates for our oil and gas coverage after incorporating meaningfully weaker crude prices. To be clear, there is no change in our midcycle price forecast of USD 60 per barrel for Brent. But the recent declines in global crude prices still weigh on our valuation because our methodology incorporates strip prices over the next three years. Our fair value estimates for CNOOC and PetroChina are lowered to HKD 13.20 per share (USD 170 per ADR) from HKD 14.70 per share (USD 188 per ADR), and HKD 5.40 per share (USD 69 per ADR, CNY 4.76 per share) from HKD 6.10 per share (USD 79 per ADR, CNY 5.50 per share), respectively. We recently lowered China Petroleum & Chemical’s, or Sinopec’s, fair value estimate to HKD 6.80 (USD 87 per ADR).As our view on long-term oil prices has not changed, the recent sell-off makes the sector look incrementally more attractive. However, we think CNOOC and PetroChina remain fairly valued currently. While Sinopec is currently trading in 4-star territory, we note the recent news on possible trading losses presents stewardship concerns.
Brent is currently trading at around USD 53, a sharp fall from recent peak of about USD 86 in early October 2018. At this level, investment is likely to fall far short of what's necessary to keep pace with demand growth over the next few years, so prices must recover sooner or later. But in the short run, uncertainty abounds. It’s possible that steep declines are still on the way for Iran, due to sanctions, and Venezuela, due to mismanagement of the economy (not to mention Angola, Libya, and Nigeria). On the other hand, current prices are likely to spur more demand growth than we were previously expecting. The bottom line is that undersupply and oversupply are both plausible outcomes and making a directional bet on short-term crude prices is risky.
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