Why Investing in CNOOC Ltd can be Lucrative

ABOUT CNOOC Ltd.:
China National Offshore Oil Corporation, or CNOOC Group, is a major national oil company in China. It is the third-largest national oil company in the People’s Republic of China, after CNPC (parent of PetroChina) and China Petrochemical Corporation (parent of Sinopec).

The CNOOC Group focuses on the exploitation, exploration and development of crude oil and natural gas in offshore China.

The company produces offshore crude oil and natural gas primarily in Bohai, Western South China Sea, Eastern South China Sea, and East China Sea in offshore China. It also has oil and gas assets in Asia, Africa, North America, South America, Oceania, and Europe.

As of December 31, 2013, the company owned net proved reserves of approximately 4.43 billion barrels-of-oil equivalent. It also provides bond issuance services.

The company is based in Hong Kong. CNOOC Limited is considered a Red Chip company due to its listing on the Hong Kong Stock Exchange.

On July 23, 2012 CNOOC agreed to buy Canadian Nexen for US$15.1 billion, which has become China’s largest foreign deal.

CNOOC Limited’s (0883.HK) shares are near 5-year low and have been trading between HKD 10.20 and HKD 22.00 as can be seen from below chart.

With a beta of 1.2, CNOOC has been trading in the HKD9.80 – HKD15.64 range during the last 52 weeks. The dividend in 2014 of HKD 0.57 a share, based on the closing price of HKD10.20 indicates that the company’s stock is yielding 5.58%.

Below chart shows the dividend development and dividend payout ratio in the period 2009 – 2013.

As can be seen from below table CNOOC has one of the lowest P/E among those in the oil & gas industry: 6.8. with a Price/Earning to growth ratio (PEG Ratio) set at 1.13.

	CNOOC Ltd	Industry	S&P-500
Dividend Yield	5.58%	2.30%	1.92%
P/E	6.8	28.7	19.48
Price/Book	0.99	1.4	2.82
Price/Cashflow	3.3	5.2	11.2
Price/Sales	1.27	1.9	1.81

Below chart shows the free cashflow of the company in the period 2009 – 2013.

PGM CAPITAL COMMENTS:
Based on the above mentioned fundamental data and assuming the company’s P/E ration will converge to S&P 500 average, the shares of CNOOC are about 65% undervalued.

Based on the above let’s try to calculate what CNOOC shares should be valued today if its P/E ratio would converge at some point to the P/E average for the S&P 500 (which is lower than the Oil & Gas industry average).

In this case the projected current price of CNOOC Ltd, would be (HKD10.20/6.8)*19.48 = HKD19.22.

As can be seen from below 10-year chart, the stock of the company appreciated with approx. 206% in the last 10-years, and that the price corrections of the past have proven to be excellent buying opportunities.

 

It is also worth mentioning that, the company increased its dividend payment from HKD 0.15 a share in 2001, to HKD 0.57 a share in 2014, an increase of its dividend payout of approx. 280 percent. (two hundred and eighty percent) in the last 12 years.

Source:

Looking at some basic technical analysis, the shares are bearish right now, trading below the 50-day and the 200-day SMA, but are recovering from an oversold momentum. Due to this we believe that the current price could clearly be a good entry point to start accumulating a long position.

Based on the above we have a STRONG BUY rating on the stock of CNOOC.

Disclosure:
We own CNOOC in our own personal portfolio since March of 2009 and haven’t sold a single share of the Company since then and are accumulating it at any dip.

Last but not least keep in mind that the market can remain irrational longer, than you can remain solvent.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Commodities, as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Until next week.

Yours sincerely,

Eric Panneflek