CNOOC 2018Strategy Preview:Returning to growth mode;reiterating Buy on CNOOC and COSL
With oil closing in at USD70/bbl, CNOOC’s management was much more upbeatin its strategy guidance for 2018 than it was for 2017. The company's focus hasshifted back to growth and it has revised up its volume guidance for 2018/2019.
Following a 3% beat vs. its FY17 volume target (469mmBOE vs. target of450-460mmBOE), FY18 and FY19 production targets were raised by 3.3% and4.3%, to 470-480mmBOE and ~485mmBOE, respectively. The revised targets arein line with DB’s more bullish view on the company. CNOOC was also confidentof achieving RRR > 100% in 2018 with reserve life likely rebounding to c.10.5years in 2017 (8.1 years in 2016) and 11.2 years in 2018 on new projects that willbe booked such as Liza phase 1 in 2017 and other new projects such as Librain 2018. We note that CNOOC has used a very conservative oil price of USD53/bbl Brent in setting its volume and capex guidance for 2018, setting itself up formore upside surprises.
CNOOC's FY17 capital spent (RMB50bn) came in below the low-end of the budgetrange of RMB60-70bn provided at the 2017 strategy day. However, CNOOC plansto spend RMB70-80bn in FY18E, 40%-60% higher than FY17, primarily due to 1) alow-base effect, 2) delays in the development of the Uganda and Angola projectsprompting deferral of capex to the 2018 budget, and 3) a focus on developingnew projects (65% capex in development) to underpin longer-term productiongrowth. Similar to last year, half of its capex will be spent on overseas projects,with CNOOC now amassing an impressive portfolio of assets surrounding theAtlantic Ocean in Canada, the Gulf of Mexico, Guyana, Brazil, the North Sea andNigeria. In the near term, 64% of CNOOC’s production will still come from China,but we see that shifting more towards overseas in the medium to long term.
Management didn't provide guidance on costs but they were confident theycould achieve growth while keeping costs in check. In general, we see slight costinflation in 2H17 arising from higher oil price-related resources taxes and RMBappreciation, but overall costs should be kept in check at c.USD35/bbl in 2H17and 2018. We believe higher reserve life should keep DD&A costs flat to down in2018, which would help to offset some of the other cost increases in 2018 due tothe higher oil price. For example, CNOOC will lock in most of the drilling contractswith COSL before CNY in order to ensure lower day rates for the full year.