Event: when the company released its 2019 semi-annual report, 19H1 achieved a total operating income of 2.67 billion yuan (YOY+24.32%) and a net profit of 371 million yuan (YOY+53.68%), which was in line with expectations.

The growth of production wells in Howard and Borden oilfields is the core reason for the increase in productivity: as an oil and gas mining company that enjoys the core block of shale oil production in North America, the company is very sound in the promotion of oil and gas production business. 19Q2 crude oil / natural gas production (sales) is 366.5 / 709400 barrels respectively, up 35.54% and 50.17% year-on-year, and 0.25% and 38.69% month-on-month.

The increase in oil and gas production is mainly related to the growth of production wells in Howard and Borden oilfields:

In the second half of 2018, the company increased its capital investment in Howard and Borden county oilfields. As of 2019Q1, the number of production wells in this area reached 345, an increase of 31.18% compared with 18Q2 (263), while production wells in Hoople oilfield remained at a relatively stable level all the year round.

The floating loss caused by hedging loss decreased, and the company's cash flow and production were normal: the core reason why the company's performance in the first quarter was much lower than expected was the hedging floating loss caused by the fall in crude oil prices, resulting in an operating profit of-204 million yuan. if excluding the impact of floating losses (- 630 million yuan), the operating profit is 426 million yuan. 19Q2 hedging has a certain floating profit, excluding the net income of fair value changes, the operating profit is about 506 million yuan, basically in line with expectations. It must be pointed out that as an oil and gas production enterprise, it is a common practice in the industry to adopt hedging to lock in profits. the floating losses or profits caused only affect the profit statement but not the actual cash flow. Although the company still needs financing to make up for the gap of capital investment, after the production scale expansion slows down and the hedging tools are used reasonably, the free cash flow of the enterprise is expected to become positive gradually.

Profit forecast: according to the company's H1 operation, we adjust the homing net profit for 2019-2021 to 1.2741,580,917 million yuan, corresponding to PE times that of 11-9-7, maintaining the "buy" rating.

Risk hint: the risk of falling crude oil prices