China National Offshore Oil Corp CNOOC (883.HK) BUY. Solid earnings in 1Q11, but production dropped on quarter basis

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1 China National Offshore Oil Corp CNOOC (883.HK) Market Sector Reuters Bloomberg Stock Exchange Hong Kong Oil/Gas 0883.HK 883. HK Solid earnings in 1Q11, but production dropped on quarter basis BUY SUMMARY: Phillip Securities Research Hong Kong 12 May 2011 Closing Price HKD Target Price HKD 22.3 (+19.76%) - CNOOC released its 1Q11 results on April 27 th. Total net production increased 26.6% yoy but dropped 5.1% qoq, reaching 85.2mmboe. - Revenue increased 59.1% to RMB48.5 billion, mainly due to the higher realized oil and gas prices. Average realized oil price was US$99.98/bbl, while average realized gas price was US$4.81/mcf, up by 32.7% and 8.6% yoy respectively - Jinzhou 25-1 came on stream as planned. - We reiterate our BUY rating with target price of HK$22.3 Net production Crude oil and liquids (mmbbls 1Q11 1Q10 YoY (%) 4Q10 QoQ (%) Bohai Bay % % WS China Sea % % ES China Sea % % E China Sea % (0.0) % Overseas % % Total % % Major Shareholders (31 Dec 09) % 1 CNOOC Natural gas (bcf) 1Q11 1Q10 YoY (%) 4Q10 QoQ (%) Bohai Bay % % WS China Sea % % ES China Sea % % E China Sea % 0.0 n/a Overseas % % Total % % Phillip Research Team FAX research@phillip.com.sg Web: MICA (P) 004/01/2011 Ref No: HK2011_0048

2 Sales Revenue (RMB million) 1Q11 1Q10 YoY (%) 4Q10 QoQ (%) Crude and gas 48, , % 43, % Marketing, net % % Others % % Total 48, , % 43, % Production Dropped on Quarter Basis Total crude oil production increased 25.1% yoy, reaching 68.8mmbbl; however, the net production dropped 5% compared to 4Q10. Productions from the Bohai Bay and East South China Sea contributed the most to the total oil output, representing 57.6% and 14.2% respectively. Outputs compared to last quarter dropped 3.4% and 2.5% in these two regions. Oversea production also declined from 11.3mmbbl in 4Q10 to 9.8mmbbl in 1Q11. Production of natural gas was a similar story: net production increased 35.1% yoy, but dropped 9.3% qoq. The decrease in production was mainly due to the 32.7% and 29.1% drop from overseas and ES China Sea respectively. Management explained the drop in productions was partially due to the higher oil prices that suppressed demand in some regions (ie. Indonesia). CNOOC keeps its full year target set at the beginning of 2011: mmboe. 80 Crude oil and liquids (mmbbls) Overseas E China Sea ES China Sea WS China Sea Bohai Bay Q10 2Q10 3Q10 4Q10 1Q11 2

3 120 Natural gas (bcf) Overseas E China Sea ES China Sea WS China Sea Bohai Bay Q10 2Q10 3Q10 4Q10 1Q11 CAPEX Capital expenditure increased 10.3% yoy, reaching RMB6.4 billion. While RMB5.2 billion was spent on E&D, RMB1.1 billion was spent on production activities. The total capex represents approximately 11% of CNOOC s full year target of US$8.7 billion. Management said that spending will catch up later this year, and there s no adjustment at this point. CAPEX 1Q11 1Q10 YoY (%) 2011E % completed Exploration % % Development % % Production % % Total 6, , % % * approximate ex rate of 1US$=6.49RMB 7000 CAPEX (RMB mn) Production Development Exploration Q Q11 3

4 Malfunction Occurred on the Single Point Mooring System of Haiyangshiyou 102 A malfunction occurred on the single point mooring system of the Floating, Production, Storage and Offloading (FPSO) vessel Haiyangshiyou 102 serving in the Bohai Bay due to rough sea conditions. While operations were shut down, no injuries or oil spills were reported. Four oilfields in Bozhong were affected. A total production loss of 39000bbl/day is estimated. While the management said that they are currently working on resuming the production, an approximate production impact on 2Q11 wasn t given out. Based on CNOOC s 1Q11 results, the affected capacity represents approximately 5% of the total domestic crude oil production; thus, we adjust downward our full year production by 2.5% to 975kbbl/calendar day. We don t expect the oilfields to resume production within 1H11, but if the fields would be down for the full year remains uncertain. Management keeps their full year production target of mmboe set at the beginning of We believe this target is achievable, if not exceeded, as CNOOC was being conservative when setting its target. We also believe that earnings will not incur significant material impact, as oil prices remain robust. VALUATION We reiterate our BUY rating with target price of HK$22.3, which is based on DCF with the assumption of an average oil price at US$90/bbl in 2011 and CAGR of 9.0% in the following 5-years. The recent malfunction of Haiyangshiyou 102 will not materially affect CNOOC s mid-to-long term. P/B is trading at a very attractive value, barely at its mean level since We expect the forward p/e to recover to approximately positive one standard deviation, because CNOOC was trading above 1std the last time we saw oil prices higher than US$100/bbl back in 2007/2008. Historical P/B Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 4

5 Forward p/e band 25 PEER COMPARISON Source: Bloomberg.com, Phillip Securities estimates RISKS Short-term volatility could be seen if oil prices cannot be sustained at the current high level. Delay in new projects would also lower the expected rate. The exact impact of Malfunction of Haiyangshiyou 102 could be higher than expected, and thus deteriorate earnings. negatively affect earnings. Feb-07 Apr-07 Jul-07 Oct-07 Dec-07 Mar-08 Jun-08 Aug-08 Nov-08 Feb-09 Apr-09 Jul-09 Oct-09 Dec-09 Mar-10 Jun-10 Aug-10 Nov-10 Feb-11 Apr-11 The higher than expected strengthening of RMB could Current Mkt cap (RMB bn) FY09 sales FY10 sales FY11e sales FY12e sales FY09 eps FY10 eps FY11 eps FY12 eps CNOOC % 74.0% 15.5% 7.0% -33.3% 83.3% 12.8% 1.4% PetroChina % 43.8% 5.5% 7.5% -11.1% 39.3% 5.3% 4.0% SINOPEC % 42.2% 5.3% 2.5% 11.6% 13.7% 13.2% 10.9% Avg -9.5% 53.3% 8.8% 5.7% -10.9% 45.4% 10.4% 5.4% FY09 p/e FY10e p/e FY11e p/e FY12e p/e FY09 p/b FY10e p/b FY11e p/b FY12e p/b CNOOC PetroChina SINOPEC Avg FY09 roe FY10e roe FY11e roe FY12e roe 2009 Profit Margin 2010e Profit Margin 2011e Profit Margin 2012e Profit CNOOC 17.7% 27.9% 25.9% 21.3% 28.0% 29.7% 29.8% 27.7% PetroChina 12.6% 15.7% 16.2% 15.9% 10.5% 10.3% 10.8% 11.1% SINOPEC 17.6% 18.1% 18.5% 17.8% 4.7% 5.5% 5.8% 6.3% Avg 15.9% 20.6% 20.2% 18.3% 14.4% 15.2% 15.5% 15.0% 5

6 FINANCIAL STATEMENT Consolidated Income Statement RMB million 2009A 2010E 2011E 2012E REVENUE oil and gas sales 83, , , ,460 marketing revenues 20,751 32,446 41,706 44,626 other income 528 1,489 1,061 1, , , , ,226 EXPENSES operating expenses (12,490) (16,204) (22,293) (25,151) production taxes (3,647) (8,204) (7,483) (8,075) exploration expenses (3,233) (5,580) (7,321) (8,950) dd&a (15,942) (27,687) (32,409) (36,396) crude oil and product purch (20,455) (17,706) (41,593) (45,162) selling and admin (2,263) (3,063) (5,324) (5,520) others (6,840) (33,214) (12,035) (14,552) (64,870) (111,658) (128,458) (143,806) PROFIT FROM OPERATIN 40,325 71,405 82,968 84,050 interest income ,732 2,705 finance costs (534) (1,222) (1,160) (1,620) exchange gain(loss) (3,754) (1,995) investment income others ,119 2,960 PROFIT BEFORE TAX 40,820 72,650 85,218 86,413 income tax (11,335) (18,240) (22,157) (22,467) PROFIT ATTRIBUTABLE T 29,485 54,410 63,061 63,946 EPS DILUTED EPS Financial Highlights 2009A 2010A 2011E 2012E Sales (%) % 74.01% 15.50% 7.00% Op profit (%) % 77.07% 16.19% 1.30% Eps (%) % 83.33% 12.81% 1.39% Op profit marin (%) 38.33% 39.01% 39.24% 37.15% Net profit margin (%) 28.03% 29.72% 29.83% 28.27% ROE (%) 17.65% 27.90% 25.90% 21.30% ROA (%) 13.14% 16.59% 16.00% 14.10% p/e (x) p/b (x) p/sales (x) eps (RMB) Source: company data, Phillip Securities estimates 6

7 Rating History Rating Date Closing price (S$) Fair value (S$) Remarks BUY 16 Feb Strategy Preview HOLD 15 Oct Interim Results BUY 19 July Q10 Results BUY 27 Apr Annual Results HOLD 23 Dec Q09 Results SELL 5 May Updates HOLD 12 Feb Annual Results BUY 13 Nov Q08 Results BUY 12 Sept H08 Results Phillip Research Stock Selection Systems TRADING BUY BUY HOLD SELL TRADING SELL Share price may exceed 10% on the upside over the next 3 months, however longer-term outlook remains uncertain >15% upside from the current price -10% to 15% from the current price >10% downside from the current price Share price may exceed 10% on the downside over the next 3 months, however longer-term outlook remains uncertain We do not base our recommendations entirely on the above quantitative return bands. We consider qualitative factors like (but not limited to) a stock's risk reward profile, market sentiment, recent rate of share price appreciation, presence or absence of stock price catalysts, and speculative undertones surrounding the stock, before making our final recommendation 7

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