Bank of America Remains Bearish On Fundamentals For Oil In China

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  • CNOOC Ltd (ADR) CEO shares are down 9 percent year to date, despite having jumped more than 21 percent since August 25.
  • BofA Merrill Lynch analyst Sonia Song upgraded the rating on the company to Buy, while raising the price target from HK$8.7 to HK$11.
  • A review of China Oil 1H results showed that E&P was a major drag, and non E&P buffer is expected to weaken in 2H15. CNOOC is expected to benefit from a near term rally in oil prices.

Analyst Sonia Song mentioned that the 1H15 results of China Oil companies indicated that E&P was a major drag and that the non E&P buffer is expected to weaken during the second half.

Although CNOOC exhibited the best cost control capability in the first half, its core earnings decline was the highest, Song pointed out. The company is poised to benefit from an expected near-term increase in oil prices from $40 per barrel to $55 per barrel by the end of 2015.

In the report BofA Merrill Lynch noted, “Historically, CNOOC’s share prices have high correlation to oil prices as it’s a pure oil & gas producer with 80% output being oils.”

Depletion of reserve life enabled CNOOC’s 1H production to grow by 13.5 percent y/y despite a 31 percent decline in its capex, Song wrote, while adding, “CNOOC’s reserve life stood at 9.7 years vs. global large cap oil average of 19-20 years. Assuming a 100% RRR (reserve replacement ratio), CNOOC’s reserve life is estimated to fall to 9.2 years in 2015. At 0% RRR, it would tumble to 8.3 years.”

CNOOC maintained its interim dividend despite the decline in its 1H15 profitability. Terming the move as “surprising,” Song said that the company would not be able to maintain the dividend from 2H15.

The report explained, “CNOOC's payout ratio is 62% at interim. If they maintain 2H dividend as well, payout would rise to 80%+. We don't think such a high payout ratio is sustainable for any company in the E&P sector.”

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Posted In: Analyst ColorUpgradesPrice TargetAnalyst RatingsBofA Merrill Lynch
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