CNOOC (H-share) is a Hong Kong-listed HK$1.19 trillion ($191 billion) market capitalisation company that mainly engages in exploration, development, production and sale of crude oil and natural gas. CNOOC is the largest producer of offshore crude oil and natural gas in China and one of the world’s largest independent oil and gas exploration and production companies. The company derives nearly 80% of its revenue from crude oil and liquids, with the remainder from natural gas. As a result, revenue is sensitive to the realised sales prices of crude oil and natural gas.
The case for CNOOC is that it is a strong dividend stock to hold, with strong diversification benefits, given its commodity-focused business. China’s risk-free rate is currently 1.81%, while both CNOOC’s trailing and forward dividend yields are at a healthy 5.79%, indicating it is attractive, particularly for dividend-based investors. Like most dividend-based strategies, if the price of oil and natural gas spikes downwards, which will likely lead to a drop in CNOOC’s share price, investors can accumulate shares because its dividend yield will rise. However, investors need to note that if they are purchasing shares in CNOOC for diversification purposes, then accumulating too much or above a certain threshold might be detrimental to their overall strategy. Conversely, above a certain price at which dividend yields are no longer attractive, investors should consider selling or reducing their holdings.
Chart 1 shows CNOOC’s historical dividend yield over the past 10 years, of which it has paid consistently every semi-annual period. The exception was in 2022, when the company paid special dividends following a successful recovery in oil prices, which caused the dividend yield to spike. Although the dividend yield appears more volatile than that of a typical blue-chip stock, the average dividend yield, excluding the special dividend, has been high at 6.12% over this 10-year period. The range of dividend yields, however, is wide, with the lowest being 2.43% and the highest 22.33%. There are two things to note here: first, the lowest is still above the risk-free rate, and the highest is due to special dividends, which means investors could also receive special dividends in the future. Some stocks’ investment returns differ significantly when dividends are accounted for, and CNOOC is one of them. Over the same 10-year period, the price-only return is 11.59% CAGR, while the dividend-reinvested return is almost double, at 20.14% CAGR. Similarly, over a five-year period, the price-only return is 22.57% CAGR, while the dividend-reinvested return is at a whopping 34.89% CAGR.
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Financially, CNOOC has performed well, except for 2020, when oil prices were negative. The company’s strong operating cash flow generation reinforces its ability to pay attractive dividends, as shown in Chart 2. In terms of margins, which represent the company’s moat, CNOOC has shown steady, healthy growth over the past 10 years. The company’s gross margin, operating margin, and net margin have grown from 50.7%, 29.5%, and 21.9% in 2016 to 52.2%, 44.6% and 32.7%, respectively.
The company’s financial safety is exemplary, as evidenced by both its liquidity and solvency. CNOOC’s cash and current ratios are 1.89 and 2.32 times, respectively, well above the benchmark of 1 time. It is also net cash, has an Altman Z-score of 3.5, which is above the benchmark of 3, and has an interest coverage ratio of over 60 times. CNOOC also trades cheaply relative to regional peers, with 45%, 27%, 47% and 23% discounts to its forward P/E, forward EV/Ebitda, forward EV/Ebit, and forward EV/Revenue ratios, respectively, indicating it is an attractive pick-up compared to peers.
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Sentiment-wise, there are 19 “buy” calls, two “hold” calls and one “sell” call for CNOOC from analysts, with an average target price of over 5% above its current trading price of HK$23.58 over the next 12 months. Based on a methodology that uses multiple valuation methods (see Charts 3a and 3b), the company’s fair value, including dividend reinvestments, is HK$28.40, which is over 20% above its current trading price. Singapore investors seeking to purchase this stock can do so without much hassle through their international trading account, as the company is a Chinese stock listed on the Hong Kong stock exchange.
