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CNOOC Ltd. Upgraded on Oil Production

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CV_CEO_thumb(Oct. 23, 2009 - Scott Lin) SUMMARY: We recommend a BUY rating on CNOOC Ltd (NYSE:CEO), as we expect a continuous strong recovery in earnings in the short term. CNOOC has increased oil production above its peers (Sinopec and Petrochina) in recent times and is set to continue this trend with further discoveries and projects in the pipeline. The earnings recovery is supported by a recovery in crude oil prices.

Strong oil production

CNOOC Ltd. (NYSE:CEO) outperformed Petrochina (NYSE:PTR) and Sinopec (NYSE:SNP) in crude oil production growth in first half results in 2009 with a 15.2% year-on-year increase. The main reason is due to CNOOC’s commencement in production in new projects in 2008 and first half 2009. These new projects include OML 130, Tanguh LNG and Bozhong 28-2S. Strong growth in production is set to continue with ten new exploration discoveries and eight new appraisals. All in cost for crude production increased by 3.9%, year-on-year.

Petrochina and Sinopec achieved marginal increases in crude oil production of 1.4% and 1.2% respectively. These were caused primarily by different strategic drivers of these companies compared to CNOOC. Whilst CNOOC Ltd. (CEO) commenced production in new crude oil projects, Petrochina and Sinopec focused on cost efficiency and producing levels that reflect market changes.

Symbol / Exchange

CEO-NYSE

Recent Price

US$131.22

52-Week Price Range

US$55.50-146.09

Market Cap. (bil.)

US$5,861.49

Average Daily Volume

363,919

Beta

1.32

ROE (TTM)

18.52%

Dividend Yield

--

LT Debt / Equity (MRQ)

9.75

Shares Outstanding (bil.)

44.75

Institutional Holdings (%)

64.41






2008A

2009E

EPS

0.62

0.99

P/E

13.81

14.57

 

 

 

China National Offshore Oil Corporation (CNOOC LTD)





Key Income Statement Data

1st half 09

2nd half 08

1st half 08

2nd half 07

1st half 07


In Millions of CNY or RMB







Total Revenue

40648

55932

70045

48505

42219


Total Operating Expense

(24181)

(34382)

(37730)

(27587)

(21938)


Operating Income

16467

21550

32315

20919

20280


Net Interest Expense (Non-Operating)

260

560

3456

1712

(267)


Net Income Before Taxes

16727

22109

35771

23298

20013


Tax

(4325)

(13505)

(8229)

6590

(5462)


Other comprehensive loss

(102)

--

(5247)

--

--


Net Income

12300

22080

22295

16707

14551









Key Balance Sheet Data

1st half 09

2nd half 08

1st half 08

2nd half 07

1st half 07


In Millions of CNY or RMB







Cash & Equivalents

42039

19762

44019

30557

12275


Total Receivables, Net

10825

5633

15108

10105

6305


Total Inventory

3264

2684

2685

2346

2158


Other assets

8075

35691

10243

12724

29185


Total Current Assets

64203

63770

72055

55732

49923


Property/Plant/Equipment - Net

151681

138358

125494

118880

111510


Intangibles, Net

1194

1206

1264

1331

1339


Other non-current assets

3312

3335

3695

3850

3483


Total Assets

202390

206669

202508

179793

166255









Total Current Liabilities

23460

18799

27737

21402

17426


Total Long Term Liabilities

32157

27632

23834

24076

33912


Total Liabilities

55617

46431

51571

45478

51338


Total Equity

164773

160238

150937

134315

114917


Total Liabilities and Equity

220390

206669

202508

179793

166255









Market Comparisons

CNOOC

Industry

Sector

S&P500



Current Ratio (MRQ)

2.74

1.23

1.14

0.92



Total Debt / Equity (MRQ)

9.78

1.51

21.77

236.25



Asset Turnover (TTM)

0.46

0.57

0.50

0.45



ROA (TTM)

13.83

19.64

14.35

3.51



ROI (TTM)

15.73

27.99

20.40

4.79



ROE (TTM)

18.52

39.37

28.99

8.40



Gross Margin (TTM)

59.28

36.45

29.66

25.35



Operating Margin (TTM)

39.98

29.24

21.86

--



Pre-tax Margin (TTM)

39.80

45.69

33.24

6.41



Net Profit Margin (TTM)

29.96

33.04

23.99

5.31





Competitor Comparison

Petrochina (NYSE:PTR) aimed to optimize the production in the Songliao Basin, Bohai Bay Basin, Erdos Basin, Tarim Basin, Junggar Basin and Sichuan Basin. Sinopec (SNP) aimed to achieve greater exploration cost efficiency by improving overall geological research, optimization of exploration layout, and investment to relieve technological bottlenecks.

CV_CEO_09Q21


Revenue and Earnings Decline

CNOOC Ltd (NYSE:CEO) first half net profit slumped 55% year-on-year to 12.4 billion RMB ($1.8 billion), but outperformed analyst estimates of 11.4 billion RMB. In light of CNOOC’s increased oil production and ten new promising exploration projects, one may expect revenues and net profit to improve. However, overall crude oil industry profits have been adversely affected by low crude oil prices.

CV_CEO_09Q22

CNOOC’s first half net profit slump compares favorably against Petrochina’s decline of 71.3%. Sinopec’s decline in its exploration and production segment was 79.7%. Exploration and production continues to be the main source of production for Petrochina.

Symbol / Exchange

CEO-NYSE

VALUATION MEASURES

Sales (TTM) (bil.)

US$40.31

Price / Sales (TTM)

4.13

Price / Book (MRQ)

2.46

Current Ratio (06 Oct. 09)

2.74

PEG (5 yr expected)

4.34

EV / Revenue (TTM)

--

EV / EBITDA (TTM)

--

FINANCIAL HIGHLIGHTS

Fiscal Year Ends

31-Dec

Most Recent Quarter (MRQ)

30-Jun

Operating Margin (TTM)

--

Net Profit Margin (TTM)

30.27

ROA (TTM)

13.83

ROE (TTM)

18.52

Qtrly Earnings Growth (yoy):

(55%)

CNOOC’s revenue fell 42% to 40.65 billion RMB. Revenue dropped due to falling crude oil prices and falling demand.

CV_CEO_09Q23

As shown by the graphic above, crude oil prices have been steadily improving from its low early in 2009.

 

Relatively Unchanged Cash and Cash Equivalents

CNOOC’s cash and cash equivalents balance has increased slightly on a year-on-year basis, increasing from 39 billion to 42 billion RMB. The severe cash balance drop in December 2008 by 19 billion RMB is due to CNOOC’s investment in short-term time deposits of 21 billion RMB. No time deposits were recorded in the June 2009 balance sheet.

CNOOC’s significant increase of cash from 2007-2009 reflects CNOOC’s strategy shift towards taking our stakes in joint ventures rather that to buy out companies. As can be observed from CNOOC’s investing activities, CNOOC Ltd. (NYSE:CEO) had net investment inflow of 9280 million RMB in 1H 2009 compared to net investment outflow of 7340 million RMB in 1H 2008.

CV_CEO_09Q24

 

According to Sinopec Group Su Shulin, overseas energy assets are facing a lot of competition.

In recent months, CNOOC has faced three setbacks in acquiring overseas assets. Its latest bid to secure drilling rights in Ghana may be thwarted by Exxon Mobil Corp. CNOOC’s large cash balance may reflect the difficulty that Chinese companies face in acquiring overseas energy assets.


- Debt Equity and Financial Credibility

CV_CEO_09Q25

 

Return on Assets

CNOOC’s Return on Assets figure of 13.83% is greater than Petrochina’s 9.95% and Sinopec’s 6.27%. This implies that CNOOC Ltd. (NYSE:CEO) is relatively effective at generating profits from its assets. CNOOC has a significantly higher Net Profit Margin, which assists in generating a higher rate of return on its assets. However, due to its much higher Net Profit Margin, the Return on Assets should also be much higher than that of its competitors. Further, the driver behind the differences in ROA could be due to different infrastructure of the companies. CNOOC’s main infrastructure base is oil platforms, which is a much smaller base than its competitors.

Return on Equity

CNOOC has the highest Return on Equity, 18.52%, compared to its competitors. The percentage differential between Return on Assets and Return on Equity is similar for CNOOC (CEO) and Petrochina (PTR). However, when compared to Sinopec’s Return on Equity of Sinopec’s relatively high Return on Equity (16.23%), low Return on Assets (6.27%) and low Net Profit Margin (4.10) reflects its strategy to invest in streamlining and making more efficient its exploration and production processes and has not yet realized the return on its investments, as shown by its low Return on Assets. Investing with a lower leverage ratio during the global financial crisis makes sense. Therefore, Sinopec’s equity is used to invest. The return on its investment would then yield a high Return on Equity figure, as there is now less equity. Petrochina’s ratios tell a similar story, however to a lesser degree than Sinopec.


Earnings Per Share

CNOOC Ltd. (NYSE:CEO) has the highest Earnings Per Share compared to Petrochina (PTR) and Sinopec (SNP). This is reflected in its net profit results. Although overall industry profits were adversely affected by a weak crude oil price and waning demand, CNOOC’s overall net profit did not fall by the same percentage as Petrochina and Sinopec.

Price-to-Earnings

Given the above analysis on Return on Assets, Return on Equity and Earnings Per Share, it appears that CNOOC’s Price-to-Earnings ratio of 14.57 is under its true value when compared to that of Petrochina and Sinopec, which both trade at above 20 Price-to-Earnings. CNOOC Ltd. (NYSE:CEO) has achieved growth in production and is projected to continue to do so with further production.


Annual Income Statement

China National Offshore Oil Corporation (CNOOC LTD)

In Millions of CNY

2008

2007

2006

2005

2004

Oil and gas sales

100831

73037

67828

53418

36886

Marketing revenues

22967

17397

20964

15901

18191

Other income

2179

290

155

137

145

Revenues

125977

90724

88947

69456

55222

Operating expenses

(9990)

(8040)

(6999)

(5935)

(5070)

Production taxes

(4889)

(3497)

(3316)

(2597)

(1726)

Exploration expenses

(3410)

(3432)

(1705)

(1294)

(1316)

Depreciation, depletion and amortisation

(10058)

(7374)

(6933)

(5896)

(5455)

Dismantlement

--

(562)

(472)

(253)

(202)

Special oil gain levy

(16238)

(6837)

(3981)

--

--

Impairment

(1541)

(614)

(252)

(90)

--

Crude Oil and Product purchases

(22675)

(17083)

(20573)

(15704)

(17963)

Selling and administrative expenses

(1743)

(1741)

(1544)

(1370)

(1104)

Others

(1568)

(345)

(117)

(77)

(46)

Profit from Operating Activities

53865

41199

43054

36172

22340

Interest Income

1091

673

782

359

207

Finance costs

(415)

(2032)

(1832)

(1101)

(442)

Exchange gains net

2551

1856

308

287

29

Investment income

476

902

613

248

72

Share of profits of associates

374

719

322

307

344

Non-operating expense, net

(62)

(7)

876

29

519

Profit before tax

57880

43311

44123

36301

23070

Tax

(13505)

(12052)

(13196)

(10978)

(6931)

Net Income

44375

31258

30927

25323

16139







Basic net income (loss) per share

0.99

0.72

0.73

0.62

0.39

Diluted net income (loss) per share

0.99

0.72

0.73

0.61

0.39

 

 

Annual Balance Sheet

China National Offshore Oil Corporation (CNOOC LTD)

In Millions of CNY

2008

2007

2006

2005

2004

Cash and cash equivalents

19761

23357

14364

8992

14092

Time deposits-maturity over 3 months

21300

7200

9233

12200

8603

Trade Accounts Receivable, Net

5633

7130

5438

5278

4276

Inventory and supplies

2684

2346

1691

1200

1147

Due from related companies

--

3299

2340

2099

1173

Held-to-maturity financial asset

--

3000

--

--

--

Available for sale financial assets

11660

6688

12390

13847

5444

Other Current Assets

2730

1627

2435

806

557

Non-current assets held for sale

--

1087

--

--

--

Total Current Assets

63770

55732

47892

44421

35293

Property/Plant/Equipment - Net

138358

11800

103406

66625

57182

Intangibles, Net

1205

1331

1409

1300

--

Investments in associates

1785

2030

1543

1402

1327

Available for sale financial assets

1550

1819

1017

1017

--

Total Assets

206669

179793

155268

114765

93802

Trade Payables

7490

5051

4146

2868

3102

Other Payables and Accrued Liabilities

8445

9051

5481

5207

4191

Current portion of long term bank loans

17

--

18

826

24

Due to the parent company

--

587

457

488

370

Due to related companies

--

1533

1175

760

211

Tax payable

2848

4690

3204

3468

2503

Total Current Liabilities

18799

21402

14481

13616

10402

Long Term Bank Loans

7115

2720

2438

24

865

Long Term Guaranteed notes

6749

8326

17886

16531

16314

Provision for dismantlement

8340

6737

5413

4162

3089

Deferred Tax Liabilities

5428

6295

7236

6828

6688

Total Liabilities

46431

45479

47454

41162

37359

Issued capital

949

943

924

877

877

Reserves

159288

133372

106848

72726

55566

Total Equity

160238

134315

107814

73603

56443

Total Liabilities& Shareholders’ Equity

206669

179793

155268

114765

93802

 

Annual Cash Flow Statement

China National Offshore Oil Corporation (CNOOC LTD)

In Millions of CNY

2008

2007

2006

2005

2004

Cash generated from Operations

71181

53042

50902

41696

29706

Income taxes paid

(15443)

(11741)

(12875)

(9849)

(7402)

Net Cash from Operations

55738

41301

38027

31846

22304

Acquisition of oil and gas properties

(1004)

--

(21175)

(864)

(5779)

Additions of property, plant  and equipment

(36317)

(26862)

(23041)

(16606)

(12843)

Additions of intangible assets

(93)

(80)

--

--

--

(Increase)/decrease in time deposits over 3 months

(14100)

2033

2967

(3597)

(6280)

Proceeds from sale of non-current assets

1552

--

--

--

--

Dividends received from associates

624

232

180

232

135

Interest received

1091

673

782

359

207

Investment income received

76

661

264

46

5

Purchase of available-for-sale financial assets

(6491)

(3607)

(12281)

(21487)

(5735)

Proceeds from sale of available-for-sale financial assets

1920

8535

14003

13204

6030

Sale/(purchase) of held-to-maturity financial assets

3000

(3000)

--

--

--

Proceeds from disposal of property, plant and equipment

757

42

2

--

--

Net cash used in Investing

(48984)

(21374)

(38300)

(28712)

(24260)

Proceeds from bank loans

4804

896

2414

--

8154

Net proceeds from issue of shares

--

--

14243

--

--

Repayment of bank loans

(250)

(18)

(808)

(19)

(21)

Dividends paid

(14652)

(11524)

(9814)

(7772)

(6101)

Interest paid

(36)

(153)

(27)

(330)

(322)

Share repurchases

--

--

--

--

61

Proceeds from exercise of share options

5

--

4

5

Net Cash used in Financing

(10129)

(10799)

6012

(8116)

1648

Net Change in Cash and Cash equivalents

(3375)

9128

5739

(4982)

(309)

Net Cash - Begin Balance

23357

14364

8992

14092

14400

Effect of foreign exchange rate changes, net

(220)

(135)

(366)

(118)

--

Net Cash and Cash equivalents - End Balance

19762

23357

14364

8992

14092

 

Analyst Certification
I, Scott Lin, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.

Other Important Disclosures
The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Chinavestor.com.

Copyright, user agreement and other general information related to this report:

Copyright 2009 Chinavestor.com. All rights reserved. This research report is prepared for the use of Chinavestor.com clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Chinavestor.com.
This research report provides general information only. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice. Past performance is not necessarily a guide to future performance.
Fundamental equity reports are produced on a regular basis as necessary to keep the investment recommendation current.



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