Headwinds in the near term
Production growth in FY14 to be lower-than-expected due to slow project executionat CNOOC, while its volume growth is expected to deliver in FY15We have adjusted our earnings in FY13/14/15 by +5%/-1%/+5% accordingly and reduced our target price to HK$17.6.
CNOOC released its business strategy previewfor 2014 with a production target of 422-435mmboe,including 69mmboe from Nexen. It has 7-10 new projects scheduled to come onstream in 2014.We expect the FY14 capex plan to be Rmb105bn-120bn (including Nexen).The FY10-15 production growth target remains unchanged at 6-10%CAGR.
What We Think
Project delay. Of the 11 new projects scheduled for FY13, eightcommenced operations.Of the three delayed projects (Liwan 3-1, Lufeng 7-2 and Lishui 36-1), Liwan 3-1 is the most crucialandestimated to deliver 11mmboe in FY14, representing 28% of the total estimated production from new projects.The delay isdue to late arrival of subsea equipment and engineering woes,which impactedthe schedule of deep water installation, in which the work is being sub-contracted to an Italian subsea giant Saipemby Husky Energy (operator).
Expect lower end of target. While management remains confident of delivering its production growth target of 6-10% CAGR in FY10-15, we expect it to comein at the lower endgiven the project delays. The majority of thesenew projectswill come onstream in 2H14,and we expect theirfull contribution to be realised in FY15.We lower our production estimate (excludingNexen)by 6% to 366.3mmboe in FY14 and 1% to 431.1mmboe in FY15, representing 4% and 18% yoy volume growth respectively.
Failure of international majors in China. Wehave detecteda worrying trend of international oil companies failingto deliver in production-sharing contracts(PSCs) in China. This includesthe oil spill in Penglai 19-3 in Jun 2011 operated by ConocoPhillips, the Liwan 3-1 delay (operated by Husky), and Lufeng 7-2 (operated by Newfield), leading us to question the competency of thesecompanies in ChinaPSCs and their impact on CNOOC.
What You Should Do
While we see near-term headwinds, we maintain Add rating on CNOOC,with a new target price of HK$17.6,based on 9.8xFY14 P/E (2007-10historical avg).
Publish date: 21/01/14