CNOOC:2016Strategy review

Management guided down on production in 2016/17 and cut capex byc.10% in 2016, in line with our expectation. We believe hands are tied interms of what management can do to further reduce costs and bolstercashflow. Also, we are arguing it could benefit very little from astrengthening USD. The two accidents within seven months in NexenCanada might indicate unsuccessful consolidation between CNOOC andNexen, and more negatives could potentially arise. Maintain SELL.

First production decline since IPO listing; Capex cut looks light

Management guidance came in within our expectation, with the companyguiding down on production in 2016/17, due to reduced contributions frominfill drilling and adjustment projects, showing the first production decline in2016 since its IPO listing. Also, the company guides to cut 2016 capex tobelow Rmb60bn, from Rmb67bn in 2015. The c.10% cut looks a bit light to usgiven its global peers are cutting by over 20% on average in 2016.

M&A and hefty impairment charge are both off the table

The timing does not appear ideal for the company to strike any deals, withBeijing investigating overseas acquisitions completed years ago as part of thegraft probe. For a similar reason, we believe the company won’t provision anysignificant impairment charge, which is often associated with “loss of stateassets” for Chinese SOEs and is a quite politically sensitive issue.

Not a USD appreciation play

We sensed some investors hiding behind the name as a USD play, which we don’tagree with. It’s true that the company receives payments priced off USD (settled inRMB), but a big chunk of its cost base (+60%) is also in USD, offsetting the toplinegains. Besides, almost all of its debt is USD-denominated, thus, the companycould benefit very little from a strengthening USD. An appreciating USD shouldhave a neutral impact on the company.

Two accidents within seven months in Nexen Canada; Retain SELL

With limited headroom to further slash costs, the company is vulnerablyexposed to a decade-low oil price. Also, two accidents in Nexen Canada withinseven months might indicate unsuccessful consolidation between CNOOC andNexen. Although the deal was closed three years ago, the negatives have yetto be fully priced in with more issues potentially a