CNOOC Ltd (CEO) Has Massive Upside Potential

CNOOC Ltd (NYSE:CEO) is the largest offshore oil exploration company in China. In contrast to PetroChina and Sinopec, CNOOC is purely focused on upstream operations. The company’s stock has a massive upside potential, according to a long thesis by Asian Century Stocks.

CNOOC has been performing well over the past years. Production has grown at ~10% CAGR historically, and management is guiding for a 6% production CAGR in the years ahead. The company has achieved this while maintaining positive free cash flow. That enabled the firm to maintain a median dividend pay-out ratio of 40% without incurring any debt.

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A key part of CNOOC’s competitive advantage is its monopoly on exploration under production sharing contracts in offshore China. It is then able to sell its oil domestically at prices tied to Brent, despite differences in crude quality with Bohai/South China Sea region oils. The company’s all-in cost is among the lowest of all oil majors globally, thanks to shallow water resources, low competition in offshore China and strong management cost control. In addition, CNOOC enjoys a net cash position that gives it significant flexibility. Meanwhile, low leverage enables the company to grow via M&A in a period when energy stocks are trading at low valuation multiples, according to the thesis.

Under a scenario of a gradual recovery in the oil demand, the Brent oil prices are expected to recover to $60/bbl over a three-year period, according to the thesis.

Using what we consider to be realistic assumptions, we predict a target price of HK$16.6/share, implying an upside of +115% without even considering yearly dividend payouts. We expect a prospective 2023e dividend yield of 8.6%.

The major risk is potential asset injections from the parent, which has not been approved yet. In July 2020, the company announced that the parent is considering injecting gas and power assets into CNOOC at $7.6 billion, below replacement cost, ~15x PE. These include LNG regas terminal assets, pipeline and oil pipelines.

A vote on this asset injection could happen sometime in 2021. But, it would be a negative for the stock, without necessarily breaking the long-term investment case for the stock, according to the thesis.

But the company’s growth profile, its competitive advantage in offshore oil exploration and the very low expected 2023e PE multiple more than makes up for such risks, in our view.

Disclosure: None. This article is originally published at Insider Monkey.