CNOOC Earnings: Higher Capital Expenditure to Drive Future Production Growth; Shares Undervalued

CNOOC’s 00883 cumulative nine months 2023 net profit was down 10.2% year on year to CNY 97.6 billion, largely in line with the Refinitiv consensus. The impact of lower energy prices was partly offset by stronger output and stringent cost control. After incorporating our latest energy price and foreign exchange assumptions, we raise our 2024-25 earnings estimates by 6%-19%. Our fair value estimates of HKD 18.00 per H-share (CNY 16.60 per A-share) remain intact as our long-term Brent forecast of USD 60 per barrel is unchanged. We think CNOOC’s H-shares are currently undervalued, with estimated 2024 dividend yield of more than 10%, based on the Oct. 24 closing price. The firm remains our top pick in the sector, given its cost efficiency and robust production growth.

CNOOC’s strong output growth and low all-in cost continue to stand out. The firm’s cumulative nine months oil and gas output rose 8.3% year over year to 499.7 million barrels of oil equivalent, or mmboe. We now expect CNOOC to produce about 663.5 million boe in 2023, slightly above the firm’s target output of 650-660 mmboe. Meanwhile, cumulative nine months all-in cost was 6.3% lower year on year to USD 28.37 per barrel due to lower taxes and operating expense. Although this was partly aided by the depreciation of the Chinese yuan, this reaffirms management’s capability in cost control. We expect CNOOC to keep its average all-in cost at around USD 30 in our explicit five-year forecast periods.

Cumulative nine months capital expenditure rose 30.2% year over year to CNY 89.5 billion, and management raised full-year target to between CNY 120 billion to CNY 130 billion, from CNY 100 billion to CNY 110 billion, previously. The higher spending is mainly due to faster projects approvals and accelerated capacity expansion. We believe this will support CNOOC’s reserves and production growth. CNOOC will provide more information on its future output target in the 2024 strategy preview in January next year.