South China Sea Production Will Capitalize On Enduring Hydrocarbon Demand

Key Takeaways

• Technological innovation and rapid project development are driving efficiency gains and positioning CNOOC for strong, resilient margin and revenue growth, even in volatile markets.
  
• Strategic advantages in reserves, cost leadership, and state support underpin long-term stability and upside, while energy transition trends secure enduring demand for its gas business.
  
• Heavy reliance on oil and gas, exposure to geopolitical risks, and insufficient energy diversification leave CNOOC vulnerable to market, regulatory, and environmental shifts.

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.

• While analyst consensus recognizes CNOOC's technological advancements and digital transformation as supportive of efficiency, the pace and scale of their intelligent drilling, digitalized field management, and accelerated exploration-to-production cycle suggest that cost reductions and production growth could vastly outpace expectations, leading to sustained margin expansion even in lower oil price environments.
  
• Analysts broadly agree that reserve replacement and overseas field discoveries will drive revenue growth, but CNOOC's record pace in bringing large new projects online-particularly in high-potential regions like Brazil and the South China Sea-imply reserves and production may see compounding annual growth at rates the market has not yet priced in, providing significant long-term upside to revenue and cash flow.
  
• CNOOC's ability to maintain industry-leading all-in costs near historical lows-despite inflation and rising volatility-uniquely positions it as a long-term consolidator during any extended low-oil-price cycle, allowing the company to acquire global upstream assets at attractive valuations and drive accretive growth in both earnings and asset base.
  
• The ongoing and committed state support for energy security in China, combined with CNOOC's indispensable domestic supply role, creates a highly resilient demand floor and on-access capital for investment, protecting and potentially accelerating revenue and profit growth regardless of global market cycles.
  
• The gradual transition to renewables across Asia and China's ongoing preference for natural gas as a "bridge fuel" ensures multi-decade demand growth for CNOOC's expanding gas business, while the company's scale, infrastructure, and strategic contracts in high-demand regions lock in stable, high-visibility revenues and mitigate downside volatility in earnings.

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 3.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 31.8% today to 33.5% in 3 years time.
• The bullish analysts expect earnings to reach CN¥150.2 billion (and earnings per share of CN¥3.15) by about September 2028, up from CN¥127.7 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 9.6x on those 2028 earnings, up from 6.7x today. This future PE is greater than the current PE for the CA Oil and Gas industry at 8.6x.
• Analysts expect the number of shares outstanding to decline by 0.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.84%, as per the Simply Wall St company report.

CNOOC Future Earnings Per Share Growth

Risks

• Global efforts toward decarbonization and stricter climate policies could reduce long-term demand for oil and gas products, threatening CNOOC's core business and leading to lower future revenue and potential asset write-downs.
  
• Asset maturation and natural reserve depletion in flagship offshore fields like Bohai and the South China Sea may force CNOOC to make higher ongoing capital expenditures for exploration, which could squeeze profitability and eventually lead to declining production volumes.
  
• The company's core strategic focus remains on oil and gas, with only gradual diversification into new energy, exposing it to technological disruption from renewables and the risk that faster-than-expected transition to cleaner energy could erode future earnings.
  
• CNOOC's overseas projects, such as those in Brazil, Iraq, and Kazakhstan, increase its exposure to geopolitical risks and potential operational difficulties, which could result in volatile cash flows and impairments that impact its net income.
  
• Long-term cost inflation in offshore drilling and the likelihood of stricter environmental and safety regulations-including compliance and emissions costs-could erode the benefit of current cost efficiencies and place sustained downward pressure on net margins.

Valuation

• The assumed bullish price target for CNOOC is HK$27.6, 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$27.6, 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¥447.9 billion, earnings will come to CN¥150.2 billion, and it would be trading on a PE ratio of 9.6x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of HK$19.79, the bullish analyst price target of HK$27.6 is 28.3% 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.