The net profit of CNOOC Limited dropped 13% YoY to RMB123.8bn in 2023, 6% below our forecast. Looking ahead, we expect the company to see 10% YoY earnings growth in 2024 on higher output and the absence of one-off charges. More importantly, the company achieved exceptional reserve replacement ratio of 180% which brought its proved reserves to an all-time high. We reiterate our BUY call with higher target price at HK$19.95.
Key Factors for Rating
The small miss in earnings mainly came from the higher-than-expected payment for mining rights acquired since mid-2017 (RMB6bn vs RMB3bn forecast) and an unexpected RMB3.5bn asset impairment.
Otherwise, the company showed strong performance in almost all other major parameters as usual. Its total oil and gas output surged 9% YoY to 678m BOE. Its unit opex and all-in cost dropped 3% YoY and 5% YoY respectively. To reward shareholders, the company generously raised payout ratio from 41.4% in 2022 to 43.5% in 2023.
Looking ahead, although we assume average oil price to drop 1% YoY in 2024, we expect the company to still see 10% YoY growth in earnings on the guided 3-6% YoY growth in total oil and gas output and the absence of one-off charges. We now expect the mining rights payment under the new rules to be RMB1bn per annum.
More importantly, the company achieved exceptional reserve replacement ratio of 180% in 2023 and its total proved oil and gas reserves reached all-time high of 6,784m BOE by end-2023. Its reserve life stayed at 10 years despite its growing output. We estimate the recent discoveries in deep South China Sea and Bohai will further boost its reserves by 7% applying a 30% recovery rate.
Key Risks for Rating
Sharp fall in oil prices.
Higher-than-expected costs.
Valuation
Although we lower our 2024/25 earnings forecasts by 2%, we increase our SOTP NAV from HK$19.41 to HK$21.09 to reflect the value of the newly added proved reserves. Hence, we raise our target price from HK$18.49 to HK$19.95 as we continue to set our target price at 1.5 standard deviation above the mean in the past five years in terms of share price discount to our NAV (now at 5.4%). This is equal to 6.4x 2024E P/E.