Cnooc aims for highest spending in four years amid oil recovery

By Aibing Guo on 2/1/2018

HONG KONG (Bloomberg) -- Cnooc Ltd. plans to raise capital spending to the highest since 2014 and revised upward its oil and gas output targets as China’s biggest offshore producer recovers from crude’s crash.

The Beijing-based explorer sees capital expenditures at 70 billion to 80 billion yuan ($11.1 billion to $12.7 billion) for 2018, it said in a statement to the Hong Kong stock exchange Thursday. That’s an increase of as much as 60% from the previous year, which came in under target. It also raised its production estimate to between 470 MM and 480 MMboe, poised for the first increase in three years.

Cnooc’s cost cuts and efficiency, as well as the quality of its overseas projects in the pipeline from Africa to the Gulf of Mexico and South America, has been contrasted by analysts with its bigger, slower state-owned rivals PetroChina Co. and Sinopec, officially known as China Petroleum & Chemical Corp.

“The new output guidance should provide investors some confidence on the growth perspective going forward,” Tian Miao, a Beijing-based analyst at Everbright Sun Hung Kai Co., said by phone. “The only risk at the moment is the oil price.”

Investors are now looking to a possible reserves upgrade, driven by its 25 percent share in the Exxon Mobil Corp.-operated Stabroek block offshore Guyana. Cnooc is expected to announce revised reserves in its annual results, which typically come late March.

Significant Increase

The company said Thursday in a presentation online that reserve life is “expected to see significant increase” as it brings on Stabroek’s Liza field and Libra in Brazil, as well as re-booking reserves from the Long Lake oil sands project in Canada.

Reserve life in 2017 saw strong growth and reached near or above 10 years, Chief Executive Office Yuan Guangyu said in a briefing in Hong Kong. Growth should continue this year thanks to a large amount of new projects in the pipeline, he added. Reserve life in 2016 was 8.1 years, the company said in its presentation.

Cnooc is also getting close to a final investment decision on its Lingshui 17-2 natural gas field in the South China Sea and is seeking to lock in big industrial customers, Chief Financial Officer Xie Weizhi said in Thursday’s briefing.

Cnooc is most exposed among China’s big three oil companies to a rebound in crude prices as its lack of refining capacity leaves almost all its revenue from exploration and production. Global benchmark crude Brent in 2017 averaged almost $55/bbl, up 21% from the previous year. Prices have averaged about $69/bbl so far this year.

Higher Targets

Net income for 2017 will jump 50-fold to almost 32 billion yuan, according to the mean of 22 analyst estimates compiled by Bloomberg.

The 2018 output target announced Thursday is higher than its year-ago projection of 455 MM to 465 MMboe. Cnooc produced 469 MMboe in 2017 (about 1.28/MMbpd), the second year of declines, it said.

Higher-than-expected capex and increased production targets “may sit well with investors with the company reiterating its prudent capital allocation strategy,” analysts at JPMorgan Chase & Co. including Scott Darling wrote in a research note.

Shares closed down 0.8% at HK$12.08 before the statement was published, pacing losses on the city’s benchmark Hang Seng Index.

Global E&P

Cnooc’s production may advance by almost 20% to 562 MMboe by 2021 thanks to strong growth in overseas projects, Neil Beveridge, a senior analyst at Sanford C. Bernstein & Co. in Hong Kong, wrote in a Jan. 23 research note.

“If Cnooc can deliver on growth projects, the company will transform into a truly global Chinese E&P for the first time,” Beveridge wrote.

Other details from the 2018 strategy preview include:

Capital spending in 2017 estimated to total 50 billion yuan, little changed from the previous year. Cnooc had originally targeted spending between 60 billion and 70 billion yuan. About 49% of this year’s spending will be focused overseas. Production this year will be split 81% oil, 19% gas. Five new projects will come online, including the Stampede oil field in the U.S. and the Dongfang 13-2 gas field offshore China. Plans to drill 132 exploration wells. Net production in 2019 and 2020 is forecast to be about 485 MMbbl and 500 MMboe, respectively.

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