The company's 2019H1 production, revenue and net profit increased significantly by +31%, +24.32%, and +53.68%, respectively. The company has the advantage of storage and consumption ratio among similar enterprises in Permian, leading the oil price industry. The comprehensive cost is comparable to the average level, the profitability is leading, and the market value is relatively undervalued. Hedging tools help to withstand fluctuations in oil prices, but at the same time, they have a great impact on net profit and require continuous attention. Currently, the risk of changes in the company's management is low, and measures are being taken to actively manage the remaining issues. It is expected that the company's performance will continue to grow and maintain its “buy” rating.
Production continued to grow, shale oil production increased rapidly, and net revenue and profit increased sharply in the first half of the year. The company produced and sold 8.54 million barrels of crude oil and natural gas equivalent in 19H1, an increase of about 31% over the previous year. The increase all came from the MosScreek shale oil field. The 19Q1 and Q2 production of this field were 45600 and 47400 barrels of oil equivalent per day respectively, in line with our expectations of producing 17 million barrels of oil and gas equivalent for the previous year. Revenue from 19H1 was 2.67 billion yuan, up 24.32% year on year, in line with expectations; Guimu's net profit was 371 million yuan, up 53.68% year on year, lower than previous expectations. Among them, income from changes in the fair value of hedging instruments was -456 million yuan, which greatly dragged down the company's net profit.
The company has the advantage of storage and consumption ratio among similar enterprises, leading the oil price industry. Costs and expenses are comparable to the industry average, profitability is leading, and market value is relatively undervalued. The company is currently a small shale oil enterprise based in the Permian Midland Basin. Compared with other independent shale oil producers in Permian, the company's remaining reserves can be harvested for 18.39 years, and the oil content ratio is as high as 90%. The oil price stabilized above 45 US dollars/barrel of oil equivalent. Operating costs and financial expenses rank among the highest in the industry, but oil and gas asset reduction costs and management expenses are above the industry average. As a result, the overall cost side is comparable to the industry average, and profitability is at the forefront of the industry. According to the EV/EBITDAX average multiple of the target company's market capitalization, the company's enterprise value should be around 3.3 billion US dollars. Currently, the company's market value is clearly low.
Hedging tools can help protect against the risk of falling oil prices, but their impact on net profit should still be watched. Commercial Bank of America loans require shale oil companies to hedge 50% of production over the past 12 months and 25% of expected production over the next 12 months. Hedging by hedging tools ensures that the fluctuation in the company's net profit during the period when oil prices fall is far less than the fluctuation in oil prices, enhancing the resilience of shale oil companies to the risk of oil price fluctuations. However, since 2019, fluctuations in the fair value earnings of hedging instruments have become the main influencing factor in net profit fluctuations. It is estimated that in October 19, the collar and swap contracts held by the company will reach 6 to 7.35 million barrels, the average contract price fluctuates by 1 US dollar, and the resulting net profit fluctuation will reach 42 to 51.45 million yuan, equivalent to 7.0% to 8.6% of the company's net profit for the full year of 2018. It is expected that future fluctuations in fair value earnings from hedging instruments will be the main factor affecting the company's net profit fluctuations.
Changes in the company's management are less likely, and the current management actively manages the remaining issues and risks. The bill to remove some of the company's directors and supervisors via anonymous email on July 11 has been determined by law to be invalid. Since some of the shareholders participating in the proposal are already in a trusteeship and auction state, they are unable to meet the requirement to hold 10% of the shares. Currently, the risk of changes in the company's management is low. Since the current management took office, they have actively managed the risks caused by remaining issues by calculating impairment preparations, litigation, etc. Furthermore, on May 13, 2019, 11.57% of the company's shares were centrally lifted. Currently, some of the company's holdings have been reduced. There is no risk that the company will continue to lift the ban on restricted shares in the short term.
Risk factors: Industry: risk of large fluctuations in international oil prices; risk of exchange rate fluctuations due to trade conflict between China and the US. Company: Risk of shale oil and gas production falling short of expectations; risk of large fluctuations in the fair value of hedging tools; risks accumulated during the tenure of the company's former management have not been fully disclosed; risk of changes in the company's control.
Investment advice: Due to lower international oil price expectations, the company's revenue and net profit expectations for 2019-21 were lowered, but it is expected that the company's performance will continue to grow. Impairment accruals were not dragged down by litigation matters in 2019, and the company's net profit is expected to increase significantly. Net profit attributable to shareholders of listed companies in 2019-21 is estimated to be 11/13/1.5 billion yuan (the original forecast was 15.6/179/1.94 billion yuan), the corresponding EPS forecast was 0.17/0.20/0.23 yuan respectively, and the current stock price corresponding to PE is 13/11/9 times respectively. On this basis, according to the 2020 valuation of 15 times PE and 1.2 times PB (averaged), we gave the company a target price of 3.00 yuan to maintain the “buy” rating.