3Q13 review - volume on track
CNOOC’s new project pipeline will deliver strong growth in the near term, while successful explorations and appraisals will ensure sustainable growth.
CNOOC’s production is on track to deliver strong growth in FY14-15, with its project pipeline on schedule and meeting expectations for FY13. We think its valuations are attractive at the current level and maintain an Outperform rating and our target price of HK$18, based on 9.8x CY14 P/E (2007-2010 historical average). Catalysts include Liwan production commencement by end of this year. CNOOC remains our top pick in the China oil and gas universe.
CNOOC reported its 3Q13 operation review with net production of 103.4mmboe, marginally down 1.1% qoq but up 17.8% yoy. While its domestic production rate was 696kboe/d during 3Q13 (down 2.8% qoq, down 5.4% yoy) and its year-to-date daily run rate was 720kboe/d vs. 733kboe/d in FY12, we believe that the 10 new domestic projects scheduled to come onstream by end of 2013 will improve 4Q production rate. The total production rate (ex-Nexen) in 3Q was 949kboe/d (flat qoq and yoy), which was still 1.2% higher than the FY12 average run rate of 938kboe/d. With 9M13 production (ex-Nexen) at 260.6mmboe representing 75% of our full-year target, CNOOC is on track to meet management’s high-range target of 338-348mmboe for FY13.
What We Think
We believe that domestic volumes will post modest growth in 4Q as 10 new domestic projects come onstream. The bulk of the volume contribution will kick in during FY14. We estimate that the projects will deliver volume growth 7% yoy, while overseas assets will contribute to achieve our FY14 forecast of 11%. In addition to the 26 new projects under construction, CNOOC had achieved 5 new discoveries and 15 successful appraisal wells in offshore China and overseas assets, which will continue to secure its sustainable growth in the longer term.
What You Should Do
The stock is currently trading at 8.4x FY14 P/E, below its historical mean of 9.1x since 2005. We believe that it should trade closer to its growth-phase valuation of 10x on the back of strong volume growth in the near term and sustainable development in the longer term from a successful exploration programme.
Projects on track and production growth intact
Ten new projects are scheduled to come onstream in offshore China by the end of FY13, located in the Bohai Bay area as well as in the South China Sea.
To date, Weizhou 6-12, Weizhou 12-8W, Wenchang 8-3E and Wenchang 19-1N have already started production and we expect the remaining projects to ramp up by end-13 and to reach peak production in FY14. We expect these 10 new projects to contribute 3.5mmboe of annual production in FY13 and 34.4mmboe in FY14. While we expect additional volume growth from its overseas assets, we see a domestic organic growth of 7% yoy in FY14 from CNOOC’s current project pipeline.
These projects are currently on track to come onstream by the end of this year, with the exception of Lufeng 7-2 as management is guiding for delays. However, we believe that the impact will be minimal. Assuming a worst-case scenario with Lufeng 7-2 not included in our contribution assumption, FY14 volume growth will be 6.4% instead of 7%, in our view.
Publish date: 25/10/13