CNOOC Ltd

SSE:600938

Earnings Call Transcript 2021-Q3

[Operator]

Good afternoon, ladies and gentlemen. Welcome to the Analyst Presentation of CNOOC Limited 2021 Third Quarter Review. I'm pleased to present Mr. Xie Weizhi, CFO of the company. We will have 2 parts in today's presentation. Mr. Xie will give you an update on the performance of third quarter 2021. Afterwards, we'll have a Q&A session. Now, may I pass the floor to Mr. Xie. [Foreign Language]

[Weizhi Xie, executive]

Thank you. Good afternoon, ladies and gentlemen. Thank you for joining CNOOC Limited 2021 Third Quarter Review Conference Call. I'm Xie Weizhi, CFO of the company. Now let me introduce you the company's financial and operating highlights in the third quarter of this year.

Before we start, please take a moment to read the disclaimer on Slide 2. Let's turn to the next slide. First of all, let's have an overview of our operating performance for the first 3 quarters. Total net production was $422.2 million BOE, up 8.5% year-over-year. We made 18 new discoveries and successfully appraised 27 oil and gas structures. On development and production, 10 new projects have commenced production.

Turning to the financial performance. Average realized oil and gas price was USD 65.09 per barrel and USD 6.77 per 1,000 cubic feet, respectively. The oil and gas sales revenue was RMB 158.650 billion, increased 55.7% year-over-year. CapEx spending was RMB 56.960 billion.

Slide 4 shows our production breakdown. In the third quarter, the net production increased 9.9% year-over-year, and the production in China increased 13% as new projects started. Our production from China and overseas was 69% and 31%. Crude liquids and natural gas represented 79% and 21% of our total production, respectively.

Slide 5 shows the company's net production of the first 3 quarters. Total net production was 422.2 billion -- million BOE in the first 3 quarters, up 8.55% year-over-year, representing 76% to 77% of the annual target. China's production increased 11.6% year-over-year and overseas production increased 2.2% year-over-year.

Let's turn to the Slide 6. In the third quarter, our average realized oil price increased 63.6% year-over-year in line with the trend of international oil prices. The average realized gas price increased 21%. Oil and gas sales revenue increased 33.6% year-over-year, mainly due to combined efforts of the increased international oil and gas prices and the increased sales volume. Capital expenditure increased 13.8% year-over-year, mainly due to the increase of the work growth.

Page 7 shows the results of our exploration activities. In the third quarter, we achieved 9 new discoveries and successfully appraised the 13 oil and gas structures. In offshore China, 6 new discoveries were made. In overseas, we made 3 new discoveries of Whiptail, Pinktail and Turbot-2 in Stabroek block of Guyana.

So we would like to share with you more details on our exploration achievements in the third quarter. In Offshore China, large-sized commercial discoveries were made -- was made in Kenli 10-2 with 100 million tons oil proved in-place volume. Breakthrough exploration was achieved in Bozhong 28-1. And we successfully appraised Baodao 21-1 structure in Qiongdongnan Basin, which indicated broad natural gas prospects in the area.

In overseas, new discoveries were achieved continuously in Stabroek block of Guyana. Up to now, the total recoverable resources have reached over 10 billion BOE. An update of our new projects for 2021 is summarized on Slide 10.

10 out of 19 new projects planned for this year have commenced production. And most of the remaining projects have entered installation and commissioning stage. The company has always upheld HSE core value of safety first development department, people oriented and equipment integrated and put HSE first. At the same time, the company committed to green and low-carbon development, steadily implementing emission reduction of oil and gas business and promoting the development of new energy business actively.

As announced, we have initiated the process of A-Share IPO. This is an important step for the company to go with U.S. sections and protect shareholders' interest. On the other side, while maintaining our international development strategies, this will broaden the company's funding raising channels. At the same time, promote the brand value of the company. This concludes my presentation. Thank you. And now I'd like to open the call for questions.

[Operator]

[Operator Instructions] Our first question comes from [indiscernible].

[Unknown Analyst]

[Interpreted] Thank you very much. I am from [indiscernible]. I know that there was an announcement dated 26 of September concerning the A-Share IPO. And today, this was already passed in the shareholders meeting. I would like you to give a more elaboration on your consideration about the A-Share IPO.

My second question is, this year, international oil price has been rising. And right now, the oil price is at a level of above USD 80 per barrel. Based on the Q3 operation data, what do you think is the dividend outlook for this year, next year and thereafter.

[Weizhi Xie, executive]

[Interpreted] Let me answer your first question concerning our A-Share IPO. Yesterday, we issued an announcement already. And in fact, this resolution was passed in the EGM with 99.9% support. So as a result, the resolution was passed. There are actually 3 considerations behind our decision to issue or to conduct IPO in A-Shares. The first consideration is the U.S. sanction. So with the U.S. sanction, we had to make an exit in the New York Stock Exchange. So we'd like to improve our shareholder structure. So as a result, we've decided to return to the A-Share market.

And the second consideration is to widen and broaden our financing channel. So after we made an exit from New York Stock Exchange, we only have the Hong Kong stock market where we are listed. So we definitely need to broaden our financing channels.

And the third consideration is as a centrally operated state-owned enterprise in China, we would like to actually and improve our relationship with mainland investors. We'd like to pay back to mainland investors and enhance our own brand value as well. So these are the 3 main considerations behind our decision for the A-Share IPO.

My answer to your second question is this. At present, the international oil price is indeed at a very satisfactory level. It is at around USD 85 per barrel. And it is also a very good level historically speaking. And in terms of our dividend payout, all along, we paid 2 times of dividend every year. And usually, the dividend at the year-end is better than our interim dividend. So we believe that we are going to maintain this same practice of paying 2 dividends that is 2x of dividend every year. And the dividend level is going to reflect our profitability as well. And we believe that our profitability and our overall results this year is going to be at a very satisfactory or outstanding level if compared to historical patterns.

[Operator]

Our next question is from Neil Beveridge.

[Neil Beveridge, analyst]

Just a couple of questions. Firstly, production seems to be well ahead of target. Do you think it's highly likely that you will beat the production target this year? Or are there any unplanned shutdowns that we should be aware of in 4Q that could cause weaker production in the final quarter?

And secondly, can you comment just on the impact of some of the inflation effects that we're seeing across metal prices, materials and what impact that may be having on the operating costs. So are we starting to see costs rise within the business as a result of those higher prices?

[Weizhi Xie, executive]

[Interpreted] Let me answer your question. For your first question. In the first 3 quarters, our production volume was up 8.5%. In China, production volume was up 11.6%. So this year, I would say that the trend of production volume is very good. Actually, in the first 3 quarters, I believe that the typhoon season has been over. So in the fourth quarter, I don't think there would be any more influence from typhoon.

And then this year, at the beginning of this year, we gave a guidance on production volume at 545 to 555. And I believe that after the completion of this year, we are going to be at the upper range of this guidance. And we are going to see a historical high level in production volume. Then to answer your next question concerning inflation impact, it is true that commodities price has risen. And as a result, there is cost pressure on our operations as well as our construction costs. Besides, RMB has appreciated against USD. So concerning all those cost items denominated in USD, there is indeed some pressure. However, our company will adopt all necessary measures to hedge against this pressure. So we would say that at the end of the day, cost is still controllable even though there is some pressure.

[Operator]

Next question comes from Lau Cho Ming, BOCI.

[Lawrence Lau, analyst]

[Interpreted] Lau Cho Ming of BOCI. So I have 2 questions. First of all, this year, the CapEx should be at around RMB 90 billion to RMB 100 billion. And in the first 3 quarters, the amount of CapEx already utilized was CNY 50-odd billion. So this year, would it be the case that the actual CapEx would be smaller than the original estimate?

My second question is, in Africa, your production volume of oil has come down. So what are the reasons?

[Weizhi Xie, executive]

[Interpreted] Let me now provide a translation of the answers. Well, during the interim results announcement and also during our road show, we already gave an explanation concerning our CapEx. Well, in the first half year, our utilization of CapEx was rather low. And in Q3, we still lagged behind the original CapEx estimate. Well, altogether, we have 19 projects running. And in fact, most of these projects started operation in the second half of the year. And usually, the recognition of these projects took place to a larger extent when they are closer to the commencement -- operations management date.

So for the whole year, we believe that we are going to be in the lower range of the estimate of CNY 90 billion to CNY 100 billion. In fact, in the past year, every year, we saw the same pattern. So usually, we are at the lower range of the CapEx guidance given.

And then to answer your second question, it is true that the production volume in Africa had come down. Our main production area in Africa is Nigeria. And usually towards the middle to the later stage or part of the contract, well, that would be a recycling of the investment or recycling of the oil investment. And every year, in terms of the production amount, well, towards the mid to later stage of the period, the recycling will gradually come to an end. And then at that point in time, that would be the start of the profit sharing or profit payback period. And so this year, we have seen a reduction in the production volume in Nigeria, that is because towards the later stage of the contract, the government is taking a bigger share of it, and our share starts to decline. That's the reason.

[Operator]

Our last question is from [ Alex Zou ], UBS.

[Unknown Analyst]

[Interpreted] I am Alex Zou of UBS. I have 2 questions. The first question is concerning the pressure from a cost increase. So for next year and the year after next year, what will you think will be the cost per barrel? Will there be any increase? The second question is about offshore wind energy projects. So over the last weekend, the government has already announced some refined policies and targets concerning offshore wind energy. So I would like to know whether you also have some new targets and guidelines concerning development of offshore wind energy as well as clean energy.

[Weizhi Xie, executive]

[Interpreted] Now let me answer your question. First of all, concerning the -- okay. Let me see. Yes. Your first question is a question that the market has been very much concerned about cost. So it is all along our top priority for the management's work to maintain our cost competitiveness. However, if you can -- if you talk about absolute costs, it is really extremely difficult to make sure that absolute cost will continue to come down year after year because there are many factors that are out of our control. For instance, the increase in commodities price and also the increase in oil price. An increase in oil price will also lead to an increase in service price. So as a result, all these factors are, in fact, out of our control. So we are not really concerned about lowering absolute costs. What we are concerned about is to maintain a relative competitive edge.

So in the fourth quarter next year as well as the year after next year, we can't really promise that we are going to achieve a decrease in cost. But then we will be trying our best to keep our cost competitiveness. That has all along been the formal target for our management.

And then you also asked a question about development of offshore wind power. Well, under the dual carbon targets or goal, we are trying our best to achieve a transformation in energy mix. So this -- on this side, all along, we have established a basic threshold. And our plan is that in the coming 5 years, every year, we will spend 5% to 10% of our CapEx on offshore wind power research and development. So for this, there has not been any change in this particular threshold. And while we continue to explore the development of wind power and achieve technological reform, we believe that our development will be able to achieve a breakthrough in the energy and also power transformation mix. Thank you.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's presentation, and thank you very much for your attendance. We hope to see you very soon. Goodbye.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]