The earnings of CNOOC Limited slipped 6% YoY to RMB32.1bn in 1Q23, 2% ahead of our forecast. Although realised oil price fell 24% YoY during the period, it was largely offset by the 9% YoY growth in total oil and gas output and the 8% YoY fall in all-in cost. Looking ahead, we expect higher oil price in 2H23 as we see supply shortfall in the global oil market. We reiterate our BUY call and increase our target price to HK$16.37.
　　Key Factors for Rating
　　The company’s total oil and gas output surged 9% YoY to 163.9m BOE in 1Q23, reaching about 25% of its full-year guidance. The decent growth was mainly driven by the strong growth in overseas projects, especially the output at new projects in South America exceeded the company’s expectation.
　　The company’s unit opex dropped 7% YoY to US$7.0/BOE and unit all-in cost decreased 8% YoY to US$28.2/BOE in 1Q23. On top of its continued stringent cost control and lower windfall tax （as a result of lower oil price）， higher output at new projects and improved recovery rate at existing projects also helped to lower the unit DD&A expense.
　　Realised oil price dropped 24% YoY to US$74.2/bbl in 1Q23, falling faster than the 16% YoY drop in the average price of Brent over the same period. The faster output growth at South America and Canada weighed on its realised price as the oil prices at these regions follow WTI and West Canada Select respectively, both trading at a discount to Brent, especially the latter.
　　We adjust our 2023/24/25 earnings forecasts by 1.0%/0.6%/-2.7% after updating our model with its 1Q23 results and its annual report.
　　Although the company’s share price has already seen a strong run so far this year, its shares still look attractive at current level as they are only trading at about 4.1x 2023E earnings and offer over 9% dividend yield for the coming three years.
　　Key Risks for Rating
　　Sharp fall in oil price.
　　Higher-than-expected cost.
　　Valuation
　　We lift our SOTP NAV from HK$16.70 to HK$18.49 after updating our model with the annual to include the impact of the increase in oil and gas reserves.
　　Hence, we raise our target price from HK$14.73 to HK$16.37 as we still set our target price at the mean in terms of share price discount （widened from 11.4% to 11.5） to our NAV since early 2016. This is equal to 5.4x 2023E P/E.