CNOOC Limited’s total output beat the high end of its guidance by 1.6% in 2022 and it guides for about 6% CAGR for the output for the coming three years. By keeping its capex at a relatively high level, the company targets to achieve a reserve replace ratio of 130% in 2023. Although we expect lower average oil price for 2023, the company’s shares still offer more than 11% dividend yield for 2022-24. We reiterate our BUY call with target price raised to HK$14.13.
　　Key Factors for Rating
　　The company’s total oil and gas output in 2022 is expected to be about 620m BOE, 1.6% higher than the high end of its guidance (610m BOE). More importantly, the company guides for CAGR of 5.6%-6.1% in total output for 2023-25 with the guidance for 2023 and 2024 both up 10m BOE from the previous levels. In particular, the company expects its total oil and gas output to grow by 4.8%-6.5% in 2023 to 650-660m BOE with nine new projects scheduled to start production in the year.
　　The company’s capex in 2022 was RMB100bn, at the high end of its guidance.Its capex budget for 2023 is RMB100-110bn, up 0-10% YoY. It intends to keep its capex at a relatively high level in order to drive the output growth in the next few years. It targets a reserve replacement ratio of 130% for 2023, same as last year. Given the change in the split between China and overseas from 73-27 in 2022 to 76-24 in 2023, we estimate the capex in offshore China to grow 4-15% YoY in 2023. This will be positive to China Oilfield Services (2883 HK/HK$9.89; 601808 CH/RMB16.34, BUY).
　　Oil price has dropped quite a bit recently on the concern of demand from China.
　　However, with business expected to resume normal after the Chinese New Year, we expect China’s demand will pick up and the global oil market will be in supply shortfall again in late 2023. Although we expect the average Brent price to drop 15% YoY to US$84/bbl in 2023, the company’s shares still offer attractive dividend yields.
　　Key Risks for Rating
　　Sharp fall in oil price.
Higher-than-expected cost.
　　Valuation
　　We increase our SOTP NAV from HK$15.02 to HK$15.84 to reflect the changes in our assumptions and the recent appreciation of RMB against HK$. Hence, we increase our target price from HK$13.49 to HK$14.13 as we still set our target price at the mean (widened from 10.2% discount to 10.8%) in terms of share price discount to our NAV since early 2016. This is equal to 4.2x 2022E P/E.