<News Analysis> 2024 Strategy Preview
Raising the bar. CNOOC produced c. 675 mmboe (+8.2% yoy) in FY23E, 3% above guidance of c. 650 – 660 mmboe announced in its 2023 Strategy Preview. Management has also raised its average production targets for FY24-25 by 2-7% to 710 and 790 mmboe respectively (versus previous targets of 695 / 735 mmboe) and introduced FY26 target of ~820 mmboe. This translates into output compound annual growth rate (CAGR) of 6.7% during 2023-2026. Production will target both oil and gas, with higher weightage towards gas exploration.
3-year Production Target
Source: Company, DBS Bank
Higher capex guidance. CNOOC spent ~RMB128bn capex in FY23E, in line with the adjusted guidance of RMB120-130bn. Management has also guided higher capex spending to Rmb125-135bn for FY24F, as it increased development capex to support future growth. While this is marginally higher than 2023 levels, it is 25-35% higher than the Rmb100bn levels in 2021/22. Approximately 63% of the capex will be deployed for development projects, 16% for exploration and 19% for product capitalization. More projects expected in China with domestic capex as a proportion of total capex projected to make up 72% in FY24F. Recent exploration efforts have generated positive returns; Reserves Replacement Ratio (RRR) is expected to stay above 100% at >130%.
Green initiatives. CNOOC aims to increase its natural gas production, the transitional cleaner fossil fuel, to c.30% of total output by 2025, from 20-25% currently. It is also actively promoting exploration of tight gas and deep-play coalbed methane (CBM). In addition, it continues to grow the deep-sea floating wind power as part of its renewable drive.
Dividend policy maintained. CNOOC paid HK$0.65 interim dividend for 1H23, we expect similar final dividend, bringing full year dividend to c.HK$1.2, or over 8% yield.
CNOOC maintains its commitment to pay out at least 40% of profits as dividend and absolute dividend to be not less than HK$0.70 (c. 5% yield) for FY22-24. Assuming 40% payout, we project DPS to be around HK$1.2 in FY23-25, implying c.8% dividend yield. We believe the dividend payout is sustainable as projected OCF of ~Rmb200bn is sufficient to fund capex and dividends.
Earnings revisions. We have adjusted our forecasts to reflect the higher production growth and capex. Our FY23-25F earnings forecasts are revised up by 6-11%.
In 1H23, CNOOC reported net profit of Rmb64bn on the back of ~ US$74/bbl realised oil price. We expect the company to report slightly higher profit in 2H23E in view of 3% higher output and steady average oil price.
Reiterate BUY and TP of HK$16. Our DCF-based TP is adjusted to HK$16 after raising earnings and capex as well as rolling over to FY24F. We continue to like CNOOC. While oil price seems normalizing to US$80/bbl range, CNOOC could surprise on the upside with accelerated growth and cost management. The improving sentiment of a recovery in China could drive valuation re-rating, and the share buyback exercise should also lend support to share price. Valuation remains undemanding at 0.9x PB and <5x FY24PE with a high dividend yield of ~8% in FY24-25.
