A LOW-RISK PLAY ON A BULLISH OIL PRICE

CHINA’S CNOOC MAY PAY OFF EVEN IF CRUDE DOESN’T RISE

Chinese offshore oil giant CNOOC Ltd. may have more to offer investors betting on the recovery in global crude prices, even if the rally appears to be taking a bit of a breather.

The state oil company boasts vast reserve potential and a robust track record in cost-cutting — making it better positioned to tap strong oil prices than most of its regional rivals such as Australia’s Woodside Petroleum Ltd., Inpex Corp. of Japan and Thailand’s PTT Exploration & Production PCL, according to analysts and data compiled by Bloomberg.

Yet CNOOC is still trading at an around 30-per-cent discount to those peers, partly reflecting investor disappointment over its first-quarter revenue, while also indicating it may have been undervalued. The stock has a potential to gain 29 per cent over the next 12 months, the most among Asian oil and gas producers after India’s Oil & Natural Gas Corp., according to analysts’ price targets compiled by Bloomberg.

“CNOOC is a low-risk play on a bullish oil price view,” said Laban Yu at Jefferies Group LLC in Hong Kong. The stock is “absurdly cheap” compared with international majors such as Exxon Mobil Corp. and Chevron Corp., he added.

CNOOC — which gets almost all its earnings from exploration and production of oil and gas — tracks closely crude’s rise and fall. Prices have staged a comeback since the 2014-2016 slump, first as OPEC restrained output and more recently amid concern about supply disruptions from suppliers such as Libya, Iran and Venezuela. While there are signs the rally is cooling, benchmark Brent is still more than double its nadir below US$30 a barrel, and CNOOC is reaping the benefit as shares and profits rebounded.

CNOOC’S shares have gained about 12 per cent in Hong Kong this year to HK$12.52 (US$1.60), extending two annual gains. It currently trades at 8.9 times its forecast 2018 earnings, below the 15.4 for its major peers in the Asia Pacific region. Of the 22 analysts covering the stock, 19 had the equivalent of a buy rating and none called for a sell.

The company may post a more than 60-per-cent surge in first-half net income from a year ago when it reports financial results later this month, according to estimates in a Bloomberg survey. In the past year, CNOOC’S earnings growth have trounced 93 per cent of its regional peers, and 79 per cent in terms of sales, according to data compiled by Bloomberg.

Even as prospects for further gains in crude are limited, the company’s cost-cutting and higher spending on exploration and production projects will probably bolster earnings. CNOOC’S all-in cost has declined every year since 2013 to US$32.54 per barrel of oil equivalent last year, according to its annual reports.

The Beijing-based explorer is targeting capital expenditure of between 70 billion and 80 billion yuan (US$10.2 billion to US$11.7 billion) this year, the highest since 2014. It’s also aiming to produce 500 million barrels of oil equivalent by the end of the decade, with 42 per cent coming from overseas, from 469 million barrels last year.

CNOOC’S proved reserves — a gauge of future earnings potential — rose by a quarter to about 4.84 billion barrels of oil equivalent at the end of 2017. Its reserves are set to expand further, largely due to contribution from the Stabroek Block in Guyana, the world’s biggest new deepwater project in which CNOOC has a 25-per-cent stake.

Exxon, operator of the project, raised estimates of its discovery by 25 per cent, saying last month the find could now produce 4 billion barrels of oil. Goldman Sachs Group Inc. has cited reserves from the project as reasons for its buy rating on CNOOC.

“We still see CNOOC as the essential oil to own in the sector,” Goldman’s Hong Kong-based analysts, including Mark Wiseman, wrote in a July 29 note, adding that the Guyana discovery is overlooked. The bank will seek an update from the company on its reserve life and progress of international projects at its first-half results release.

Naturally, with CNOOC’S fortunes so wedded to oil, any potential slump in prices could hurt its shares. Citigroup Inc. has outlined a scenario where the company’s shares may slide to HK$11.80 if Brent were to fall to US$45 a barrel next year. The reverse holds true as well: should oil climb to US$85, CNOOC would jump to HK$19.90, Citigroup said in a July 19 note.

So far this year, the global benchmark has traded at about US$72. Brent is expected to average US$66 next year, according to the median estimate of eight forecasts compiled by Bloomberg in the past month.

“CNOOC has underperformed the China oil sector average on concerns of lower production volume guidance and reserve writedowns,” Citigroup said in the note. “With these concerns behind us, and with the company’s excellent cost control track record and strong cash flow position, the stock looks well positioned to outperform.”

WE STILL SEE CNOOC AS THE ESSENTIAL OIL TO OWN IN THE SECTOR.

THE ASSOCIATED PRESS FILES Workers lay cables on a CNOOC oil rig. CNOOC may post a more than 60-per-cent surge in first-half net income from a year ago when it reports financial results later this month, according to estimates in a Bloomberg survey.