Raise oil price assumptions to US$60 and US$70 per barrel for 2009 and 2010 respectively. Benchmark oil price has gone up 30% in May. Compared with the low at the beginning of year, oil price has doubled. The average oil price was US$49/bbl ytd, and we believe it is very likely to stay above US$70/bbl (currently US$68/bbl). If so, average oil price will be US$60/bbl in 2009. For 2010, we believe a few catalysts, such as an economic recovery, sufficient liquidity and geographical turmoil will drive oil price higher. As such, we lift our oil price assumptions to US$60/bbl and US$70/bbl for 2009 and 2010. Our long-term oil price target is still US$75/bbl.
We notice a few houses have started to revise oil price assumption recently. Bloomberg’s consensus average oil price assumption for 2009 has been revised to US$57/bbl from US$53/bbl a month ago. Amid more signs of an economy recovery, we believe more houses will raise their oil price targets.
CNOOC’s earnings are sensitive to changes in oil price. It plans to produce 184mmbbl of oil in 2009 and 195mmbbl in 2010. Remember when realised oil price is above US$40/bbl, the company has to pay a special oil gain levy to the government. Applying a 10% discount to benchmark, the realised oil price is US$55/bbl for 2009 and US$64/bbl for 2010. After the special oil gain levy, EPS will increase by Rmb0.015 for 2009 and Rmb0.013 for 2010 for every dollar rise in oil price. Hence, we raise our net profit forecasts by 11% and 7% in 2009 and 2010 to Rmb28.1b and Rmb36.1b respectively. Our forecasts are now 11% and 4% higher than consensus. We believe the company’s re-rating is still under way amid the strong rebound in oil price.
We upgrade the stock to BUY and raise our target price to HK$13.85, which translates to 15x 2010F PE. Share prices of international independent oil companies have risen strongly recently. They are trading at an average 16.5x 2010F PE. CNOOC’s closest peers, Occidental Energy (OXY US) and Encana Energy (ECA US), are trading at 15x and 20x 2010F PE respectively.
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