On track with strong volume growth in FY14-15
CNOOC’s production growth is on track, driven by new projects that are expected to come on stream by the end of this year. We believe the market’s concerns are overdone and the stock’s current valuation is attractive.
Even excluding the contribution from CNOOC’s overseas assets, we believe it can achieve a 7% rise in production in FY14-15. We see an opportunity to accumulate the stock. As such, we maintain our Outperform rating and our target price of HK$18 based on 9.8x CY14 P/E (207-2010 historical average). CNOOC remains our top pick in the China oil and gas universe.
CNOOC’s share price has underperformed MSCI China by 1.4% and its peers by 1.8-3.9% month-to-date as the market is concerned that the company will not be able to achieve its production target. Management’s target of 6-10% CAGR over the five-year period ending FY15 translates into a double-digit volume growth over the next two years. The market is not convinced that it can achieve more than 10% yoy growth in production.
What We Think
We believe the market needs more evidence on CNOOC’s double-digit volume growth story for FY14-15, considering that the growth has stalled since FY10. Given the new projects are on schedule and are expected to come onstream by 4Q13, we estimate that the 10 new domestic projects will deliver an additional production volume of 31mmboe in FY14, representing a 7% yoy growth, while the overseas assets will contribute to achieve our FY14 forecast of 11%. In addition, the 26 new projects under construction will secure the growth over the next 2-3 years. We believe that CNOOC has returned to its volume growth phase and project 11% yoy rise in FY14 and 12% in FY15. This will achieve the management’s production target of 6-10% CAGR over the five-year period ending FY15, in our view.
What You Should Do
We see an opportunity to accumulate CNOOC, which is currently trading at 8.8x FY14 P/E, marginally below its historical mean since 2005 of 9.1x. We believe CNOOC should trade closer to its growth-phase valuation of 10x. Our target price of HK$18 represents a 13% upside.
Strong volume growth on track
We believe that CNOOC is on track to achieve a production volume growth of 11% yoy in FY14 and 12% yoy in FY15, with 10 new projects coming onstream by 4Q13.
While CNOOC’s volume growth is expected to be lacklustre in FY13, we believe the strong production growth will return in FY14-15, in the process achieving the management’s production target of a 6-10% CAGR over the five-year period ending FY15.
Ten new projects are scheduled to come onstream in offshore China by the end of FY13, located in Bohai Bay area as well as in the South China Sea. Weizhou 6-12 and Wenchang 8-3E in Western and Eastern South China Sea have already commenced production in Apr and Jul 2013 respectively, and we expect the remaining projects will ramp up production by the end of this year.
According to Woodmac, the new projects are expected to reach peak production by FY14, with the production volume reaching 39.3kboe/d and 142.3kboe/d in FY13 and FY14 respectively. 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 overseas assets, we see a domestic organic growth of 7% yoy in FY14 from CNOOC’s current project pipeline. As such, we believe that the market’s concerns over CNOOC’s volume growth will provide an entry point.
While we are expecting a production growth of 11% yoy to 474mmboe in FY14 on the back of a strong pipeline coming onstream by the end of FY13, CNOOC’s successful exploration programme has made eight new discoveries and 18 successful appraisal wells in Bohai Bay, Western South China Sea and overseas in Algeria in 1H2013. This further supports CNOOC’s excellent reserve replacement ratio (RRR) track record of 188% as at end-FY12. The new discoveries are under construction and scheduled for completion this year, which will contribute to the prospective growth over the next 2-3 years. We estimate production volume to rise 12% yoy and reach 532mmboe in FY15.
1.1 Weizhou 6 -12 and Weizhou 12-8W
Weizhou 6-12 and Weizhou 12-8W are located in Western South China Sea at an average water depth of 28-33m. The Weizhou Block contains five commercial discoveries including Weizhou 6-12S, Weizhou 6-12N, Weizhou 12-8W, Weizhou 12-8E and Weizhou 12-3, with recoverable reserves of 26.5mmbbl as of Jan13, according to Woodmac.
The commercial production at Weizhou 6-12 and Weizhou 12-8W is expected to begin in FY13, with an estimated production of 15,000b/d and reach peak production of 16,000b/d by FY14. We estimate these two projects will contribute 1.6mmboe and 3.0mmboe in FY13 and FY14 respectively to CNOOC’s production profile.
1.2 Wenchang 8-3E and Wenchang 19-1N
Wenchang 8-3E and Wenchang 19-1N are wholly owned by CNOOC and are located in the Eastern South China Sea region.
Commercial production of Wenchang 8-3E is already underway and expected to reach peak production of 5,000b/d in FY14, while Wenchang 19-1N is ready for production and expected to ramp up in 4QFY13, with a similar production output. We estimate these two projects will contribute 480kboe and 3.7mmboe in FY13 and FY14 respectively to CNOOC’s production.
1.3 Lishui 36-1
Lishui 36-1 is located in East China Sea at an average water depth of 90m. First gas is expected to come in late FY13 and reach peak production of 25mmcf/d, while the peak oil production expected to reach 1,200 bbl/d by FY14.
Currently, Lishui 36-1 is ready for commercial production and we estimate it will contribute 180kboe and 1.0mmboe in FY13 and FY14 respectively to CNOOC’s production profile.
1.4 Lufeng 7-2
The Lufeng block is located in the Pearl River Mouth Basin in Eastern South China Sea with a block area of 2,064km2 and an average water depth of 105m. The jacket installation is complete and Lufeng 7-2 is expected to start production in early FY14. The output is expected to peak in FY14 with a volume of 20,000b/d which will contribute 3.72mmbbl to CNOOC’s production volume in FY14.
1.5 Qikou 18-1
Qikou 18-1 is an adjustment project located in Western Bohai Bay. Offshore installation is complete and production is expected to commence in FY13, with oil production of 800bbl/d and gas production of 1.0mmcf/d. Oil production is expected to peak by FY14 with an estimated output of 2,500bbl/d, while gas output is expected to remain at 1.0mmcf/d. We estimate it will contribute marginally in FY13 and approximately 1.0mmboe in FY14.
1.6 Suizhong 36-1
Suizhong 36-1 is an adjustment project wholly owned and operated by CNOOC and is located in Liaodong Bay area of Bohai Gulf. The project has gone through several phases of adjustment since late 1997. The Suizhong 36-1 new adjustment project is expected to come onstream in late FY13, with the output expected to reach peak production of an estimated 26,600bbl/d in FY14. We estimate that this will contribute 0.7mmbbl and 9.7mmbbl to CNOOC’s oil production volume in FY13 and FY14 respectively.
1.7 Liuhua 19-5
Liuhua 19-5 is a new gas fields project in the Panyu Area in Eastern South China Sea at an average water depth of 150m. The project is expect to come onstream in late FY13 and reach peak production of 38mmcf/d in FY15. Its production volume contribution is estimated at 150kboe in FY13 and 1.8mmboe in FY14.
1.8 Liwan 3-1
Liwan gas project is one of the key projects and is located in Pearl River Mouth Basin, 270km away from Guangdong province at an average water depth of 723-1,500m. It includes three main fields – Liwan 3-1, Liuhua34-2 and 29-1 fields – operated by Husky Energy.
Liwan 3-1 offshore installation is complete and is expected to come onstream in late FY13 with an initial production of 35mmcf/d. It is projected to reach peak production in FY14 at 340mmcf/d.
We expect Liwan 3-1 will be a critical volume growth driver in FY14, with a volume contribution of 10.6mmboe.