not vested
Why CNOOC Has 25% Downside: Credit Suisse
By Shuli Ren
Credit Suisse today downgraded China upstream oil producer CNOOC (883.Hong Kong/CEO) to Sell.
The bank’s new price target of 7 Hong Kong dollars (previously HK$11.50) promises another 24% downside.
Why is Credit Suisse turning bearish?
First, oil prices have corrected around 20% since peaking in June, but CNOOC’s share prices barely budged. As the summer driving season draws to a close, Credit Suisse estimates U.S. gasoline demand will see a 500kb/d retreat.
“The extremely weak Asia refining margin (US$5.8/bbl, a five-year low) could also induce more refinery outages, dampening crude oil demand in Asia. A peak in oil prices typically marks a peak in CNOOC’s share price,” wrote analysts Horace Tse and Jessie Xu.
Second, CNOOC is hitting a glass ceiling in terms of cost-cutting. While “CNOOC has done a remarkable job in cost discipline over the downturn”, operating expenditure is now at $8.80 per barrel, close to the trough level in 2009. So there is hardly any room left for further cost cutting.
Third, CNOOC is not as cheap as it looks. While it trades at only 4 times enterprise value-to-earnings (EV/EBITDA), versus global average of 8 times, CNOOC is running out of oil to drill.
Its oil reserve life is only 5.6 years, versus the global average of 12 years. This is a point raised at this year’s Hong Kong Sohn Conference.
Source: Barron's Asia
http://blogs.barrons.com/asiastocks/201 ... it-suisse/
CNOOC fell 0.7% today, while the Hang Seng Index rose 1.2%. Brent crude gained 0.2% to $44.35 in Asia hours.