CNOOC: Commerce at a future return of 30% of free money circulate utilizing oil at $ 65 (OTCMKTS: CEOHF)

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Whereas CNOOC (OTCPK: CEOHF) was delisted from the New York Inventory Alternate after an government order by President Trump went into impact, that clearly doesn’t suggest the corporate has ceased to exist. In truth, CNOOC’s principal itemizing on the Hong Kong Inventory Alternate gives a really liquid itemizing for traders trying to achieve publicity to one of many world’s largest oil producers.

Supply: Yahoo Finance

The inventory image on the HKSE is 0883, and with a mean quantity of over 60 million shares per day, the greenback worth is about 0.5 billion HKD, or about 60 million US {dollars} per day. CNOOC at present has a market capitalization of roughly GHKD 375, or roughly US $ 48 billion. The corporate stories its monetary leads to RMB and I’ll use that foreign money as the bottom foreign money all through this text. Nevertheless, the place relevant, I’ll use the HKD for any “per share” calculation, because the share trades in Hong Kong {dollars}. the the present RMB / HKD change price is 1.22. So 1 RMB is equal to 1.22 HKD.

Give attention to the monetary outcomes for the primary half of the 12 months

Earlier than I get to the third quarter outcomes, I wished to take a minute to debate the primary half monetary outcomes.

Within the first half of the 12 months, CNOOC produced slightly below 223 million barrels of oil and NGLs, whereas it additionally produced 323 billion cubic toes of pure gasoline for a complete oil-equivalent manufacturing of 278 million barrels. That is an oil-equivalent manufacturing price of 1.5 million barrels per day, of which about 1.2 million barrels have been truly oil. Which means CNOOC produces greater than 1% of the world’s oil provide.

Supply: firm presentation

Oil was offered at a mean worth of $ 62.38 / barrel whereas the worth of gasoline remained comparatively excessive (however not unusually excessive) at $ 6.6 / mcf.

This resulted in a complete revenue of 100.6 billion RMB from the sale of oil and gasoline. The entire turnover was truly 110 billion RMB, as you possibly can see within the picture beneath, as a result of CNOOC additionally made cash by the advertising and marketing of merchandise. The entire working bills to provide a barrel of oil have been solely 12.7 billion RMB (which in impact signifies that the pure manufacturing price per barrel of oil is lower than $ 8 / barrel) whereas the Whole working bills amounted to only underneath 65 billion RMB. And as you possibly can see beneath, this contains 5 billion RMB in exploration actions which have been expensed fairly than capitalized.

Supply: half-year monetary report

As CNOOC has a really wholesome stability sheet with little or no debt, the corporate generates pre-tax revenue of slightly below 45 billion RMB, which interprets right into a internet revenue of 33.3 billion RMB. Since there are 44.65 billion shares excellent, EPS was 0.75 RMB, or about 0.915 HKD.

Supply: firm presentation

Sadly, the corporate’s money circulate assertion doesn’t supply a lot element within the interim report. In line with the abridged model, the corporate generated round 23.6 billion RMB in free money circulate, however doesn’t present an in depth breakdown of how the cash was spent.

Supply: half-year monetary report

Fortuitously, a slide from the corporate’s H1 presentation supplies a bit extra readability. In line with the image beneath, the working money circulate was 64.2 billion RMB, investments have been 31.2 billion US {dollars} whereas the full quantity of curiosity paid was 3.24 billion RMB . This is able to translate right into a free money circulate consequence (excluding debt compensation) of about RMB 30 billion. In fact, that also would not present loads of element on, say, adjustments in working capital and the potential distinction between taxes owed and taxes owed, however it seems just like the free money circulate result’s roughly according to internet revenue.

Supply: firm presentation

Money circulate will circulate now, and the corporate is on observe to additional improve manufacturing

Now that we have established the working money circulate for the primary half of the 12 months, it is simpler to attempt to construct the mannequin for the total 12 months 2021. We all know that manufacturing will likely be roughly the identical within the first half. half 12 months, however the worth of oil will in all probability be round 10-15% greater. If I budgeted for a ten% improve within the worth of oil and assumed that there’s a direct correlation to first half working money circulate, we will count on first half working money circulate quantities to about 67 billion RMB for a money circulate results of about 128B RMB. It is a fairly conservative method, as we all know that the typical realized costs within the third quarter have been $ 70.38 for oil and $ 7.08 for pure gasoline.

CNOOC has deliberate an annual funding of RMB 90-100 billion. It is a bit greater than I anticipated, as the full capital expenditure invoice was barely lower than RMB 57 billion within the first 9 months of this 12 months. For me, midway by this forecast, CNOOC is anticipated to spend round 40 billion RMB within the final quarter of 2021. Not unattainable, however I want to see affirmation of that first. And perhaps the corporate additionally included its exploration spending within the complete funding forecast. That would not be 100% right (as a result of exploration “bills” will not be “capital” bills), however that is one thing I am not fully clear about.

In any case, even when CNOOC spent 90 billion RMB on capital expenditure, the free money circulate consequence can be round 38 billion RMB within the present fiscal 12 months. That may be HKD 1.04 per share.

I want to make two remarks right here. To begin with, the funding steering is round 50% greater than the depreciation fees. Which means the capital finances comprises fairly a little bit of development investments. It additionally signifies that reported EPS will doubtless be a lot greater than reported free money circulate. I might count on EPS for the total 12 months to exceed 2 HKD which might imply CNOOC is buying and selling beneath 4.5 occasions its revenue.

The thesis that capital spending features a substantial quantity of development capital spending appears to be borne out by the corporate’s personal three-year manufacturing forecast. The manufacturing price will improve by a excessive single-digit share in 2022 and 2023.

Supply: firm presentation

And that is the place it will get attention-grabbing. Working money circulate, utilizing $ 65 of oil and the official manufacturing forecast, would improve to about RMB 160 billion. If the sustaining capital expenditure then amounted to round 70 billion RMB (nonetheless greater than the present depreciation price), the underlying free money circulate consequence can be 90 billion RMB. That is HKD 2.45 per share. Which means the at present reported free money circulate clearly features a substantial funding in manufacturing development, as CNOOC will likely be a significant participant in serving to China meet its oil and gasoline calls for.

I additionally actually like the corporate’s observe document. On the finish of June, CNOOC had internet debt of round 55 billion RMB whereas it generated EBITDA of round 75 billion RMB within the first half of 2021. Which means the debt ratio will doubtless be decrease. to 0.4 occasions the total 12 months EBITDA. and doubtless lower than 0.3 occasions this 12 months’s EBITDA.

Funding thesis

It’s unlucky that CNOOC now not has a principal itemizing in america, and I perceive that some individuals will object to investing in corporations wherein the Chinese language authorities and its subsidiaries have a controlling stake.

However for traders with a broader imaginative and prescient and entry to the Hong Kong Inventory Alternate, CNOOC might nonetheless supply engaging publicity to the Asian and Chinese language oil and gasoline markets. Utilizing an oil worth of $ 65 and the corporate’s personal manufacturing forecast for fiscal 2023, it seems the corporate is at present buying and selling beneath 3.5 occasions its free money circulate in 2023. And that is purpose sufficient for me to get better shares regardless of the geopolitical threat of getting the Chinese language authorities as the principle shareholder.

CNOOC is anticipated to pay a dividend of HKD 0.60 per share in fiscal 2021, which might translate right into a dividend yield of round 7%. The withholding tax price needs to be 10%. Throughout this time, the vast majority of the incoming money circulate is reinvested within the development of manufacturing.

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