Incident: The company recently released its annual report. The company achieved revenue of 6.070 billion yuan for the full year of 2019, an increase of 26.97% over the previous year, and achieved net profit of 1,078 billion yuan, an increase of 79.37% over the previous year; it achieved earnings of 0.1,585 yuan per share, an increase of 79.50% over the previous year
The rise in oil prices in 19Q4 caused losses, and the company's operations remained steady: in the fourth quarter of 2019, the company achieved revenue of 1,690 million yuan and net profit of 76.97 million yuan. On a month-on-month basis, revenue remained stable, but 19Q4 net profit declined sharply month-on-month. The reason behind this was mainly the fluctuation and loss caused by hedging — net income from changes in fair value in 19Q3 was 208 million yuan, while in Q4 due to the continuous rise in crude oil prices, the price locked in hedging was lower than the actual price at the end of the quarter, causing the figure to be only -226 million yuan; furthermore, the company achieved net profit of -226 million yuan at the end of the quarter; furthermore, the company achieved revenue of only -226 million yuan; furthermore, the company's 19Q194 net profit was lower than the actual price at the end of the quarter; furthermore, the company's 19Q194 net profit declined sharply from the month-on-month period. Financial expenses increased somewhat month-on-month. Judging from the cash flow statement, operations in 19Q4 were very steady, with net operating cash flow reaching 1,225 million yuan. Through steady operation throughout the year, positive free cash flow was achieved at 387 million yuan.
Crude oil prices have plummeted, testing the operating capacity of shale oil companies: since March 2020, crude oil prices have begun to plummet. This has mainly affected the operation of shale oil companies from two aspects: 1) directly affects the sales revenue of oil and gas and related sales strategies; 2) the collapse in oil prices caused the financing costs of shale oil companies that rely on bond financing to increase financing costs and increase debt repayment pressure. According to our statistics, the total amount of maturing debt of shale oil and gas companies reached nearly 100 billion US dollars in 2019-2024. The collapse in oil prices posed a threat to the survival of most shale oil companies. The company's oil and gas assets are located in the Midland region, which belongs to the Permian Basin of the United States. This location is the region with the lowest cost of shale oil extraction - the full cost in 2019 was about $30 per barrel, and the overall ability to withstand falling oil prices is strong. Furthermore, the company's non-public offering of 500 million US dollars of high-yield bonds in May 2019 is expected to protect the company's operations on a capital level.
Profit forecast: As crude oil prices fell more than expected, we revised our net profit to $1,237/1,384 million (original value was 1,792/1,866 yuan) in 2020-2021, and increased net profit of $1,562 million for 2022. The corresponding EPS was 0.18/0.20/0.23 yuan respectively, and PE was 10/9/8 times respectively adjusted to 2.70 yuan to maintain the “buy” rating.
Risk warning: Crude oil has been at an extremely low level for a long time, and shale oil companies have drastically defaulted.