CNOOC far outperformed peers in cost control.
Jefferies has noted that it has raised CNOOC's target price 15% to HK$11.75.
According to a research note from Jefferies, in its last two adjustments, it had been raising its target EV/DACF multiple by low quarter point multiples.
Peer EV/EBITDA valuations doubled in 2015, despite damaging balance sheets with negative free cash flow. CNOOC far outperformed its peer group in cost control and free cash flow.
Here's more from Jefferies:
Could we still be too stingy using a 5x (up from 4.5x) EV/DACF multiple? Maybe.
After CNOOC's 2016 strategy session, we increased our target price twice with low little quarter point adjustments to our target EV/DACF multiple (from 4x to 4.25x to 4.5x). In 2015, in a collapsed oil price environment, CNOOC recorded ~US$4.3B in free cash flow while its peer group was deeply negative, leveraging up their balance sheets.
Consensus peer group EV/EBITDA (close proxy to EV/DACF) multiples doubled from ~6x to ~12x. We do not think we are being aggressive pushing up our target multiple a half point to 5x, still a discount to peer group average of ~6x prior to 2015.
We believe the market is erroneously afraid of impairments, especially of Nexen's oil sands assets. Impairments are non-cash items that the entire industry will suffer this year. We don't care about non-cash items; we actually welcome them for lowering taxes. We also believe that the market has already more than impaired CNOOC for Nexen with P/B falling from 1.7x to 0.9x while peers re-rated to 2x.
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