New Discoveries Like Lingshui 36-1 May Strengthen Operations, But Risks Could Affect Future Results

Key Takeaways

• Strategic focus on cost control and technological advancements are set to enhance net margins and profitability through operational efficiencies and cost reductions.
  
• Expansion in both domestic and overseas production capabilities strengthens future earnings potential and market positioning, supporting revenue growth.
  
• CNOOC's growth strategy is vulnerable to external uncertainties such as weather, financial mismatches, regional partnerships, and exploration project timelines, affecting revenue and growth.

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 significant investments in exploration technologies and successful discovery of large new oil and gas fields, such as the Lingshui 36-1 gas field and Bluefin discovery in Guyana, are expected to boost reserves and production, improving future revenue and growth potential.
  
• The company's strategic focus on cost control, such as reducing all-in costs and optimizing operational efficiencies through innovative projects like the ultra-deep extended reach wells, is likely to enhance net margins by lowering operational expenditure.
  
• The expansion of both domestic and overseas production capabilities, including key projects in Bohai, Guyana, and Mozambique, provides a strong foundation for future earnings growth from increased production volume and improved market positioning.
  
• Continuous technological advancements, like the development of deepwater jacket platforms, FPSO techniques, and green project initiatives, are expected to drive efficiency and further cost reduction, supporting higher profitability and net margin improvements.
  
• The company's disciplined capital management, as evidenced by strategic bond repurchases and maintaining a strong cash position, allows for flexibility in increasing dividends, share buybacks, and funding growth projects, potentially enhancing investor returns through higher earnings per share (EPS).

CNOOC Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CNOOC's revenue will decrease by 0.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 32.8% today to 31.5% in 3 years time.
• Analysts expect earnings to reach CN¥138.3 billion (and earnings per share of CN¥2.89) by about February 2028, down from CN¥142.9 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as CN¥161.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.1x on those 2028 earnings, up from 5.8x today. This future PE is greater than the current PE for the CA Oil and Gas industry at 8.8x.
• Analysts expect the number of shares outstanding to grow by 0.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.58%, as per the Simply Wall St company report.

CNOOC Future Earnings Per Share Growth

Risks

• CNOOC's growth strategy heavily relies on external factors, such as favorable weather conditions, which are unpredictable and could affect production, impacting revenue and net margins.
  
• The potential high cost of currency and maturity mismatches in financial strategies, such as bond repurchasing, could affect net profitability if not managed prudently.
  
• Dependence on partnerships in regions like Guyana introduces risks around local governance and contractual stability, which could influence future earnings and revenue continuity.
  
• Exploration projects, such as those in Mozambique, remain in early stages with uncertain production schedules and costs, which could delay revenue generation.
  
• The company's strategy of reinvesting cash into high-quality projects hinges on continuing to find worthwhile opportunities; failure to do so could stunt growth and future earnings.

Valuation

• The analysts have a consensus price target of HK$22.422 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$31.4, and the most bearish reporting a price target of just HK$8.88.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥439.6 billion, earnings will come to CN¥138.3 billion, and it would be trading on a PE ratio of 9.1x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of HK$18.66, the analyst price target of HK$22.42 is 16.8% 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.