Incident: The company released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved operating income of 3.7 billion yuan, up 17% year on year, and realized net profit of 81 million yuan to mother, an increase of 68% year on year.

In the first quarter of 2024, the company achieved operating income of 81 million yuan, a year-on-year decrease of 11%; realized net profit to mother of 170 million yuan, a year-on-year decrease of 20%.

Results for the first quarter fell short of expectations. Contracts and crude oil reserves may be mainly due to the high year-on-year increase in the company's performance in 2023, mainly due to the continuous increase in crude oil exploration business. The oil production volume of the company's Wensu project in 2023 was about 580,000 tons, an increase of 34% year on year; achieved crude oil sales of 520,000 tons, an increase of 31% year on year. The Tenge block produced 100,000 tons of crude oil, with a total output of 680,000 tons.

2024Q1 performance declined year-on-year. On the one hand, the company's drilling plant sector is in the transition period between old and new contracts, and the revenue will be relatively prominent; on the other hand, based on the average price of Brent crude oil at $81.76 per barrel in 2024Q1 and the production of Wensu Oilfield in the current quarter, we believe that the company has accumulated a certain inventory of crude oil, and the company's 2024Q1 inventory increased by 160 million yuan to 750 million yuan compared to the 2023 annual report.

Oil prices are rising at the center, and profits are expected to recover and increase in the second quarter

The company's crude oil production growth maintained a good momentum. 2024Q1's Wensu project achieved crude oil production of 155,000 tons, an increase of 19% over the previous year; the crude oil production of the tenge project was 43,000 tons, an increase of 147% over the previous year. Moreover, by the end of April, the average price of 2024Q2 Brent crude oil had reached 89.05 US dollars/barrel, up 9% from 2024Q1 and 15% from 2023Q1. The crude oil sales business of 2024Q2 is expected to rise sharply. Furthermore, after the completion of key tasks such as moving and installing the company's drilling engineering sector, inspection and drilling, the sector's profit is also expected to improve significantly in the second quarter.

The acquisition of the tenge block was consolidated to expand overseas oil and gas growth

In November 2023, the company completed the Tenge Oilfield acquisition procedure, indirectly held 53.6% of the rights in Tenge Oilfield, and consolidated and offset the drilling engineering services of the previous Tenge Oilfield procurement and listed companies. The total net profit to the mother was reduced by 54.39 million yuan. Kazakhstan's Tenge oil field has a total C1+C2 geological reserve of 78.54 million tons, and production is growing rapidly, which is expected to continue to contribute to the increase in performance. In addition, the company's Wensu Phase II 817 square kilometer exploration project continues to advance.

Profit Forecasts, Valuations, and Ratings

We expect the company's revenue for 2024-26 to be 47/55,63 billion yuan, respectively, with corresponding growth rates of 25%/18%/15%, respectively, net profit to mother of 13.0/15.2/17.01 billion yuan, corresponding growth rates of 60%/17%/13%, EPS 3.24/3.79/4.28 yuan/share, respectively, and a 3-year CAGR of 28%. In view of the rapid progress of the company's core exploration business and large room for growth, we gave the company 10 times PE in 24 years, corresponding to a target price of 32.4 yuan, maintaining a “buy” rating.

Risk warning: sharp drop in oil prices, undermining progress in Wenbei Oilfield, risk of information asymmetry in overseas blocks