Offshore Oil Engineering:Offshore engineering did not recover in Q316

Q316 profit down QoQ

    Q316 net profit excluding one-offs fell 33% QoQ to Rmb247m and gross margincontracted to 15.6%, with a drop in the fixed-asset turnover ratio resulting from a4%/21% QoQ decline in the company's designed work hours and steel-processingworkload.

    Russia project not earnings driver; overseas projects slower than expected

    Year to date, the company has been relying on LNG project construction in Russia towithstand the downturn in the industry, with its domestic business seeing a noticeabledecline. The company has not made significant progress in obtaining large overseasprojects due to a lack of new projects caused by reduced capex at international oilcompanies.

    CNOOC's capex may improve slightly in 2017

    Given a crude oil price of cUS$50, CNOOC's capex may improve slightly in 2017, butthe company may recover more slowly than COSL. We believe the market has priced inthe industry's recovery.

    Valuation: Maintain Neutral rating

    We maintain our Neutral rating and Rmb7.60 price target (based on 19.5x 2017E PE).