1H19's homing net profit increased by 53.68 per cent compared with the same period last year. In the first half of 2019, the company achieved an operating income of 2.67 billion yuan, + 24.32% compared with the same period last year, and a net profit of 371 million yuan, + 53.68% compared with the same period last year. Of this total, 2Q19 achieved a net profit of 533 million yuan in a single quarter, a substantial increase of 241.77 percent over the same period last year.
1H19 US oil and gas prices fell year-on-year. Due to the sharp drop in international oil prices in 4Q18, oil prices fell in the first half of 2019 compared with the same period last year. The average oil price in WTI Midland was 54.37 US dollars per barrel, down 13.70 percent from the same period last year; and the average unit price of natural gas was 2.93 US dollars per thousand cubic feet (about 0.70 yuan per cubic meter), down 41.05 per cent from the same period last year.
The number of wells drilled by 1H19 has increased, and the rapid increase in oil and gas production and sales has contributed to the growth of the company's performance. The company's total oil and gas production in the first half of the year was 8.5422 million barrels of oil equivalent, + 30.74% compared with the same period last year; of which, oil production was 7.3213 million barrels (about 1 million tons), + 29.31% year-on-year; natural gas production was 1.2209 million barrels of oil equivalent (about 200 million cubic meters), + 39.98% compared with the same period last year; oil and gas production and sales rate is 100%. By the end of the first half of 2019, the company had 689 net oil wells, an increase of 45 over the beginning of the year and 96 more than at the end of June 2018.
Large losses in 1Q19 hedging contracts affected the overall performance in the first half of the year. 1H19's fair value change resulted in a loss of 456 million yuan, an increase of 324 million yuan compared with the same period last year, mainly due to the fact that the average price of hedging contracts at the end of the first quarter was lower than the market price, resulting in 1Q19 fair value change profit and loss of-630 million yuan.
1H19 financial expenses, asset impairment losses decreased significantly compared with the same period last year. 1H19's financial expenses were 4.7535 million yuan, a sharp decrease of 245 million yuan compared with 250 million yuan in the same period last year, mainly because last year's financial expenses included penalty interest (US $20.9117 million) and one-time amortization (US $15.9544 million) incurred by US subsidiaries in January 2018. In addition, 1H19 Company recorded a credit impairment loss of 2.42 million yuan (original asset impairment loss), which was significantly lower than the asset impairment loss of 194 million yuan in the same period last year.
The company's oil and gas reserves in the United States are growing steadily. The company mainly owns three oil field assets of Hoople, Howard and Borden. Among them, Hoople oilfield assets are conventional oilfields, waterflooding development; Howard and Borden oilfields assets are shale oil and gas, with large room for production growth, contributing to the company's main performance. As of December 31, 2018, the company's oil field assets have proven reserves (1p) of 271 million barrels of oil equivalent, an increase of 10.142 million barrels of oil equivalent from the same period last year.
Us crude oil production continued to grow in 2019. U.S. crude oil production reached 1224.4 million barrels per day in the week ended July 26, 2019, an increase of 549,000 barrels per day from the end of 2018. We expect the United States to release about 2 million barrels per day of crude oil pipeline capacity from 2019 to 2020, and we expect U.S. crude oil production to grow further after the pipeline bottleneck is alleviated.
Profit forecast and investment rating. We estimate that the return net profit of the company from 2019 to 2021 is 770 million yuan, 1 billion yuan and 1.09 billion yuan respectively, the EPS is 0.11,0.15,0.16 yuan respectively, and the BPS is 2.22 yuan in 2019. With reference to the comparable company valuation, we give the company 1.2-1.5 times PB in 2019, corresponding to a reasonable value range of 2.66-3.33 yuan (corresponding to 24-30 times PE in 2019), maintaining a "better than the market" rating.
Risk hint: crude oil prices fluctuate sharply, and the company's oil and gas production growth is not as expected.