1Q22 results in line with our forecast

CNOOC Energy Technology & Services (CETS) announced its 1Q22 results: Revenue was Rmb8.2bn, up 25% YoY and down 38% QoQ; attributable net profit was Rmb301mn, up 37% YoY and turning positive QoQ, largely in line with our forecast.

Gross margin in 1Q22 was 10.8%, up 0.8ppt YoY and down 3.6ppt QoQ. Cash flow from operating activities reached Rmb1.7bn, up 1,607% YoY and 26% QoQ, mainly thanks to the strengthening of accounts receivable management and increase in receivables collection.

Trends to watch

Profitability to rise as efforts to improve quality and efficiency pay off. The firm has been adhering to a cost leadership strategy and strengthening efforts to reduce costs and increase efficiency since 2021. Its gross margin in 1Q22 rose 0.8ppt YoY to 10.8%, and costs and expenses grew at a slower pace than revenue. We believe that the firm’s cost control measures have been effective. If the firm continues to implement its cost leadership strategy, we believe that it will gradually build a cost competitive advantage, and its gross margin will continue to improve and profitability will rise further.

CNOOC’s seven-year action plan for increasing reserves and production lays a solid foundation for business growth. The firm’s product and service workloads increased YoY in 1Q22 thanks to parent company CNOOC’s seven-year action plan to increase oil and gas reserves and production. In addition, CNOOC estimates its capex in 2022 at Rmb90-100bn (an increase from Rmb87.6bn in 2021), according to its business strategy and development plan. We believe that increased investment in upstream exploration and development will bring ample workload to CETS, laying a solid foundation for future business growth.

Offshore oil and gas engineering industry entering an upward cycle driven by high oil prices and demand recovery. Crude oil prices have been fluctuating at high levels since the beginning of 2022. The average price of Brent crude oil in 1Q22 reached US$102/barrel, a YoY increase of 67%. According to IEA forecasts, 1) on the supply side, the growth of OPEC crude oil production and US shale oil production in 2022 would be relatively slow, and 1.5mn barrels/day of Russian crude oil production would exit the market in April; and 2) on the demand side, the average global crude oil demand in 2022 would be 99.4mn barrels/day, a YoY increase of 1.9mn barrels/day. We believe that the offshore oilfield service industry will enter an upward cycle, and the firm’s operating performance will improve steadily.

Financials and valuation

We keep our earnings forecasts unchanged. We maintain OUTPERFORM and a TP of Rmb3.45, which implies 16x 2022e and 14x 2023e P/E and offers 49% upside. The stock is trading at 11x 2022e and 9x 2023e P/E.

Risks

Gross margin under pressure; overseas business risks.