Action
　　We maintain OUTPERFORM and our TP of HK$11.50 for CNOOCH-shares (corresponding to 4.1x 2022e and 3.9x 2023e P/E) offering 15% upside. The firm's H-shares are trading at 3.6x 2022e and 3.4x 2023e P/E.
　　Reasoning
　　Oil and gas output has grown steadily; proportion of natural gas output to improve. CNOOC’s net oil and gas output reached 573mnboe in 2021. The firm expects its gas output to grow to 600-610mnboe in 2022, 640-650mnboe in 2023 and 680-690mnboe in 2024, implying a CAGR of 7% over 2020-2024. The firm plans to participate in the global energy transition trend, and renewable energy transformation, by developing more natural gas projects, aiming to increase the portion of natural gas output to about 30% in 2025.
　　Effective cost control; firm to maintain leading advantages over peers in per-barrel cost. CNOOC has strengthened its cost controls since the 13th Five-Year Plan (2016-2020). We calculate that the firm’s per-barrel full cost dropped from US$52/boe in 2013 to US$34/boe in 2021. Looking ahead, we expect CNOOC to maintain its leading advantage in per-barrel cost, thanks to 1) strictly controlled exploration and exploitation expenses, and the firm’s US$35/bbl oil-price pressure test on new projects; and 2) technological upgrading such as onshore power supply projects, automated platforms, and smart oilfields to reduce operating costs.
　　Ample cash flow; firm emphasizes growth and dividend payout. We estimate the firm’s annual capex at Rmb100bn during the 14th Five-Year Plan (2021-2025), and this should support the steady growth of oil and gas output. We expect free cash flow to reach Rmb84.1bn in 2022 and Rmb91.1bn in 2023, benefiting from the firm’s sound profitability. The firm’s 2022 strategic outlook and operating guidance state that CNOOC plans to emphasize the returns granted to investors, promising that its annual dividend payout ratio will be no less than 40%, with an annual dividend of no less than HK$0.70/sh (absolute value, including taxes) over 2022-2024.
　　Following a global trend of low-carbon transition, CNOOC plans to invest 5-10% of its annual capex in the new energy segment, mainly to develop offshore wind power projects and promote the application of carbon capture, utilization, and storage (CCUS) technologies.
　　Financials and valuation
　　We maintain OUTPERFORM and our TP of HK$11.50 for H-shares (corresponding to 4.1x 2022e and 3.9x 2023e P/E) and offering 15% upside. H-shares are trading at 3.6x 2022e and 3.4x 2023e P/E. A-shares are trading at 6.6x 2022e and 6.3x 2023e P/E. Given the firm’s strengths in per-barrel costs and reserve quality over its peers in China and overseas, we initiate coverage with an OUTPERFORM rating and our TP of Rmb20.00 based on relative valuation (corresponding to 8.3x 2022e and 8.0x 2023e P/E) and offering 26% upside.
　　Risks
　　Sharp fluctuations in international oil prices; disappointing returns from new energy projects and/or capacity expansion; sanctions from the US.