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Edited Transcript of 883.HK earnings conference call or presentation 29-Aug-19 9:00am GMT

Half Year 2019 CNOOC Ltd Earnings Call

HK Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of CNOOC Ltd earnings conference call or presentation Thursday, August 29, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Keqiang Xu

CNOOC Limited - President & Executive Director

* Weizhi Xie

CNOOC Limited - CFO

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Conference Call Participants

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* Mark Wiseman

Goldman Sachs Group Inc., Research Division - Senior Analyst

* Neil Beveridge

Sanford C. Bernstein & Co., LLC., Research Division - Senior Oil and Gas Analyst

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Presentation

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Unidentified Company Representative, [1]

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Good afternoon, ladies and gentlemen. Welcome to the 2019 Interim Results Presentation of CNOOC Limited. Before we start, please allow me to introduce the Management on stage today, Mr. Xu Keqiang, President; Mr. Weizhi Xie, Chief Financial Officer.

Now I'll pass to Mr. Xie for the presentation.

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Weizhi Xie, CNOOC Limited - CFO [2]

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Good afternoon, ladies and gentlemen. Welcome to CNOOC Limited 2019 Interim Result Analyst Briefing. Today, we will go through our operating and the financial results for the first half of 2019. Before we start, please take a moment to read the disclaimer on Slide 2.

Okay, let's turn to the next slide. Our presentation today includes 4 parts. Firstly, we will start by giving you a brief overview of our interim results; secondly, we will talk about our operating results and the highlights; thirdly, we will discuss our financial performance and analysis; and finally, the company's future outlook.

In the first half of 2019, significant successes were achieved in exploration and the development. The net production hit a record high. New achievements were made in exploration with 16 new discovery. Three out of 6 new projects planned for 2019 successfully came on stream.

Net production reached 243 million BOE, in line with expectations.

In the first half, the company made a further efforts on cost control and maintained cost -- financial status in healthy position. Our all-in cost was USD 28.99 per BOE, down 8.9% year-over-year. Net profit was RMB 30.25 billion, up 18.7% year-over-year. Earnings per share was RMB 0.68. Gearing ratio decreased to 24.5%.

To reward our shareholders, the Board has approved an interim dividend of HKD 0.33 per share, tax inclusive. During the first half, we also maintained steadily HSE performance.

Next, let's have a look at the company's results summary for the first half. The production of crude and liquids amounted to 199 million barrels. Natural gas production amounted to 254.5 billion cubic feet. Our realized oil price was USD 64.60 per barrel, a decrease of 4.1% year-over-year. Our realized gas price was USD 6.46 per thousand cubic feet, an increase of 0.7% year-over-year. Our oil and gas sales was RMB 94.3 billion, up 4.4% year-over-year.

We would now like to share with you our major operating results and the highlights for the first half of 2019. Exploration summary is showed on Slide 7. In the first half of 2019, we acquired 11,304 square kilometers of 3D seismic data. Exploration workloads continued to increase with the independent exploration wells in offshore China increasing by 72% year-over-year. Our success rate of independent exploration wells in offshore China reached 43% to 68%.

In the first half of 2019, we continued to make exploration achievements in terms of new discovery and successful appraisals. 12 new discovery and 34 successful appraisal wells were achieved in offshore China. Four new discovery and one successful appraisal wells were made overseas.

In the first -- in the following slides, we will talk about our exploration results in offshore China and overseas. Appraisal of Bozhong 19-6 achieved new success. Four appraisal wells were completed in 2019, and all encountered gas layers above 100 meters. More than 100 million tons of oil equivalents of proved in-place volume were added.

New discovery was made in Enping 20-5, which further confirmed the hydrocarbon generation capacity of Enping 20 depression and expected to become a middle-sized oil field.

In the first half, 3 new discovery were made in Stabroek block in Guyana. Exploration potential was proved to be huge with deepen understanding of the block. So far, total recoverable resources of the block have exceeded 6 billion BOE.

Please turn to Slide 12. In the first half, our production reached 243 million BOE, in line with expectation.

Page 13 shows the company's production for the same period of the last decades. The company's net production maintained a sustainable growth and hit a record high in the first half of 2019.

Slide 14 shows our production breakdown for the first half of 2019. China and overseas production was 156.1 million BOE and 86.9 million BOE, respectively. Production from China and overseas was 64% and 33%, respectively. Crude liquid and the natural gas accounted for 82% and 18% of total production, respectively.

An update of our new projects for 2019 are summarized in -- on Slide 15. Three out of 6 new projects planned for this year successfully commenced production and other projects are promoted actively.

Health, safety, environmental protection are always our top priority. In the first half of 2019, our OSHA statistics were maintained at a good level.

Now I will share with you the detail of our financial performance and analysis. Slide 18 shows the key financial items for the first half of 2019 compared to the same period of 2018. Our financial position remained healthy at the end of the June 30, 2019. Total assets are -- total assets was RMB 720.5 billion, mainly include PP&E of RMB 410.1 billion. Equity increased RMB 13.5 billion, and our gearing ratio was 24.5%.

Slide 20 is a summary of movement of cash and the cash equivalents. In the first half of 2019, our operating cash flow was RMB 58 billion, and free cash flow was RMB 30.7 billion.

Now let's look at the CapEx on Slide 21. The CapEx was CNY 33.7 billion in the first half of 2019, representing a significant increase of 60% year-over-year. Well-implemented CapEx strongly supported the increasement of oil and gas reserve and production.

All-in cost. All-in cost per BOE decreased below USD 30, further consolidating the cost competitiveness. Excluding the impact of foreign exchange rate change of RMB against the USD, all-in cost in the first half of the year was USD 29.97.

Now let's take a more detailed look at our cost analysis. OpEx of USD 7.37 per BOE, down 7.9% year-over-year mainly due to effective cost control, sales volume increase and RMB exchange rate change. DD&A of USD 16.09 per BOE, down 8.1% year-over-year mainly due to change in production mix and increased reserve. We will continue to increase oil and gas reserves and production with well enhancing quality and efficiency.

To reward our shareholders, the Board has approved 2019 interim dividend of HKD 0.33 per share, tax inclusive. This represents a dividend yield of 5.6% and a payout ratio of 42.8%.

Finally, let's talk a bit about our future outlook. Slide 26 shows our targets in 2019, which we have shared with you during the strategy preview at the beginning of the year. On Page 27, we list our future production targets and some new projects. We will actively promote the evaluation and the construction of new projects and lay a solid foundation for the sustainable production growth.

This concludes today's presentation, and any question is welcome. Thank you.

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Questions and Answers

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Unidentified Company Representative, [1]

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Thank you, Mr. Xie. Now we enter the Q&A session. Before you ask a question, please state your name and your institutions. (Operator Instructions)

The gentleman in the front.

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Mark Wiseman, Goldman Sachs Group Inc., Research Division - Senior Analyst [2]

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It's Mark Wiseman here from Goldman Sachs. Just a quick question on CUCBM, the acquisition that you conducted recently. Can you just explain how much production and reserves are associated with that new asset?

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Keqiang Xu, CNOOC Limited - President & Executive Director [3]

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[Interpreted] Could you please repeat the question?

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Mark Wiseman, Goldman Sachs Group Inc., Research Division - Senior Analyst [4]

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Yes. It's Mark Wiseman from Goldman Sachs. I was just asking about the recent acquisition that you did with CUCBM, the new asset. Just interested in, if you could just explain the resources and reserves associated with that new asset? And what sort of production that's contributing at the moment? And also, if you can, how much production growth we should expect?

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Keqiang Xu, CNOOC Limited - President & Executive Director [5]

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[Interpreted] Now I understand your question.

So before I answer your question, first, I would like to inform everyone, actually, our Chairman, Mr. Yang, had planned to be here with us this afternoon at the result announcement. However, due to an emergency public event that he had to attend tomorrow morning, and he had to go back from Hong Kong to Beijing, and he had also asked me to say hi to everyone. Just now, you had asked us about our planned acquisition?

CNOOC Limited, according to third-party fair assessed value, and we plan to acquire 100% equity in this asset with -- at the price of RMB 5.3 billion. CCBN, this company is a company that is dedicated at the on-land oil tight as company. In addition, it has a very solid foundation for reserve. Because they are mainly involved in the gas business, so this is in line with CNOOC Limited future outlook to be in the green industry and to be environmentally friendly. In addition, it has a huge amount of exploration area for our future usage. It is expected that this year for CCBN's production could reach 2 billion cubic feet.

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Weizhi Xie, CNOOC Limited - CFO [6]

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Cubic meter.

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Keqiang Xu, CNOOC Limited - President & Executive Director [7]

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[Interpreted] Apologies, cubic meter.

Looking at its current resource base, we believe that there is a huge room for growth in the future. In addition, we also have another idea because for CNOOC Limited, a lot of our oil fields are offshore. And we also hope that by taking this opportunity, we could also move inland.

With this inland gas exploration opportunity, we believe that this would be very beneficial for our future exploration when it comes to tight gas and liquid. Thank you very much.

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Unidentified Company Representative, [8]

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Okay, next question. The gentlemen in the second row on the side.

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Neil Beveridge, Sanford C. Bernstein & Co., LLC., Research Division - Senior Oil and Gas Analyst [9]

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Neil Beveridge, Bernstein. Two questions. First question is really around the cost cutting. So you've done a really excellent job of cutting costs over the last few years. Do you think we're at the bottom of the cost-cutting cycle? And I'm thinking specifically about the increase in CapEx this year and what that could do to DD&A. And whether or not we should expect costs to be flat or maybe slightly increase as a result of that higher spending.

The second question is around the Bozhong 19-6 appraisal results. So you've been talking about this discovery, I think, for the last 2 years. Can you give us some more details around what the specific development plan is? When you think you can have this field online? How big it will be? And the follow-on exploration appraisal of gas in the Bohai Bay.

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Weizhi Xie, CNOOC Limited - CFO [10]

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[Interpreted] Thank you. Your first -- please allow me to take your first question. Your first question is with regards to the trend or the trajectory of how our cost is going. Well, as you can see, the oil service industry is also recovering. And with respect to how much downward trend or how much room there is for us to further go down, I cannot promise because as the management team, we cannot control the market. However, we can do our best to make sure that we remain competitive when it comes to cost among our peers and to already have an all-in cost at below USD 30. And as I said, I cannot promise you how much further we can go down, but I can tell you that with CapEx, us management team will continue to do our best to keep it under control.

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Keqiang Xu, CNOOC Limited - President & Executive Director [11]

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[Interpreted] This morning, we had -- just had the Board meeting of CNOOC Limited. And at the Board meeting, the directors have given very high compliments to the effective cost management carried out by the management team. What everyone is concerned about is the OpEx cost, and for the first half of this year, it is at USD 7.37 per barrel and compared to last year, this is down by 7.9% year-on-year decrease. For DD&A, it is currently at USD 16.09 per barrel and an increase year on -- apologies, a decrease of 8% year-on-year.

In terms of our all-in cost, again, we are able to go back to below USD 30 and currently at USD 28.99. Even if we exclude the factors coming from exchange rate for our all-in cost, again, we can achieve USD 29.85.

For the management, our thinking remains the same as always. We cannot control the oil price, however, we would be able to always be on top of the cost control of the company.

I cannot answer you or give you a specific figure of at what number I can control my all-in cost at. However, I can tell you with full confidence that we would be able to keep our all-in cost at a very competitive rate among our peers in the industry. I believe that for the past few years, when it comes to the management's performance, I believe that everyone has witnessed this, every commitment that we have made, we were able to honor our commitment.

Just now, you also mentioned about Bozhong 19-6. And this year, for Bozhong 19-6, it has entered into the exploration and appraisal phase.

For this first half of this year, the 4 appraisal wells, we have both been able to encounter 100 meters gas pay zone. I remember that in the beginning of the year, at the results meeting, and I had -- we had said that for this, we expect that we will have 100 billion cubic feet of gas and 100 million of oil. And so far, we have already achieved 300 million oil and gas.

And as you might know that Bozhong 19-6 is a gas condensate field, and our strategy is to have an overall comprehensive deployment as well as work in phases, and this is what we are doing accordingly -- according to our plan. And we still have the principle of improving our acquisition rate to the maximum. So we will adopt the method of recycling -- cyclical gas injection method.

Looking at the present situation, we believe that we have a solid foundation for building something that would produce 3 billion cubic feet of gas as well as 3 million tons of condensate oil. And at the moment, we are planning to start our development in phases. Thank you very much.

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Unidentified Company Representative, [12]

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Thank you. Next question, please. The gentlemen on this side, second row.

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Unidentified Analyst, [13]

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[Interpreted] I'm from JPMorgan. My name is [Go Wei], and I have 2 questions. And first of all, we have seen that the production was growing very fast for the first half of the year. And does that mean the management team have full confidence that you would be able to achieve the upper limit of your guidance for this year? And what does that mean for your production target? And could you please further elaborate? And we have also seen that the CapEx was very well implemented.

And my second question, we do see that the fast development. And so for everything else that comes with it, apart from the price factor, and do you think that with such fast speed of development, would there be any risks involved? And could you please further elaborate?

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Keqiang Xu, CNOOC Limited - President & Executive Director [14]

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For the first half of this year, the company has realized the indicator and which was a production of 243 million BOE. Again, we have created a new historical high for our CNOOC Limited company since listing. So there is reason for you to believe or to imagine that we would be able to realize the upper limit of our guidance, which is 480 million BOE to 490 million BOE. But I will not be able to be promise you this year.

For example, in the future, there are many potential risks, for example, typhoon factors, and this might heavily impact our production. So what I can only say is that there is reason for you to imagine that we would be able to achieve the higher upper limit of our guidance, but I will not give you that promise. But there is one fact that I can share with you, which is that for CNOOC Limited, our production has again come back to the faster growth period. As we said, our CapEx is also improving greatly.

For first half of this year, we have realized our target of CNY 33.7 billion, and again, this is in line of our expectation for the full year, which is CNY 70 billion to CNY 80 billion. As our information disclosed in beginning of this year, in our 3-year indicators or expectations and our production for next year would be 505 million BOE to 535 million BOE. And the management team is confident that we would be able to achieve this goal along this path. And of course, with the continuous increase of supply, it has brought certain issues to the management team. But please trust the management team that we have the confidence and we have the ability to resolve these issues. And I believe that our performance for first half of this year is a good testament to what I have just said. Thank you.

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Unidentified Company Representative, [15]

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Okay. Next question, the gentleman in the middle.

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Unidentified Analyst, [16]

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[Interpreted] I am from BOC International, and I have one question, which is related to the currency. And we have seen that Argentina pesos has again depreciated greatly, and the same thing has happened same period last year, and it had caused a CNY 6 billion loss. And I wonder that whether this has caused -- the same loss has occurred again to the company for the first half of this year? Or has the company taken certain measures to offset this?

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Weizhi Xie, CNOOC Limited - CFO [17]

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[Interpreted] Thank you for your question. Yes, we have also noticed the recent changes in the Argentina currency pesos. And last year, the pesos depreciation has caused us to carry out impairment of the company. And however, the impairment that we have done, we have already impaired for all the acquisitions that we did at the premium. And the book value we had between ours versus the JV company's book value is actually very close already. And there isn't really much further left to do for further impairment.

And second, as I said, we have noticed the recent big move of depreciation in pesos again. And for our JV business, actually, it's more related for the upstream business and which we acquired at [USD 14], and we don't think that this would actually have any impact on our business. If anything, it could possibly have positive impact on our upstream business.

And for our downstream business, and this would mainly be for gas, petrol stations, et cetera, and we don't think that this will have any major impact. And of course, we continue to monitor the situation closely. But as I said, the premium that we had acquired had already been through the impairment work last year.

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Keqiang Xu, CNOOC Limited - President & Executive Director [18]

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[Interpreted] I would also like to say that please rest assured, our company obeys by the accounting rules very strictly. And should any depreciation occurs, we will carry out impairment testing. And should there be any need for further actions, and we would carry out our relevant impairment work according to the rule book.

Thank you. That concludes today's presentation. And once again, thank you for your participation, and thank you for your support to CNOOC Limited.

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