Reserve Investments And Asia-Pacific Demand Will Shape Future Success

Key Takeaways

• Aggressive reserve expansion, efficient project execution, and low-cost operations drive sustainable production growth and protect margins across market cycles.
  
• Favorable policy, strong regional demand, and disciplined capital allocation underpin stable revenues, reduced risk, and attractive shareholder returns.
  
• Heavy reliance on traditional oil and gas, limited new energy investment, and geographic concentration expose CNOOC to transition, market, regulatory, and ESG risks globally.

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.

• Robust investment in reserve expansion and accelerated project development, including multiple new discoveries and rapid project turnarounds (e.g., Bozhong 26-6 going from discovery to production in 3 years), positions CNOOC to sustain double-digit production growth, directly supporting higher long-term revenue and cash flow.
  
• The company's unwavering focus on low-cost operations, evidenced by all-in costs dropping below USD 27/boe and consistent application of efficiency and lean management programs, enhances net margins and protects earnings through commodity price cycles.
  
• Rising energy demand in China and the broader Asia-Pacific region, driven by urbanization and industrialization, is likely to underpin long-term oil and natural gas consumption, providing durable growth for CNOOC's top line in its core market.
  
• Policy emphasis on energy security and domestic supply in China supports favorable regulatory conditions, possible preferential access to projects, and revenue stability for local oil & gas producers like CNOOC, reducing long-term risk to both revenues and earnings.
  
• Consistent high dividends and an increased payout ratio (interim ratio at 45.5%, near historic highs), backed by recurring free cash flow and disciplined capital allocation, support sustained shareholder returns and could attract greater institutional ownership, driving potential re-rating of the equity.

CNOOC Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CNOOC's revenue will grow by 1.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 31.8% today to 32.1% in 3 years time.
• Analysts expect earnings to reach CN¥134.5 billion (and earnings per share of CN¥2.78) by about September 2028, up from CN¥127.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥149.5 billion in earnings, and the most bearish expecting CN¥105.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.4x on those 2028 earnings, up from 6.8x today. This future PE is lower 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

• The company's continued focus on oil and gas as its core business, coupled with only incremental and non-committal investments in new energy, exposes CNOOC to long-term risk from the accelerating global energy transition, potentially leading to declining demand and structurally weaker revenues as renewables gain market share and global policies tighten.
  
• Management expects a gradual long-term decline in global LNG/natural gas prices and notes the international price is already lower than China's domestic price, risking future revenue and net profit margin compression as price convergence increases competition and places downward pressure on the company's sales.
  
• A significant share of CNOOC's assets, production, and growth projects remain concentrated in offshore China and Chinese domestic markets, which exposes the company to resource depletion risks, local regulatory changes, and environmental risks such as typhoons-posing a long-term threat to production stability and top-line growth.
  
• The company's international expansion is confronted by geopolitical uncertainties, currency volatility (e.g., JV losses in Argentina), and potential sanctions or restrictions due to its ties with the Chinese government, which could limit global market access, disrupt partnerships, and negatively affect global earnings diversity and cash flows.
  
• Industry-wide requirements for emissions reduction, climate compliance, and rising ESG pressure are likely to accelerate, raising capital expenditures and operating costs for oil and gas producers like CNOOC and potentially eroding net margins as regulators, investors, and customers increasingly favor lower-carbon alternatives.

Valuation

• The analysts have a consensus price target of HK$21.534 for CNOOC based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$27.64, and the most bearish reporting a price target of just HK$10.61.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥418.9 billion, earnings will come to CN¥134.5 billion, and it would be trading on a PE ratio of 8.4x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of HK$19.87, the analyst price target of HK$21.53 is 7.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.