CNOOC:Capital discipline &robust FCF

The bears on CNOOC would argue that the company’s relatively low provenreserve life of 8.4 years makes the case for a significant ramp-up in capex andin-turn implies a challenged free cash flow outlook.

Against this, CNOOC’s new annual capex cap to connected entities (COSL,COOEC etc.) for 2017-19, in our view implies only a modest increase in capexand supports our constructive FCF thesis. Versus peak CNOOC capex ofRmb106 billion in 2013, we expect Rmb50 billion for 2016 (budget max Rmb60billion) and Rmb60/70 billion for 2017/18.

Even assuming US$50 per barrel Brent for 2017-18e, our modelling implies arobust 6% FCF yield for CNOOC (MQ base case 12%, US$65 avg Brent).

Overlaying CNOOC’s low gearing position then implies a high capacity to keepdividends stable -- MQe 2016-18e DPS 30% above consensus, 5% yield.

For sister OFS company COSL (601808 CH, Rmb12.59, Underperform, TP:Rmb5.80) 'more work for same/less $' implies only a modest improvementin revenues. Our 2017-18e EBITDA estimates remain 25% below consensusand we maintain an Underperform recommendation.