Digital Exploration In South China Will Boost Efficiency Amid Risks

Key Takeaways

• Strategic advancements in technology and digital transformation improve production efficiency and reduce costs, boosting potential revenues and net margins.
  
• Discoveries in new fields and a focus on natural gas provide stable, increased revenue potential, aiding in market expansion and strong profit margins.
  
• Market fluctuations, asset depreciation, declining oil prices, and regulatory complexities threaten CNOOC's revenue, profit margins, and growth momentum.

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.

• CNOOC's continual advancements in technology-driven and digital transformation for oil exploration and production can lead to increased production efficiency and reduced costs, potentially boosting future revenues and net margins.
  
• The discovery of new oil and gas fields, particularly in the South China Sea and overseas markets such as Guyana and Brazil, coupled with high rates of reserve replacement, suggests the potential for increased revenue from higher production volumes.
  
• The company's strategic focus on natural gas production and long-term contracts in high-demand domestic markets like Guangdong and Jiangsu provide a stable revenue stream and help maintain strong profit margins, despite global price fluctuations.
  
• Investment in innovative offshore technologies and green energy projects, like the floating wind farm and CCS projects, positions the company for growth in expanding energy markets, potentially enhancing future earnings.
  
• Commitment to returning value to shareholders through strategic dividend payouts and share buybacks reflects a strong cash flow position and could drive upward pressure on earnings per share (EPS).

CNOOC Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CNOOC's revenue will decrease by 0.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 32.8% today to 31.7% in 3 years time.
• Analysts expect earnings to reach CN¥135.1 billion (and earnings per share of CN¥2.73) by about April 2028, down from CN¥137.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥161.5 billion in earnings, and the most bearish expecting CN¥96.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.0x on those 2028 earnings, up from 5.6x today. This future PE is greater than the current PE for the CA Oil and Gas industry at 6.3x.
• Analysts expect the number of shares outstanding to grow by 0.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.11%, as per the Simply Wall St company report.

CNOOC Future Earnings Per Share Growth

Risks

• Market fluctuations and geopolitical tensions, particularly with the U.S., could impact natural gas and crude oil pricing, affecting future revenue and profit margins.
  
• High depreciation in asset values might indicate potential asset impairments or reduced book values, which could negatively impact net earnings.
  
• Declining oil prices, despite increased efficiency, suggest vulnerability to commodity price volatility, which could pressure revenue and profit margins.
  
• Potential difficulties in maintaining growth momentum due to a high production base may limit revenue growth and impact shareholder returns.
  
• Regulatory and approval complexities, notably in international transactions, may hinder strategic asset sales or acquisitions, affecting revenue and cash flows.

Valuation

• The analysts have a consensus price target of HK$21.778 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$27.95, and the most bearish reporting a price target of just HK$10.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥425.8 billion, earnings will come to CN¥135.1 billion, and it would be trading on a PE ratio of 9.0x, assuming you use a discount rate of 7.1%.
• Given the current share price of HK$17.16, the analyst price target of HK$21.78 is 21.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.