We believe the low volume growth in 2023 and the impairment of Iraq assets have been gradually digested by the market. We slash our 2024E/25E earnings forecast by 26%/28% due to lower oil & gas output and higher production cost assumptions. On the positive side, we expect the commencement of major central processing facilities in Iraq Block 9 in late Apr will boost the daily designed output capacity in Iraq's Block 9 to 100k/boed this year (currently ~75k). We estimate this should help UEG's total daily working interest volume growth to accelerate to 10%/11% in 2024E/25E, versus 0.2% in 2023. Given the capex guidance of US$880-930mn (~HK$6.9-7.3bn) this year, we still expect UEG to achieve positive free cash. Our TP is revised down to HK$0.96 from HK$1.45, as we revise down our target P/E (2024E) to 8x (previously 10x 2023), representing a 40% discount to the historical average to reflect the reduction of reserves. Our Brent price assumption in 2024E-25E is US$87 per barrel.

Impairment of Iraq assets affected 2P reserves. UEG made a total impairment of HK$5.1bn in 2023 (versus HK$828mn in 2022). Among this, one-off oil & gas reserves impairment and exploration dry well write-off amounted to ~HK$4.4bn, mainly due to (1) the decrease in formation pressure in the main Yamama reservoir, and (2) the physical properties and connectivity of the Mishrif reservoir being less optimal than expected. This resulted in a 33% YoY decline in Iraq's 2P reserves (i.e. proven reserves + probable reserves) by end-2023

Oil & gas output growth to accelerate in 2024E. UEG targets to achieve average daily working interest output of 101.6-113.5k barrels of oil equivalent per day (boed), implying output growth (1% to 13% YoY) this year (versus only 0.2% growth in 2023).

Low visibility on petrochemical trading business. UEG started the petrochemical trading business in 2023, with substantial revenue contribution of HK$3.2bn (23% of total revenue). The segment was close to breakeven at the EBIT level. We expect the segment will continue to contribute substantial revenue, but with less visibility on earnings.

Risk factors: 1) High volatility of intra-day share price on some trading days; 2) low visibility on trading business; 3) decline in crude & gas price; 4) further impairment loss; 5) rising receivables.