Fossil Fuel Demand Will Fall As Renewables And Regulations Intensify

Key Takeaways

• Rising regulatory, geopolitical, and environmental pressures threaten CNOOC's growth, profitability, and access to key markets and technologies.
  
• Heavy focus on offshore oil exploration exposes the company to elevated operational, legal, and transition risks, with limited progress in renewable energy diversification.
  
• Sustained production growth, operational efficiency, innovation, and diversified energy investments support robust earnings, resilient cash flow, and strong shareholder returns.

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.

• The accelerating global shift toward renewable energy and large-scale electrification poses a direct challenge to CNOOC's traditional oil and gas revenues. As governments and major economies intensify climate policies, CNOOC faces the prospect that long-term crude oil demand may peak or decline, causing persistent pressure on top-line growth and future earnings.
  
• Escalating regulatory and investor demands for climate action are likely to drive up compliance costs, restrict capital allocation options, and potentially hinder the company's ability to expand fossil fuel operations, contributing to margin compression and limiting profitability.
  
• Geopolitical tensions, especially between China and Western countries, threaten to disrupt CNOOC's access to technology, project financing, and key export markets, jeopardizing both overseas asset value and revenue stability while increasing the risk profile for long-term investments.
  
• CNOOC's continued reliance on high-risk, capital-intensive offshore exploration projects-often concentrated in politically sensitive waters such as the South China Sea-exposes the company to elevated operational costs, environmental risks, and the possibility of protracted legal or geopolitical disputes that may impair asset valuations, net margins, and earnings resilience.
  
• As global carbon pricing mechanisms become more widespread, CNOOC's operating costs for oil and gas could rise significantly, eroding competitiveness and squeezing cash flows, with limited upside from its current renewable energy transition efforts compared to global peers.

CNOOC Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on CNOOC compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming CNOOC's revenue will decrease by 4.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 32.4% today to 27.9% in 3 years time.
• The bearish analysts expect earnings to reach CN¥102.0 billion (and earnings per share of CN¥2.13) by about August 2028, down 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 bearish analyst cohort, the company would need to trade at a PE ratio of 6.7x on those 2028 earnings, up from 6.0x today. This future PE is lower than the current PE for the CA Oil and Gas industry at 8.7x.
• Analysts expect the number of shares outstanding to decline by 0.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.86%, as per the Simply Wall St company report.

CNOOC Future Earnings Per Share Growth

Risks

• Persistent growth in production volume and reserves, reflecting a reserve replacement rate of 167% and production longevity exceeding ten years, suggests that top-line revenue growth could remain robust and support long-term earnings.
  
• Strong cost discipline, with cost per barrel reduced by 5.3% in the latest period and 37% since 2013, alongside process automation and digitalization efforts, continuously improves operational efficiency and cushions net margins even in weaker price environments.
  
• Strategic investments in technological innovation, including deepwater, shallow water, and digital oilfield assets, have enabled new discoveries and production increases both domestically and overseas, which underpins stable or rising free cash flow and earnings capacity.
  
• Diversification into natural gas, backed by long-term supply contracts in high-demand regions like Guangdong, Jiangsu, and Zhejiang, as well as early and growing investments in offshore wind and renewable energy, broaden revenue streams and reinforce cash flow resilience in the face of changing global energy trends.
  
• Commitment to shareholder returns, demonstrated by increasing dividend payouts (payout ratio above 44%, committed to ≥45% through 2027) and ongoing share buybacks, signals financial strength and sustained profitability, supporting valuation appreciation and total shareholder return.

Valuation

• The assumed bearish price target for CNOOC is HK$13.09, which represents two standard deviations below the consensus price target of HK$21.15. 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 more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$27.22, and the most bearish reporting a price target of just HK$10.53.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥365.8 billion, earnings will come to CN¥102.0 billion, and it would be trading on a PE ratio of 6.7x, assuming you use a discount rate of 6.9%.
• Given the current share price of HK$18.65, the bearish analyst price target of HK$13.09 is 42.5% lower.
• 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.