Volume growth returns
CNOOC’s new project pipeline will deliver strong growth in the near term. We forecast 11% volume growth for FY14.
We have an Add rating (changed from Outperform given our new rating structure) on CNOOC. Our target price remains HK$18, based on the historical average P/E of 9.8x during FY07-10 and implying upside of 16%. We think CNOOC’s current valuations are attractive. Catalysts include the commencement of production at Liwan by end-2013. CNOOC remains our top pick in the China oil and gas sector.
Growth engine restarted
CNOOC’s 3Q13 net production was 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 the end of 2013 will improve the 4Q production rate. The total production rate (ex-Nexen) in 3Q was 949kboe/d (flat qoq and yoy), still 1.2% higher than the FY12 average run rate of 938kboe/d. With 9M13 production (ex-Nexen) of 260.6mmboe representing 75% of our full-year target, CNOOC is on track to meet management’s high end of management’s target of 338-348mmboe for FY13.
Bulk volume to kick in during FY14
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 of 7% yoy while overseas assets will contribute to achieve our FY14 forecast of 11%. In addition to the 26 new projects under construction, CNOOC has five new discoveries and 15 successful appraisal wells offshore China and in overseas assets, which will sustain its growth prospects in the longer term.
The stock is currently trading at 8.6x FY14 P/E versus its historical average of 9.1x. We believe that it should trade closer to its growth-phase valuation of 10x given the strong volume growth in the near term and sustainable development in the longer term from a successful exploration programme.