Incident: On May 11, 2024, CNPC participated in the fifth (+) and sixth round of oil and gas block tenders from the Iraqi Ministry of Petroleum and successfully won the bid to obtain development rights for Iraq's East Baghdad FieldNorthernExtension block (also known as the North Extension E. Baghdad block, “EBN block”) and Middle Euphrates block (also known as the MiddleFurat block, “MF block”).

After winning the bid, the company will carry out the next contract negotiations with the Iraqi Ministry of Petroleum as soon as possible, taking into account the relevant policies of Iraq's oil and gas field development and the company's actual situation.

Comment:

Iraq re-tendered after a lapse of six years and implemented a profit sharing agreement. Prior to this round of tendering, the Iraqi Ministry of Petroleum had completed four rounds of tenders in 2008, 2009, 2010, and 2012, and signed a technical service contract (TSC) with the contractor, giving the contractor a fixed fee for each barrel of oil. In 2018, Iraq introduced profit sharing agreements (i.e. exploration, development and production contracts (EDPC) or development and production contracts (DPC), which can be regarded as product sharing contracts) in the fifth round of tenders. In 2023, Iraq announced the fifth (+) and sixth rounds of tenders for a total of 30 projects. The winning company or consortium must sign an EDPC or DPC contract. The main terms of the contract include:

1) Contract period: EDPC has an exploration period of 5 to 9 years and a development period of 25 years. The development period for DPC is 20 years, with the possibility of extending it by 5 years.

2) Recovery costs: The contractor bears the oil investment and has the right to recover the cost of oil. For certain expenses classified as supplementary expenses, the contractor has the right to expedite recovery of these costs and receive interest. Oil costs are paid from net certified revenue (certified revenue minus royalties), and supplementary expenses are paid from net certified revenue minus oil costs and compensation.

3) Other expenses: The EDPC contract requires the contractor to pay a signing fee, as well as additional fees after commercialization is announced. The DPC contract requires the contractor to pay a signing fee and further charges after the first commercial production date. These fees are not included in recovery costs and are not tax deductible.

4) Taxes: The contractor is required to pay 15% of the certified revenue as a royalties. They also pay income tax locally in Iraq.

5) Remuneration: Payable as a percentage (bid) of the remaining net accredited revenue (certified revenue minus royalties minus oil costs paid). The bidding target for this round is the percentage of remuneration received by the contractor, and the Iraqi Ministry of Petroleum will accept the bid for the lowest remuneration percentage in the contract area.

6) Method of payment: Unless Iraq chooses to pay in cash, oil recovery costs, supplementary costs, and contractor compensation will be paid for the export of oil. These payments occurred after the first commercial production date.

7) Other obligations: The contractor will be obligated to provide training and technology transfer and hire local personnel and procure local goods and services. The contractor will contribute to the infrastructure fund, and these contributions will be treated as oil costs.

China Man Petroleum won the bid for only two DPC projects. China Man Petroleum successfully won the bid for the EBN block and the MF block in the fifth (+) and sixth rounds of oil and gas block tenders by the Iraqi Ministry of Petroleum. The EBN block is the northern edge of the East Baghdad oil field. The block covers an area of 231 square kilometers, and 7 wells have been drilled.

The East Baghdad oil field covers an area of 822 square kilometers. China Zhenhua Petroleum won the bid for the block in 2018. The oil field was put into production in 2019, and the daily production of the oil field reached 25,000 barrels in early 2022. The MF block covers an area of 1,073 square kilometers, and 6 wells have been drilled. The above two blocks are DPC contracts. According to uniform contract terms, the development period is 20+5 years.

The integration of exploration and development and drilling equipment services is expected to better guarantee the profit level of new projects. At the end of October 2023, China Man Petroleum obtained the qualification for oil and gas field development and operation in Iraq. In May 2024, China Man Petroleum successfully won the bid for two oil and gas field block development contracts in Iraq. Relying on an integrated business layout, the company will give full play to its technical and management advantages and collaborative efficiency capabilities to achieve efficient development and utilization of oil and gas blocks in Iraq, and inject new impetus into the company's crude oil extraction business and subsequent oil and gas production.

Profit forecast and investment rating: We predict that the company's net profit for 2024-2026 will be 10.89 billion yuan, 13.51 and 1,523 billion yuan, respectively, with year-on-year growth rates of 34.4%, 24.0%, and 12.8%, and EPS of 2.72, 3.38 and 3.81 yuan/share, respectively. According to the closing price of A shares on May 15, 2024, PE is 9.32, 7.51, and 6.66 times, respectively, and PB is 3.04, 2.32, and 1.85 times, respectively. Considering that the company benefits from high crude oil prices and rapid production growth, the company is expected to continue to perform well in 2024-2026, and we maintain our “buy” rating.

Risk factors: economic fluctuations and the risk of falling oil prices; the risk that the company will launch production less than expected; economic sanctions and geopolitical risks.