CNOOC Earnings: Excellent Cost Control Underpins Profit; Attractive Dividend

Despite weaker oil prices, CNOOC’s 00883 first-half 2023 net profit of CNY 63.8 billion, down 11% year on year, was largely in line with the Refinitiv consensus. However, the results beat our expectations mainly due to lower-than-expected special oil gain levy and exploration expenses. After incorporating the latest results and updating our latest energy price and foreign exchange assumptions, we raise our 2023-25 earnings estimates by 22%-47%. Consequently, our fair value estimates are increased to HKD 18.00 per H-share (CNY 16.60 per A-share) from HKD 17.50 (CNY 15.30). Our long-term Brent forecast of USD 60 per barrel remains intact. We think CNOOC’s H-shares are currently undervalued, and the firm remains our top pick in the sector, given its cost efficiency and robust production growth.

We think the key highlights are the impressive all-in cost and attractive dividend. First-half 2023 all-in cost was down 7% year on year to USD 28.17 per barrel on the back of lower tax and operating expenses. Although this was partly aided by the depreciation of the Chinese yuan, this reaffirms management’s track record in containing costs and we believe CNOOC will keep its average all-in cost at around USD 30 in our explicit five-year forecast periods. Meanwhile, CNOOC’s interim dividend of HKD 0.59 per share (payout ratio of 40%) translates to an annualized yield of more than 9% for its H-shares based on the Aug. 17 closing price.

First-half 2023 realized oil price declined by 29% year on year to USD 73.57 per barrel, but the gas price was up 1% to USD 8.12 per thousand cubic feet. In addition, oil and gas output was up 9% year on year to 331.8 million barrels of oil equivalent, in line with the upper end of guidance. Capital expenditure was up 36% year on year to CNY 57 billion, on track to achieve the full-year budget of between CNY 100 billion and CNY 110 billion. We think this will be supported by CNOOC’s robust cash flow.