Incident: CNOOC releases its 2023 annual report. During the reporting period, the company achieved operating income of 30.752 billion yuan, an increase of 4.75% over the previous year; net profit attributable to shareholders of listed companies was 1,621 billion yuan, an increase of 11.08% over the previous year. Net profit after deducting non-return to mother was 1,237 billion yuan, an increase of 44.85% over the previous year.

Domestic revenue growth has been steady, and the gross margin of overseas projects has increased. In the reporting period, the company achieved domestic revenue of 24.759 billion yuan, a year-on-year increase of 11.56%, and a gross profit margin of 9.44% (-0.65pct); overseas revenue of 5.993 billion yuan, a year-on-year decrease of 16.35%, and a gross profit margin of 16.15% (+10.57pct).

By industry, offshore engineering revenue was 22.62 billion yuan, up 10.79% year on year, with gross profit margin of 8.9% (-2.51 pct); non-marine engineering revenue was 8.130 billion yuan, down 9.06% year on year, with a gross profit margin of 15.90% (+12.43pct). The year-on-year decline in revenue from overseas projects was mainly due to projects such as Hong Kong and North American Shell LNG, which were at their peak in construction in 2022, entering the final stage in 2023. During the reporting period, the company achieved the completion and delivery of the North American Shell LNG project, which was the world's first integrated construction of an LNG modular plant, bringing high quality delivery and improved profitability. At the same time, it won bids for overseas general contracting projects such as Qatar ISND5-2, achieving an effective breakthrough from an international engineering subcontractor to a general contractor, and the profitability of overseas projects is expected to further improve.

Expenses were well controlled, and net cash flow from operating activities reached a record high. The company's management expenses, R&D expenses, sales expenses, and financial expenses accounted for 4.8% of total revenue during the reporting period. According to the operating plan disclosed in the company's annual report, the company will endeavor to keep the total sales expenses, management expenses, R&D expenses, and financial expenses within 5% of operating income. The company's net cash flow from operating activities during the reporting period was 5.125 billion yuan, an increase of 54.67% over the previous year, the highest since 2015.

CNOOC's new target to increase storage and production provides strong support. In 2023, the company completed processing volume of 472,000 tons of steel, an increase of 25% over the previous year. The outstanding orders at the end of 2023 were about 39.6 billion yuan, an increase of 11.55% over the end of 2022. The company's sales to CNOOC during the reporting period were 19.038 billion yuan, accounting for 64.88% of total annual sales. CNOOC's offensive project to increase storage and production has clarified the new target of “producing 60 million tons of domestic oil by 2030 and 40 billion square meters of domestic natural gas by 2035”, providing strong support for future workloads.

The company's profit forecast and investment rating: With the delivery and undertaking of the company's major overseas projects, the company's global competitiveness has further improved, and domestic CNOOC's capital expenditure is more certain. We expect the company's net profit to be 18.89, 20.78, and 2,149 billion yuan in 2024-26, corresponding to EPS of 0.43, 0.47 and 0.49 yuan, respectively, maintaining a “highly recommended” rating.

Risk warning: Major changes in industry policies, technological progress falling short of expectations, sharp declines in international oil prices, and capital expenditure of upstream oil and gas companies falling short of expectations.