Downgrade to NEUTRAL
Price (20 Jan 14 , HK$) 13.96
TP (prev. TP HK$) 16.00 (20.00)
New report: Downgrade to NEUTRAL on lower production growth
● At its annual Strategy Preview on 20 January, CNOOC announced its 2014 production target (ex Nexen) of 0.6-4.3% YoY growth. This is below our forecast of 8%, and significantly below consensus expectations of 10-12% growth.
● Management maintained 6-10% production CAGR for 2011-15, which we think is too stretched. We believe a 3-4% target is more likely, implying 11% 2015E growth vs the company's low-end guidance of 22%. With the disclosure of new projects, assuming peak production for all projects in 2015, and applying a 9% discount rate for the existing projects, CNOOC still needs to add 167kboe/d production in 2015 to hit the low bar of its guidance of 6%.
● CNOOC capex has been ramping up from US$6.4 bn in 2011 to US$14-16 bn in 2014E while production ramp up is later/lower than expected. We believe CNOOC's maintenance capex might be higher than our expectation.
● We downgrade CNOOC to NEUTRAL, TP of HK$16.00, implying 8.9x 2014 P/E. We prefer COSL for its oil exposure in the China space.
Production growth – turning conservative
Production growth has always been one of the most important stock price driver for CNOOC. The low single-digit growth guidance for 2014E surely comes as a negative surprise to the market, especially after an average yearly growth of a mere 2.3% from 2011-13. While management still maintains its 2011-15 growth CAGR guidance of 6%-10% (ex Nexen), we believe this target is rather stretched. Based on CNOOC’s disclosure and assuming all projects will achieve its peak production in 2015, and applying a 9% discount rate for the existing projects, CNOOC still needs to add 167kboe/day production in 2015 to hit the low bar of its guidance of 6%. Our revised 2011-15 production CAGR is at 4%, implying 2.3%/11.4% growth in 2014E/15E.
Higher maintenance capex than expected
CNOOC capex (ex Nexen) has increased from US$6.4 bn in 2011 to US$15 bn in 2014E (company guidance), with an aim to increase production. However, production ramp up has been later/lower than previously expected: volume CAGR for 2011-14 is only at 2.3%, which led us to believe that CNOOC's maintenance capex (capex required to keep production volume at current level) might be a lot higher than our expectations. We have therefore revised up CNOOC’s maintenance capex from US$6 bn to US$9 bn, the average of 2011-2013 capex.
New target price of HK$16.0/sh
We revise down our earnings estimate for 2014/15 by 4% and 15% to reflect the lower production growth. We change our DCF-based target price to HK$16.00 (from HK$20.00), to reflect (1) lower earnings for 2014E/15E and (2) a higher end-year capex. Our new TP implies 8.9x and 8.1x 2014E and 2015E P/E.
Publish date: 21/01/14