Offshore oil engineering is the largest and most powerful general contract for offshore oil and gas engineering in the Asia-Pacific region. CNOOC Engineering is a listed company of CNOOC Holdings. It is the only large-scale engineering general contracting company in China that integrates offshore oil and gas development engineering design, procurement, construction, offshore installation, commissioning, maintenance, liquefied natural gas, offshore wind power, and refining projects. In 2023, the company first appeared on the ENR double list, ranking 68th in the “World's 250 largest international contractors” and 98th in the “World's 250 largest global contractors”. In 2023, the company's contract amount reached 33.986 billion yuan, of which the overseas market's contract amount was 14.176 billion yuan, a record high; by the end of 2023, it had outstanding orders of about 39.6 billion yuan, providing strong support for future workload.

The boom in the oil and gas industry is picking up, and high oil prices are boosting upstream capital expenditure. In 2024, the overall international oil market is in balance, and international geopolitics and central bank policies will have a great impact on crude oil prices. 1) From the demand side, the market expects that the European and American central banks will cut interest rates soon, which will boost demand for crude oil. 2) On the supply side, Russia's oil and gas supply was limited due to the Russian-Ukrainian conflict. “OPEC+” announced that the production reduction agreement will continue until the end of June this year; the Red Sea crisis changed the flow of global crude oil trade and boosted crude oil prices. 3) Inventory side: SPR (strategic oil reserve) inventory was 362 million barrels on March 15, 2024. For most of the past ten years, SPR crude oil stocks have been above 600 million barrels, and the current demand for replenishment is remarkable.

China's oil and gas resources are highly dependent on the outside world, and increasing storage and production is the meaning of energy security. In 2023, China's external dependence on crude oil reached 72.93%, an increase of 1.72 ppct over the previous year; the external dependence on natural gas was 42.2%, an increase of 1.8 pct over the previous year. China's energy security situation is becoming more and more serious. In the future, oil and gas development in unconventional fields such as deep water and deep water is expected to become an inevitable choice for increasing oil and gas storage and production and ensuring energy security. In 2023, China's marine crude oil production exceeded 62 million tons, increasing production by more than 3.7 million tons over the same period last year, accounting for about 87% of the country's crude oil increase. CNOOC's actual capital expenditure in 2023 was 129.6 billion yuan, exceeding the budget of 100-110 billion yuan at the beginning of the year, while the 2024 budget was 125 billion to 135 billion yuan. As the policy of increasing storage and production continues to advance, it is expected that CNPC and Sinopec's capital expenditure will also maintain a high level trend.

The volume of LNG trade continues to grow, and construction of LNG terminals is in full swing. In 2022, global liquefied natural gas trade reached a new record of 401.5 MT, an increase of 25.4 MT over the previous year, with an annual growth rate of 6.8%, up from 4.5% in 2021. By the end of 2022, China had put into operation 25 LNG terminals, with a total receiving capacity of 112 million tons/year. According to incomplete statistics, China still has more than 30 million tons/year LNG receiving stations that have been approved for construction, and LNG terminal construction will maintain a high level of activity.

Investment advice: Increased storage and production will maintain a high level of domestic oil and gas capital expenditure, especially for unconventional oil and gas exploration and development. As a subsidiary of CNOOC Holdings, CNOOC Engineering has obvious advantages and is expected to fully benefit. The company is expected to achieve revenue of 337.56, 371.04, and 40.97 billion yuan in 2024-2026, up 9.8%, 9.9%, and 10.4% year-on-year; net profit to mother is 18.73, 21.06, and 2,666 billion yuan, up 15.6%, 12.4%, and 27.1% year-on-year, corresponding PE is 16, 14, and 11 times, respectively, covered for the first time, and given a “recommended” rating.

Risk warning: the risk of reducing upstream capital expenditure due to falling oil prices; the expansion of new domestic and foreign customers and new orders falling short of expectations; exchange rate risk.