Deepwater Breakthroughs And Rising Demand Will Fuel Long-Term Progress

Key Takeaways

• Deepwater technology advances and project scale are transforming margins and cash generation, positioning CNOOC for lasting financial outperformance versus industry peers.
  
• Strategic asset shifts and ambitious green energy moves enhance capital efficiency, secure future earnings, and create unexpected opportunities during the energy transition.
  
• Heavy exposure to geopolitical, regulatory, and environmental risks may constrain CNOOC's future growth, margins, and ability to pivot effectively toward low-carbon energy transition strategies.

Catalysts

An investment holding company, engages in the exploration, development, production, and sale of crude oil and natural gas in the People’s Republic of China, Canada, and internationally.

• Analysts broadly agree that CNOOC's technology-driven production gains and cost efficiencies will drive growth, but this narrative severely understates the impact: recent breakthroughs in deepwater seismic and drilling technologies have structurally lowered per-barrel costs over several years, allowing for record-setting production and margins even in low price environments, signaling a step-change to much higher sustainable net margins and free cash flow.
  
• Whereas analyst consensus highlights reserve replacement and overseas discoveries, the market may be underappreciating the scale of new multi-phase projects (such as Stabroek in Guyana, set for eight development phases and massive capacity gains), which position CNOOC to outpace global peers in volume growth-likely resulting in higher-than-expected revenue and long-term cash generation as high-demand regions face ongoing supply deficits.
  
• The acceleration of energy demand in emerging Asia, combined with chronic global underinvestment in new oil supply, gives CNOOC a path to above-market revenue growth and structurally stronger realized pricing, especially as China prioritizes energy security through local, state-supported producers over the next decade.
  
• CNOOC's proactive portfolio management, including the disposal of non-core assets (such as the Gulf of Mexico asset sale) and redeployment into high-return deepwater and renewables, will unlock value, enhance capital efficiency, and free additional capital for shareholder returns, resulting in a potential uplift to both return on equity and dividend growth.
  
• Embedded option value from greenfield new energy projects-such as the development of Asia's largest floating wind farm and China's first self-developed carbon capture and storage project-not only protects long-term earnings amid the energy transition but also creates new revenue streams that could surprise to the upside as green policy incentives accelerate.

CNOOC Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on CNOOC compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming CNOOC's revenue will grow by 4.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 32.4% today to 34.1% in 3 years time.
• The bullish analysts expect earnings to reach CN¥160.5 billion (and earnings per share of CN¥3.36) by about August 2028, up from CN¥134.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 9.0x on those 2028 earnings, up from 6.0x today. This future PE is greater than the current PE for the CA Oil and Gas industry at 8.9x.
• Analysts expect the number of shares outstanding to decline by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.87%, as per the Simply Wall St company report.

CNOOC Future Earnings Per Share Growth

Risks

• CNOOC's heavy investments in offshore oil and gas assets, including ongoing projects in geopolitically sensitive regions such as Guyana and the South China Sea, expose the company to significant political and regulatory risks, which could lead to asset write-downs or stranded assets and negatively impact future earnings and asset valuations.
  
• Despite some mention of green initiatives and renewable energy projects, CNOOC's energy transition strategy appears less advanced than global peers, raising the risk that the company will lag in the pivot to low-carbon business lines and see its long-term revenue growth constrained as renewables become increasingly competitive.
  
• The company's business and profitability remain highly exposed to fluctuations in global oil and gas prices, and commentary in the transcript highlights increasing difficulty in predicting demand, which could place sustained long-term pressure on revenue and reduce earnings visibility.
  
• Continued high capital expenditures on deepwater and unconventional resources, coupled with rising costs for environmental regulatory compliance and asset depreciation-visible in the reported RMB 8 billion depreciation and increasing DD&A per barrel-could squeeze net margins and dampen free cash flow generation as the sector faces greater external pressures.
  
• As global investors and governments strengthen ESG mandates and intensify decarbonization commitments, there is a risk of divestment or increased cost of capital for CNOOC, which could limit its financial flexibility and access to funding, ultimately impacting profitability and the company's ability to maintain generous shareholder returns.

Valuation

• The assumed bullish price target for CNOOC is HK$27.4, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of CNOOC's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$27.4, and the most bearish reporting a price target of just HK$10.6.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be CN¥470.1 billion, earnings will come to CN¥160.5 billion, and it would be trading on a PE ratio of 9.0x, assuming you use a discount rate of 6.9%.
• Given the current share price of HK$18.7, the bullish analyst price target of HK$27.4 is 31.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.