Global Decarbonization And ESG Pressures Will Cripple Hydrocarbon Value

Key Takeaways

• Rapid growth in renewables and global decarbonization trends are eroding long-term demand for CNOOC's core oil and gas assets, threatening market share and revenue stability.
  
• Escalating ESG, regulatory, and geopolitical pressures are increasing compliance and funding costs while restricting international expansion and technology access.
  
• Strong production growth, cost discipline, technological innovation, and diversification efforts position CNOOC for resilient margins, stable cash flow, and sustained 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.

• Global policy momentum toward decarbonization is accelerating, threatening to structurally erode demand for oil and gas over the coming decades, which could result in persistent revenue headwinds and heightened stranded asset risks as CNOOC's core production assets lose long-term value.
  
• The growing adoption of renewable energy in China and worldwide poses a direct threat to CNOOC's market share and limits future growth potential in hydrocarbons, as energy demand previously expected to support expansion is instead captured by renewables, undermining long-term earnings power.
  
• Ongoing and intensifying investor and regulatory pressure on ESG compliance, combined with rising climate-related requirements, may substantially raise compliance costs and reduce CNOOC's access to international capital markets, leading to higher funding costs and constraining capital expenditures needed for expansion or modernization.
  
• High dependence on offshore oil and gas assets exposes CNOOC to mounting climate, environmental, and operational risks, including greater incidents tied to severe weather (such as typhoons) and stricter safety regulations, which can increase both insurance premiums and maintenance costs, compressing net margins over time.
  
• Continued US sanctions and heightened state ownership could severely hamper CNOOC's ability to execute overseas acquisitions, limit international project participation, and restrict access to foreign technology or partnerships, reducing diversification options and risking longer-term declines in production volumes and global competitiveness.

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 2.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 31.8% today to 28.3% in 3 years time.
• The bearish analysts expect earnings to reach CN¥106.1 billion (and earnings per share of CN¥2.18) by about September 2028, down 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 bearish analyst cohort, the company would need to trade at a PE ratio of 6.4x on those 2028 earnings, down from 6.8x today. This future PE is lower than the current PE for the CA Oil and Gas industry at 8.4x.
• 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 ability to continuously expand reserves and production, as shown by record-high production volumes and multiple new project launches, indicates strong operational momentum which could sustain or grow revenues and support long-term earnings.
  
• Persistent execution of advanced cost-control strategies and lean management, with all-in costs reduced to historic lows near $27 per barrel, suggests resilience in net margins even amid commodity price pressures.
  
• CNOOC's accelerated deployment of technological innovations-from digital oilfields and intelligent drilling to enhanced recovery techniques-has improved production efficiency and reduced decline rates, supporting steady cash flow generation and bolstering net profit sustainability.
  
• Strategic diversification through both aggressive overseas ventures and investment in natural gas, LNG, and early-stage new energy projects positions CNOOC to capture growth opportunities, broaden its revenue base, and stabilize earnings against oil market volatility.
  
• Ongoing commitment to high dividend payout ratios, robust free cash flow, and a strong balance sheet with low gearing enhances shareholder returns and reflects management confidence in future profitability, which could support a higher or stable share price over the long term.

Valuation

• The assumed bearish price target for CNOOC is HK$12.87, which represents two standard deviations below the consensus price target of HK$21.53. 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$27.64, and the most bearish reporting a price target of just HK$10.61.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥375.1 billion, earnings will come to CN¥106.1 billion, and it would be trading on a PE ratio of 6.4x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of HK$19.87, the bearish analyst price target of HK$12.87 is 54.3% 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.