Event: On August 29, 2023, the company released its 2023 semi-annual report. In the first half of 2023, the company achieved operating income of 1,882 billion yuan, an increase of 34.85% over the previous year; realized net profit of 440 million yuan, an increase of 107.18% over the previous year; achieved net profit of 436 million yuan after deducting non-return net profit of 436 million yuan, an increase of 106.66% over the previous year.

Net profit for 23Q2 was up from the same period last month. At 2023Q2, the company achieved operating income of 984 million yuan, up 24.13% year on year, and 9.47% month on month; realized net profit of 227 million yuan, up 62.62% year on year, and 7.06% month on month.

23Q2 Crude oil production increased month-on-month, and overall profitability was strong. The company accelerated the drilling progress of the crude oil exploration and sales business, and increased efficiency across the board. 2023Q1's Wensu project produced 132,200 tons of oil, and achieved an output of 144,900 tons in 2023Q2, an increase of 27.34% over the previous year and 11.29% over the previous year. At the same time, the company has a strong cost advantage in exploration and production integration. At 2023H1, the company achieved a comprehensive gross margin of 47.02%, an increase of 2.77 pct over the previous year. Q2 gross margin for a single quarter was 46.28%, an increase of 0.93 pct over the previous year.

Oil prices rebounded in 23Q3. As the impact of the Russia-Ukraine conflict subsided, oil prices declined year-on-year. According to wind data, the average spot price of 2023H1 Brent crude oil was 79.82 US dollars/barrel, down 26.15% from the previous year; in the third quarter, OPEC+ production cuts were implemented. The US entered a period of peak crude oil consumption, and China's overall demand was relatively good, so supply and demand were tight. In addition, the market unanimously anticipated that the Fed's interest rate hike had come to an end, and macroeconomic suppression of oil prices had weakened. Thus, the average spot price of Brent crude oil in 2023Q3 was 83.13 US dollars/barrel, up 6.30% from the previous year.

Overseas mergers and acquisitions are rich in reserves, and production from the Tengo oil field may be released. In 2022, the company acquired two tenge and coastal blocks in Kazakhstan. The geological reserve scale was about 120 million tons, approved by the competent authorities of China and Kazakhstan and implemented by well-known reserve assessment agencies. At present, the production of the Tenge block is on the schedule. In April, Petro, the company's wholly-owned company, won the tender for the Tenge Oilfield well repair project service. The two companies have signed a contract for the well repair project, amounting to 26.266,000 yuan. According to the company's announcement, the output of the Tenge Oilfield from January to July 2022 was 36,500 tons. After the production increase measures are gradually implemented, the production of the Tenge Oilfield is expected to be released.

The profitability of the drilling engineering sector has increased. 2023Q2. The company's oil service business signed a contract amount of 71 million yuan. At the same time, the company operated 54 drilling rigs in the first half of the year, distributed across 13 projects at home and abroad. A total of 399,200 meters was completed. Sector operation and market development progressed smoothly. Overseas assets achieved revenue of 729 million yuan in the first half of the year; furthermore, the company strengthened management and refined KPIs, etc., so the sector's profitability increased.

Investment suggestions: We expect the company's net profit to be 897/12.05/1,437 million yuan respectively in 2023-2025, the EPS corresponding to the current share capital is 2.24/3.01/3.59 yuan/share, and the PE corresponding to the closing price on August 29, 2023 is 9/6/5 times, respectively. Due to the high growth in the company's crude oil production, combined with integrated cost advantages, PE valuation still has room to improve and maintain the “recommended” rating.

Risk warning: the risk of a sharp drop in oil prices; the risk that the exploration process will not meet expectations; the risk that the overseas epidemic will repeatedly affect overseas oil field operations.