The earnings of CNOOC Limited fell 11% YoY to RMB63.8bn in 1H23, 9% above our forecast. The discrepancy mainly came from the higher- than-expected realised oil and gas prices and lower-than-expected costs. We expect its earnings to grow 12% HoH in 2H23 as we see higher oil price in the period on tightened supply in the global oil market. We increase our 2023-25 forecasts by 6-10% given the strong 1H23 earnings. We reiterate our BUY call given the attractive yield of 9.4-9.6% for 2023-25E and its natural hedge against RMB depreciation.
Key Factors for Rating
While the net profit of CNOOC Limited inevitably dropped on much lower oil price in 1H23, it beat our forecast by 9%. Its realised oil price and realised gas price were 3% and 5% above our forecast respectively. Its marketing profit was RMB1.1bn above our forecast. On the cost side, windfall tax was RMB1.4bn below our forecast. Positive exploration results also reduced exploration expenses by 47% YoY in 1H23, RMb1.6bn below our forecasts.
Its total oil and gas output surged 9% YoY to 331.8m BOE in 1H23, reaching 50.3-51.0% of its full-year guidance.
The company’s all-in cost and opex were down 7.1% YoY and 7.9% YoY respectively in 1H23. While the depreciation of RMB helped, the growth in output also contributed to lower opex. By effectively using adjustment wells, the natural decline rate of existing oilfields was brought to record low.
We expect the company’s earnings to grow 12% HoH in 2H23 mainly on higher oil price and weaker RMB. We expect the average price of Brent to rise 10% HoH to US$88/bbl in 2H23. In addition, we expect RMB to depreciate a further 2% HoH on average against US$ in 2H23 based on the forecast of our macro team.
Although we expect the average price of Brent to drop from US$84/bbl in 2023 to US$77/bbl in 2024 and US$74/bbl in 2025, we expect the company’s earnings to be largely flat and hence the dividend yield to stay high over the period.
Key Risks for Rating
Sharp fall in oil price.
Higher-than-expected costs.
Valuation
We lift our SOTP NAV from HK$18.49 to HK$18.74 to reflect the increases in our earnings forecasts. Nevertheless, we leave our target price unchanged at HK$16.37 as the average share price discount to our NAV since early 2016 has widened from 11.5% to 12.4% in last four months. This will put us at 5.4x 2023E earnings.