The net profit of CNOOC Limited jumped 102% YoY to RMB141.7bn in 2022, in line with its guidance. The company showed strong output growth, stringent cost control and exceptional reserve replacement in 2022. While lower oil price will inevitably drag its earnings in 2023, we only expect a 12% YoY fall given its low cost and expected decent output growth. We increase our 2023-24 earnings forecasts by 5% and reiterate our BUY with target price increased to HK$14.73.
　　Key Factors for Rating
　　The superb earnings growth in 2022 was mainly due to the 42% YoY surge in realised oil price and 23% YoY gain in realised gas price. For the controllable parts, the company boosts its total oil and gas output by 9% YoY to 623.8m BOE, well above the high-end (610m BOE) of its guidance range in early 2022.
　　It also reduced its unit opex and DD&A by 1% YoY and 4% YoY. Although its all-in cost rose 3% YoY, it was mainly due to higher taxes.
　　It continued to show outstanding exploration results with eight new discoveries in offshore China in 2022. The 182% reserve replacement ratio was exceptional.
　　As a result, its net proved oil and gas reserves grew 9% YoY as at end-2022 and the reserve life remained at 10 years despite growth in output.
　　Looking into 2023, we expect the company’s earnings to drop 12% YoY on an estimated 16% YoY fall in realised oil price and 7% YoY fall in realised gas price.
　　The continued growth in output (estimated to be 5% YoY based on the mid- point of its guidance of 650m-660m BOE) will help to reduce the impact.
　　While the price of oilfield services is likely to rise with oil companies increasing investment, the company is taking measures to contain the rise in cost. For instance, it plans to use offshore wind or solar power to cut down its fuel cost.
　　The company will work hard to maintain its position as industry cost leader.
　　The company’s shares look cheap at 3.9x 2023E P/E and about 10% yield for the coming three years.
　　Key Risks for Rating
　　Sharp fall in oil price.
　　Higher-than-expected cost.
　　Valuation
　　We raise our 2023-24 forecasts by 5% as its 2022 earnings were 4% ahead of our forecast. Hence, we increase our SOTP NAV from HK$15.84 to HK$16.70.
　　Hence, we raise our target price from HK$14.13 to HK$14.73 as we set our target price at the mean in terms of share price discount (widened from 10.8% to 11.4%) to our NAV since early 2016. This is equal to 4.9x 2023E P/E.