20161026-美银美林-中国海洋石油-00883.HK-3Q16_lower_output___capex__downside_in__17-18_production_11页_741kb

CNOOC 3Q16 Operating Results and Investment Summary

Core Highlights

• 3Q16 Operating Performance:

  • Oil and gas production was 118mmboe, down 8% YoY.
  • This production level represents 75% of the full-year target for 2016.
  • Capital expenditure (capex) for the quarter was RMB12bn, down 21% YoY.
  • Realized oil price was $42/bbl, down 13% YoY and 1% QoQ.
  • Realized gas price was $5.2/mcf, down 19% YoY and 2% QoQ.
  • A new discovery was made in the Panyu 4-1 field during the quarter.

• Full-Year Targets and Capex Cuts:

  • CNOOC's capex for the first nine months of 2016 was RMB34bn, significantly below the full-year budget of RMB60bn.
  • The company is expected to cut capex by >11% in 2016, leading to a -4% YoY production decline.
  • Reserves are being drawn down, with a 1P reserve year of 8 years, below the historical average of >10 years.
  • The number of new projects has been declining since 2014, impacting future production volumes starting in 2017e.
  • If current capex levels are maintained, 2017e production could decline by ~22%.

• Valuation and Performance:

  • The implied long-term oil price for CNOOC is $85/bbl, which is significantly higher than its peers in China and globally.
  • EV/2P reserves is currently at $12/boe, much higher than China peers ($4-7/boe) and global peers (average $9.5/boe).
  • Despite the high valuation, challenges in production and reserves due to capex cuts are not fully reflected in the share price.
  • The company is rated Underperform with a Price Objective (PO) of HK$8.0 / US$100.9, unchanged from previous estimates.

Financial Performance and Projections

Valuation Metrics

*For full definitions of iQ method measures, see page 7.

Key Financial Ratios

Production Breakdown

Investment Rationale

• CNOOC is a pure E&P company in China, with 66% ownership by its parent, China National Offshore Oil Company.
• The company has exclusive rights to negotiate offshore PSCs in China with international oil firms.
• CNOOC generates 62% of its production offshore China and 38% from overseas (Indonesia, Australia, Nigeria, US, UK North Sea, Canada).
• The company's offshore China production is expected to decline at an accelerated rate from 8-10% to 15-20% due to capex cuts.
• CNOOC may miss its 2018 production target by 11% unless it increases capex significantly.
• The capex requirement to maintain production flat YoY is estimated at CNY100bn, compared to CNY60bn in 2016.
• The company may need $100 oil to fund its operations internally.
• The Long Lake oil sands project may not be viable due to low oil prices and accidents.

Price Objective Basis & Risk

• Price Objective (PO): HK$8.0 / US$100.9, based on DCF.
• Upside Risks:
  • Higher oil prices.
  • Stronger than expected demand.
  • Medium-term production target reduction.
  • Long Lake oil sand normalization.
  • Large special dividend.
• Downside Risks:
  • Slower oil price recovery.
  • Weak seasonal demand.
  • Abnormal weather.
  • Geopolitical risks.
  • Faster cost inflation.
  • Tax hikes in foreign resource countries.
  • Debt increase.
  • Dividend cut.
  • Equity-funded M&A.

Analyst Certification

• Imyoung Do, CFA certifies that the views expressed in this report reflect his personal views and that no part of his compensation is directly or indirectly related to the specific recommendations or views expressed.

Company Sector

• Oil & Gas Producers

Stock Data

iQprofile SM CNOOC

• Key Income Statement Data:

  • Sales: CNY274,634 / 171,437 / 147,913 / 195,208 / 207,167
  • Gross Profit: CNY215,197 / 141,697 / 121,863 / 163,685 / 174,260
  • Operating Profit: CNY80,915 / 17,456 / (8,962) / 30,214 / 38,579
  • Net Income (Adjusted): CNY60,199 / 20,246 / (7,135) / 20,714 / 26,748

• Key Cash Flow Statement Data:

  • Net Income: CNY60,199 / 20,246 / (7,135) / 20,714 / 26,748
  • Depreciation & Amortization: CNY58,286 / 73,439 / 81,697 / 76,744 / 72,592
  • Cash Flow from Operations: CNY110,508 / 80,095 / 73,875 / 81,665 / 92,788
  • Free Cash Flow: CNY16,554 / 12,421 / 13,875 / 21,665 / 32,788

• Key Balance Sheet Data:

  • Total Assets: CNY662,859 / 664,362 / 631,448 / 644,831 / 646,289
  • Long-Term Debt: CNY105,383 / 131,060 / 141,060 / 141,060 / 141,060
  • Total Equity: CNY379,610 / 386,041 / 353,554 / 355,822 / 356,166

iQmethod Measures Definitions

• Return On Capital Employed: NOPAT / (Total Assets – Current Liabilities + ST Debt + Accumulated Goodwill Amortization)
• Return On Equity: Net Income / Shareholders’ Equity
• Operating Margin: Operating Profit / Sales
• Cash Realization Ratio: Cash Flow From Operations / Net Income
• Asset Replacement Ratio: Capex / Depreciation
• Tax Rate: Tax Charge / Pre-Tax Income
• Net Debt-To-Equity Ratio: (Total Debt – Cash & Equivalents) / Total Equity
• Interest Cover: EBIT / Interest Expense

Important Disclosures

• The report is prepared by BofA Merrill Lynch Global Research.
• The views expressed are not registered/qualified as a research analyst under FINRA rules.
• Investors should refer to "Other Important Disclosures" on pages 8 to 11 for information on certain BofA Merrill Lynch entities that take responsibility for this report in particular jurisdictions.
• The firm may have a conflict of interest in its research due to its business with issuers covered in its reports.
• The report should be considered as only a single factor in making investment decisions.

Investment Opinion

• Underperform for CNOOC.
• The Price Objective is HK$8.0 / US$100.9, based on DCF.
• The valuation assumes long-term oil price of $80/bbl and long-term gas price of $3.8/mcf.
• The valuation is 70% premium to the 1P DCF value, in line with historical trends.