CNOOC: Trading At A Future 30% Free Cash Flow Yield Using $65 Oil

Summary

CNOOC is a state-controlled oil company, producing in excess of 1 million barrels of oil per day.

The company appears to be trading at less than 4.5 times its 2021 profits, and the net income will increase.

The reported free cash flow appears to be “low” as the company is investing in production growth.

The 2023 production rate will be almost 20% higher than the 2021 output. This should result in an FCFPS of 2.45 HKD in 2023.

I don’t necessarily like the power of the Chinese government, but I will likely initiate a long position in the higher risk segment of my portfolio.

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MicroStockHub/iStock via Getty Images Introduction

Although CNOOC ( OTCPK:CEOHF ) was delisted by the New York Stock Exchange after an executive order by President Trump became effective, this obviously doesn’t mean the company stopped existing. In fact, CNOOC’s primary listing on the Hong Kong Stock Exchange offers a very liquid listing for investors looking to gain exposure to one of the largest oil producers in the world. Source: Yahoo Finance

The ticker symbol on the HKSE is 0883 , and with an average volume of in excess of 60 million shares per day, the monetary value is approximately 0.5B HKD which is approximately US$60M per day. CNOOC currently has a market capitalization of approximately 375B HKD which is approximately US$48B. The company reports its financial results in RMB and I will use that currency as base currency throughout this article. However, where applicable, I will use the HKD for any “per share” calculation as the stock is trading in Hong Kong Dollars. The current RMB/HKD exchange rate is 1.22 . So 1 RMB is 1.22 HKD. A closer look at the financial results in the first half of the year

Before moving over to the results in the third quarter, I wanted to take a minute to discuss the financial results in the first half of the year.

In the first half of the year, CNOOC produced just under 223 million barrels of oil and NGLs while it also produced 323 bcf of natural gas for a total oil-equivalent production of 278 million barrels. That’s an oil-equivalent production rate of 1.5 million barrels per day, of which about 1.2 million barrels were actually oil. This means that CNOOC produces in excess of 1% of the total world oil supply. Source: company presentation

The oil was sold at an average price of $62.38/barrel while the gas price remained relatively high (but not unusually high) at $6.6/mcf.

This resulted in a total revenue of 100.6B RMB from the sale of oil and gas. The total revenue was actually 110B RMB as you can see in the image below, as CNOOC also earned some money from marketing products. The total operating expenses to produce a barrel of oil were just 12.7B RMB (which indeed means the pure production cost per barrel of oil is less than $8/barrel) while the total operating expenses came in at just under 65B RMB. And as you can see below, this includes 5B RMB in exploration activities that have been expensed rather than capitalized. As CNOOC has a very clean balance sheet with very little debt, the company generates a pre-tax income of just under 45B RMB resulting in a net profit of 33.3B RMB. As there are 44.65B shares outstanding, the EPS was 0.75 RMB, or approximately 0.915 HKD. Source: company presentation

Unfortunately the company’s cash flow statement doesn’t offer a lot of details in the interim report. According to the shortened version, the company generated about 23.6B RMB in free cash flow, but doesn’t provide a detailed breakdown of how the money was spent. Source: half-year financial report

Fortunately one slide in the company’s H1 presentation offers a little bit more clarity. According to the image below, the operating cash flow was 64.2B RMB, the capex was 31.2B while the total amount of interest paid was 3.24B RMB. This would result in a free cash flow result (excluding debt repayment) of approximately 30B RMB. Of course this still doesn’t provide a whole lot of detail on for instance working capital changes and the potential difference between taxes owed and taxes due, but it looks like the free cash flow result is pretty much in line with the net income. Source: company presentation The cash flow will be […]

source CNOOC: Trading At A Future 30% Free Cash Flow Yield Using $65 Oil