Events:
The company announces its 2019 semi-annual report. In the first half of 1919, the company realized operating income of 2.67 billion yuan, an increase of 24.3% over the same period last year, and realized a net profit of 371 million yuan belonging to shareholders of listed companies, an increase of 53.7% over the same period last year. Among them, 19Q2 achieved operating income of 1.404 billion yuan in a single quarter, and realized net profit of 533 million yuan belonging to shareholders of listed companies, an increase of 241.8% over the same period last year, and the performance was basically in line with expectations.
Comments:
1. 19Q2 performance basically reflects the normal operation level of overseas assets.
From a profit point of view, 19Q1 realized a net profit of-163 million yuan attributable to shareholders of listed companies, mainly due to a change in book fair value of about 630 million yuan in the company's hedging derivatives positions, which to a certain extent dragged down the results of the first half of the year. Deducting this part of the profit and loss, the oil and gas industry actually realized an operating profit of about 430 million yuan (before income tax). 19Q2 achieved a net profit of 533 million yuan, of which the profit or loss of book fair value changes was about 174 million yuan, while the actual operating profit of the oil and gas industry in the current quarter was about 510 million yuan (before income tax). Considering that the level of WTI oil prices in the second quarter increased compared with the first quarter, and equivalent production increased in the second quarter, we believe that the performance of the above data basically reflects the normal operating level of overseas assets.
2. 19Q2 equivalent production continues to rise month-on-month, and the progress of new drilling is good. According to the company's production and operation data, the company's oil and gas equivalent production was about 48,000 b / d in the second quarter of 1919, which was further higher than 463m b / d in the first quarter. Among them, the fastest increase in production is natural gas, with equivalent production of about 7800 barrels per day in the second quarter, an increase of about 2100 barrels per day compared with the first quarter, while crude oil production is basically flat at about 40,000 barrels per day.
In terms of drilling progress, the company's investment gradually recovered in the second quarter, with 33 new wells drilled in a single quarter, an increase of 10 wells compared with the first quarter, which has changed the trend of continuous decline in previous quarters and provided an important support for the increase in the company's equivalent production.
Earlier, the company announced drilling and fracturing completion of the longest known horizontal well in the Permian basin, with a total horizontal footage of 5467 meters, setting a new record for the length of horizontal wells in the Permian basin. The well is expected to be put into production by the end of the third quarter of this year. In the future, the company will actively look for new production layers and improve the production of existing oil wells.
3. Hedging operation is a common practice for American shale oil companies. Large fluctuations in oil prices affect the fair value profit and loss market. The company's fair value profit and loss fluctuations for many consecutive quarters are confused. We believe that by investing in a certain amount of derivatives hedging instruments, it is a common practice in the industry to lock in the sales price of some crude oil production in the future, and even one of the prerequisites for most shale oil companies to obtain bank credits. the aim is to avoid the uncertain impact of sharp fluctuations in oil prices on the company's operating cash flow.
According to the company's disclosure, the company's current investment in derivatives instruments include the New York Mercantile Exchange WTI Swap contract, Midland-Cushing Swap contract, put options and lead options. In terms of the control of trading volume and settlement time, the company uses 50% of PDP (proven reserves) production in the next 12 months and 25% of PDP production in the next 13-24 months as the control basis of futures maturity and futures trading volume, and makes small adjustments in the trading process according to the fluctuations of WTI spot and futures prices. Because the company needs to predict the price in advance when buying derivatives positions, and when the oil price fluctuates sharply, it is easy to have a certain deviation between the oil price on the balance sheet date and the actual price level of the position, resulting in large fluctuations in fair value gains and losses. In the case of unsettled positions, fair value gains and losses are only book gains and losses and do not affect the actual cash flow.
4. Low cost of assets, good effect of increasing production and transparent traceability of output are important advantages that distinguish Xinchao Energy from other overseas oil and gas companies.
The company accurately stepped in at the most pessimistic moment of the oil price mood at the end of 2015, acquiring the Howard & Borden oil field, which is located at the "core" of the shale production area in the United States. The full cost is $24 / barrel at 16-year levels (currently over $34 / barrel). Up to now, there are still a large number of areas to be developed in the north of the block, with great potential to increase production. We have always stressed that unlike other overseas oil and gas resources operators, the oil and gas industry in Texas, where trendy energy assets are located, has complete chains, a high degree of marketization, transparent and traceable production, and obvious advantages.
5. The company made a large provision for impairment last year, and the operational problems involving the former management in the past 19 years have been gradually resolved.
Since the current management joined the company in the past 18 years, it has actively defused the company's operational risks and focused on the main oil and gas industry. In terms of financial expenses, the one-time penalty interest and bond issuance fees resulting from the early repayment of loans by American subsidiaries have been settled in 18 years, and the current debt cost has been capitalized in accordance with the usual practice. The impairment of bad debts has been included in the litigation matters previously implemented by the management, such as Hami mining right investment and founder Trust, and the amount of the company in 18 years has reached 1.117 billion yuan, of which the full provision for impairment of the book assets involved has been 1.067 billion yuan. even if the above assets cannot be recovered through legal procedures, it will not have a further impact on 19-year performance. However, at present, there are still some problems left over from history at the company level that have not been completely resolved, which may lead to poor capital flow at the parent company level.
Investment advice:
Based on the current oil price performance and production situation, the oil price assumption was adjusted to 56-58-62 US dollars per barrel in 19-21, and the equivalent production assumption in 19-21 was adjusted to 46000, 53000 and 55,000 barrels per day. Considering the relatively high probability of fluctuation in the international oil price range in the second half of 1919, the fair value profit and loss should be maintained in a reasonable range. It is estimated that the company will achieve net profit of 10.8,14.3 and 1.69 billion yuan belonging to shareholders of listed companies in 19-21, and the current price corresponds to 12.8,9.7 and 1.69 billion times of PE. Maintain the "highly recommended" rating.
Risk Tips:
International oil prices fluctuate sharply; the progress of foreign pipeline construction in the main producing areas of Permian basins in the United States lags behind; the progress of litigation-related matters lags behind, affecting the cash flow and financing capacity of the parent company.