Incident: The company released its report for the third quarter of 2019. Q1-Q3 achieved revenue of 4.38 billion yuan (YOY +23.01%), net profit of 1.01 billion yuan (YOY +53.74%), Q3 achieved operating income of 1,710 million yuan, achieved net profit of 630 million yuan (YOY +53.66%), and the single-quarter results exceeded expectations.
Crude oil prices declined, operating profit bucked the trend, and operating strength was highlighted: for oil and gas extraction companies, rising crude oil prices often led to a sharp increase in profits. However, when the company's average oil price fell sharply year on year in 19Q3 (56.42 VS 69.48), the company's operating profit reached 799 million yuan, an increase of 52.77% over the previous year. Even after deducting profit and loss from changes in fair value, operating profit reached 590 million yuan, a year-on-year decline of only less than 10% (WTI prices fell 18.80% during the same period). There are two main reasons behind the excellent performance: 1) The company's oil and gas production grew steadily in 19Q3 — crude oil production reached 4,3322 million barrels, an increase of 18.31% over the previous year, and natural gas production reached 8853 million barrels of oil equivalent, an increase of 60.51% over the previous year — the logic of volume increase made up for the decline in the unit price of energy products; 2) The price difference between Midland and Cushing's delivery site narrowed drastically. In August, due to the official launch of the Cactus II, the price spread between Midland and Cushing had already changed from water prices to rising water. As a result, although the decline in WTI prices was huge, the company achieved only a slight drop in crude oil prices. It is expected that the company achieved crude oil prices in 19Q4 and will remain at the Q3 level.
The ability of hedging to withstand falling oil prices was highlighted, and problems left over from history were gradually resolved: although crude oil prices fell significantly in 19Q3, the company's net income from changes in fair value reached 209 million yuan, showing a relatively steady hedging strategy. The company has a strong ability to withstand falling oil prices. In terms of corporate governance, the company's new management actively addressed issues left over from history and prepared depreciation of about 1,094 million yuan in 2018. Litigation cases are progressing steadily and milestones have been achieved.
Profit forecast: Since the company's Q3 operating situation slightly exceeded expectations, we revised the net profit returned to the mother in 2019-2021 to 15.06/17.92/18.66 (original value was 1,274/15.80/1,917) of RMB 15.06/15.80/1,917 million yuan. The corresponding PE was 9/8/8 times, respectively, maintaining the “buy” rating.
Risk warning: risk of large fluctuations in crude oil prices