20141029-美银美林-U_P_i2015_capex_cut_and__4__sustainable_growth_confirmed_11页_523kb

CNOOC Summary: 2015 Capex Cut and ~4% Sustainable Growth Confirmed

Core Content

This report provides an analysis of CNOOC's performance and outlook for 2014-2016, with a focus on capital expenditures (CAPEX), production growth, and valuation metrics. It highlights the company's strategic direction, financial performance, and key risks and opportunities.

Main Points

• 3Q14 Operating Highlights:

  • CNOOC reported flat oil & gas production growth both YoY and QoQ.
  • Realized oil price decreased by 6.8% YoY to $99/bbl, aligning with spot Brent crude.
  • Realized gas price increased by 21.7% YoY to $6.6/mcf, which was unexpected but had a marginal impact on earnings.
  • CAPEX was up 24% YoY in the first 9 months of 2014, with slow progress in new project ramp-up (only one project came online between 2Q and 3Q14).

• 2015 Capex Guidance:

  • Management confirmed a lower CAPEX for 2015 compared to 2014.
  • The magnitude of the cut depends on the crude oil price outlook for 2015.
  • CNOOC's breakeven oil price to cover CAPEX and dividend requirements is estimated at $98/106 in 2015/16, higher than the spot Brent oil price of $85.
  • To lower the breakeven oil price to $85, CNOOC needs to cut 2015 CAPEX by 13% from the current assumption.

• Sustainable Growth Outlook:

  • The management clarified that the 2011-15 production CAGR of 6-10% includes Nexen's contribution.
  • The sustainable growth from CNOOC's PRC and existing overseas assets is estimated at 2-6% pa.
  • The report's analysis suggests that near and medium-term growth will likely be at the lower end of the range, 2-4% pa.

• Earnings Revisions:

  • FY14-16E net profit and EPS forecasts were adjusted downward by 2%, 5%, and 9%, respectively.
  • The adjustments were based on assumptions about CAPEX cuts and changes in marketing strategies.

• Valuation Metrics:

  • The price objective is HK$11.00 (US$141.39) based on a DCF model with a long-term crude oil price of $100/bbl and a WACC of 10.0%.
  • The valuation implies a 7.5x 2014E earnings multiple.
  • Key valuation ratios include P/E, P/B, and EV/EBITDA, which have varied over the forecast period.

Key Information

• Price Objective: HK$11.00 / US$141.39
• Investment Opinion: C-3-8
• Volatility Risk: HIGH
• 52-Week Range: HK$11.42 - HK$16.06
• Market Value: US$72,289 million / HK$560,772 million
• Shares Outstanding: 44,647.5 million / 446.5 million
• Average Daily Volume: 66,560,560 shares
• ROE (2014E): 13.5%
• Net Debt to Equity (Dec 2013A): 34.4%
• Breakeven Oil Price: $98/106 for 2015/16
• Spot Brent Oil Price: $85
• Sustainable Growth Rate: ~4% pa

Key Changes

Key Financial Highlights

Key Risks and Opportunities

Downside Risks:

1. Crude Oil and Natural Gas Price Risk: Volatility in prices affects profitability and valuation.
2. Overseas Fiscal Regime Changes: Potential changes in tax systems could impact earnings.
3. Operational and Execution Risk: Delays in key projects could affect earnings forecasts and market confidence.
4. M&A Risk: Acquisitions at premium prices may not be sustainable.

Upside Risks:

1. Sudden Rise in Crude Oil Prices: Above the assumed $100/bbl could boost earnings.
2. New Oil and Gas Discoveries: Could increase reserve value.
3. Turnaround in Overseas Assets: Efficiency gains or fiscal changes could improve performance.

Analyst Certification

• Analyst: Sonia Song, CFA
• Certification: The views expressed accurately reflect the analyst's personal opinion, and no part of compensation is directly or indirectly related to the report's recommendations.

Investment Thesis

• Rating: Underperform
• Reasoning: The report argues that CNOOC's production growth is limited, with a sustainable growth rate of ~4% pa. The company's aggressive CAPEX in recent years is not sustainable given the current oil price environment. The report suggests that CAPEX needs to be cut to align with the spot Brent oil price and maintain profitability.