offshore oil engineering - credit suisse

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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23 September 2014

Asia Pacific/China

Equity Research

Oil & Gas Equipment & Services

Offshore Oil Engineering

(600583.SS / 600583 CH) INITIATION

A pure play on CNOOC's capex trend

■ A key beneficiary of CNOOC’s deepwater development. COOEC is the

offshore engineering construction arm of CNOOC Group, providing full EPCI

services to CNOOC as well as international oil majors. On top of CNOOC’s

20+ new projects set to come on stream in 2015-16, CNOOC’s development

on its four deepwater discoveries in South China Sea in the next five years

should be a key driver to COOEC’s revenue growth, in our view. In addition,

contrary to market perception, our analysis on CNOOC’s reserve life and

F&D cost trend suggests that its capex spend should remain elevated

beyond 2015. We think COOEC is a pure play on CNOOC’s capex vs COSL.

■ Zhuhai base will increase COOEC’s deepwater capability and double

its construction capacity. COOEC is building up its deepwater capability to

meet with CNOOC’s deepwater exploration effort. Its Zhuhai deepwater

equipment base is currently into Phase II of construction to be completed by

end-2014. The Zhuhai base alone will bring in Rmb2.2 bn of incremental

revenue in 2015, based on our estimate. Given its location and favourable

climate condition it should be highly competitive among global peers.

■ Overseas expansion. COOEC has expanded its international business,

winning EPC contracts from Ichthys LNG project in Australia and Yamal

LNG in Russia. Overseas only contributes to 10% of COOEC’s revenue

currently but the company targets a 50% contribution in the long run.

■ Initiate coverage with OUTPERFORM, TP Rmb10 (24% potential upside).

Our Rmb10 TP is based on 10x 2015E P/E, in line with our target multiple

for COSL and at a discount to global EPC peers. We believe COOEC will

benefit from the upcoming SH-HK Stock Connect as global investors look for

ways to play the deepwater South China Sea theme. Risks include cutback

in CNOOC’s capex spend, and a slowdown in deepwater development effort.

Share price performance

80

100

120

140

160

4

6

8

10

Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the

MSCI CHINA IDX which closed at 65.12 on 22/09/14

On 22/09/14 the spot exchange rate was Rmb6.14/US$1

Performance over 1M 3M 12M Absolute (%) 6.6 11.4 9.0 — Relative (%) 9.5 3.9 5.1 —

Financial and valuation metrics

Year 12/13A 12/14E 12/15E 12/16E Revenue (Rmb mn) 20,339.2 23,460.2 26,181.4 29,336.5 EBITDA (Rmb mn) 4,194.9 5,407.1 6,549.1 7,829.6 EBIT (Rmb mn) 3,254.6 4,219.8 5,095.2 6,142.4 Net profit (Rmb mn) 2,744.2 3,588.9 4,289.2 5,162.8 EPS (CS adj.) (Rmb) 0.69 0.81 0.97 1.17 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 0.80 0.96 1.13 EPS growth (%) 216.3 17.7 19.5 20.4 P/E (x) 11.7 10.0 8.3 6.9 Dividend yield (%) 1.2 1.6 1.9 2.3 EV/EBITDA (x) 8.1 5.8 4.6 3.5 P/B (x) 1.9 1.8 1.5 1.3 ROE (%) 20.4 19.8 20.0 20.4 Net debt/equity (%) net cash net cash net cash net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Rating OUTPERFORM* Price (22 Sep 14, Rmb) 8.08 Target price (Rmb) 10.00¹ Upside/downside (%) 23.8 Mkt cap (Rmb mn) 35,725 (US$ 5,820) Enterprise value (Rmb mn) 31,134 Number of shares (mn) 4,421.35 Free float (%) 41.0 52-week price range 9.30 - 7.04 ADTO - 6M (US$ mn) 35.2

*Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

Research Analysts

Horace Tse

852 2101 7379

[email protected]

Thomas Wong

852 2101 6738

[email protected]

Kelly Chen

852 2101 7079

[email protected]

23 September 2014


(600583.SS / 600583 CH) 2

Focus table and charts Figure 1: CNOOC’s current deepwater projects in Offshore China

Project CNOOC stake

Year of

discovery Start-up

Water depth

(meters) Stage Remarks

Liwan 3-1 51% 2006 2014 1,500 Production

Liuhua 34-2 100% 2009 2016 1,145 Development Scheduled to tie in to Liwan infrastructure in 2H14

Liuhua 29-1 100% 2010 2017 723 Development Also to tie in to Liwan infrastructure in 2016/17

Liuhua 29-2 100% 2012 n/a 765 Development

Lingshui 17-2 100% 2014 n/a 1,500 Exploration CNOOC’s first 100%-owned deepwater project

Source: Wood Mackenzie, company data, Credit Suisse estimates

Figure 2: A structural increase in CNOOC’s development

cost—cost of new reserves on the rise

Figure 3: A continued increase in CNOOC’s development

wells drilled

8

10

12

14

16

18

20

22

2006 2007 2008 2009 2010 2011 2012 2013 2014E

Development cost - Offshore China (3yr avg.)

(US$/boe)

138 113 121 115

284 335

370 330

509

680

780

-

100

200

300

400

500

600

700

800

900

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E

Development wells drilled - Productive

(No. of wells)

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 4: Upon completion, Zhuhai base to double

COOEC’s construction capacity

Figure 5: COOEC P/E valuation vs global peers—at a

discount

140

120

-

50

100

150

200

250

300

Tanggu Qingdao Zhuhai

60

200

(ktpa)

260

Phase I & II

Phase III & V

8.3 8.7 9.3 10.0

12.7

22.5

25.7

-

5

10

15

20

25

30

COOEC @Current

price

COSL EuropeanOFS

COOEC @CS TP

USintegrated

OFS

Japan EPC McDermott

2015 P/E (x)

Source: Company data, Credit Suisse estimates Source: Datastream, company data, Credit Suisse estimates

23 September 2014


(600583.SS / 600583 CH) 3

A pure play on CNOOC's capex trend COOEC is the offshore engineering construction arm of CNOOC Group, providing full

EPCI services (Engineering, Procurement, Construction and Installation) to CNOOC Ltd

as well as international oil majors. Between the two oilfield service entities COSL and

COOEC within the CNOOC Group, COOEC is primarily engaged in the development &

production capex cycle of CNOOC. In our view, COOEC is a pure play on CNOOC’s

capex cycle vs COSL.

A key beneficiary of CNOOC deepwater development

We believe the market is excited about COOEC as CNOOC enters the peak development

capex cycle in the 12th Five-Year Plan. CNOOC has 20+ new projects on the pipeline set

to come on stream in 2015-16 in order to achieve its 6-10% CAGR production growth

target over 2011-15. We take a step further and conclude that beyond 2015, COOEC is

likely to continue to benefit from CNOOC’s capex boom.

In our view, CNOOC will focus on domestic deepwater in the 13th Five-Year Plan, and

COOEC is likely to benefit from CNOOC’s deepwater capex boom over the next five

years. We believe CNOOC’s development on its four deepwater discoveries in South

China Sea over the next five years should be a key driver to COOEC’s revenue growth. In

addition, contrary to market perception, our analysis on CNOOC’s historical reserve life

and F&D cost trend suggests that its capex spend should remain elevated beyond 2015.

Zhuhai base will increase COOEC’s deepwater

capability and double its capacity

COOEC is building up its deepwater capability to meet with CNOOC’s deepwater

exploration effort. Its Zhuhai deepwater equipment base is currently into Phase II of

construction which is expected to complete by the end of 2014. The Zhuhai base alone will

bring in Rmb2.2 bn of incremental revenue in 2015, based on our estimates. The Zhuhai

base will be ranked #1 globally in terms of capacity, and given its location and favourable

climate condition it should be highly competitive among global peers.

Overseas expansion

COOEC has expanded its international business over the past two years, winning EPC

contracts from Ichthys LNG project in Australia and Yamal LNG in Russia. Overseas only

contributes to 10% of COOEC’s revenue currently but the company targets a 50%

contribution in the long run. The company is bidding for more than Rmb50 bn worth of

overseas contracts.

Initiate coverage with OUTPERFORM, TP Rmb10

Our Rmb10 target price (24% potential upside) is based on 10x 2015E P/E, in line with our

target multiple for COSL and at a discount to global EPC peers. We believe COOEC will

benefit from the upcoming Shanghai-HK Stock Connect as global investors look for ways

to play the deepwater South China Sea theme. Risks include a cutback in CNOOC's

capex spend, and a slowdown in CNOOC’s deepwater development effort.

23 September 2014


(600583.SS / 600583 CH) 4

Offshore Oil Engineering Co. Ltd. 600583.SS / 600583 CH Price (22 Sep 14): Rmb8.08, Rating: OUTPERFORM , Target Price: Rmb10.00, Analyst: Horace Tse

Target price scenario

Scenario TP %Up/Dwn Assumptions

Upside 15.00 85.64 CNOOC capex to grow 10% p.a. beyond 2015

Central Case 10.00 23.76 CNOOC capex to maintain at 2015 levels

Downside 5.00 (38.12) CNOOC capex to decline 15% p.a. beyond 2015

Key earnings drivers 12/13A 12/14E 12/15E 12/16E

Revenue growth (%) 64.3 15.3 11.6 12.1 Net profit growth (%) — — — — OP margin (%) — — — — Net margin (%) 223.6 30.8 19.5 20.4 15.2 17.4 18.8 20.3

Income statement (Rmb mn) 12/13A 12/14E 12/15E 12/16E

Sales revenue 20,339 23,460 26,181 29,337 Cost of goods sold 15,564 17,315 18,937 20,785 SG&A 1,075 1,674 1,925 2,149 Other operating exp./(inc.) (549) (989) (1,283) (1,481) EBITDA 4,195 5,407 6,549 7,830 Depreciation & amortisation 995 1,241 1,507 1,741 EBIT 3,255 4,220 5,095 6,142 Net interest expense/(inc.) 130.0 95.1 50.8 40.5 Non-operating inc./(exp.) 132.4 134.8 46.3 25.7 Associates/JV — — — — Recurring PBT 3,257 4,260 5,091 6,128 Exceptionals/extraordinaries — — — — Taxes 505.0 660.4 789.3 950.0 Profit after tax 2,752 3,599 4,301 5,178 Other after tax income — — — — Minority interests 7.8 10.2 12.2 14.7 Preferred dividends — — — — Reported net profit 2,744 3,589 4,289 5,163 Analyst adjustments — — — — Net profit (Credit Suisse) 2,744 3,589 4,289 5,163

Cash flow (Rmb mn) 12/13A 12/14E 12/15E 12/16E

EBIT 3,255 4,220 5,095 6,142 Net interest — — — — Tax paid — (660.4) (789.3) (950.0) Working capital (369) 3,885 (74) (86) Other cash & non-cash items 349 1,362 1,544 1,754 Operating cash flow 3,235 8,806 5,776 6,860 Capex (1,516) (4,000) (4,000) (3,000) Free cash flow to the firm 1,720 4,806 1,776 3,860 Disposals of fixed assets — — — — Acquisitions — — — — Divestments 39.9 277.5 — — Associate investments — — — — Other investment/(outflows) (3,967) 19 62 72 Investing cash flow (5,443) (3,703) (3,938) (2,928) Equity raised — — — — Dividends paid (95.7) (578.2) (691.0) (831.7) Net borrowings (101.6) — — — Other financing cash flow 3,151 (113) (113) (113) Financing cash flow 2,953 (691) (804) (945) Total cash flow 745 4,412 1,034 2,988 Adjustments (1.2) 11.4 — — Net change in cash 744 4,423 1,034 2,988

Balance sheet (Rmb mn) 12/13A 12/14E 12/15E 12/16E

Cash & cash equivalents 1,780 6,203 7,237 10,225 Current receivables 4,624 5,446 6,057 6,765 Inventories 1,716 1,928 2,152 2,411 Other current assets 4,719 610 610 610 Current assets 12,838 14,187 16,057 20,012 Property, plant & equip. 10,965 13,789 16,335 17,648 Investments 70.7 70.7 70.7 70.7 Intangibles 1,917 1,864 1,810 1,757 Other non-current assets 2,313 2,023 2,023 2,023 Total assets 28,104 31,933 36,295 41,510

Accounts payable 5,633 6,427 7,173 8,037 Short-term debt — — — — Current provisions — — — — Other current liabilities 3,245 1,775 1,791 1,807 Current liabilities 8,878 8,202 8,964 9,845 Long-term debt 132 1,612 1,612 1,612 Non-current provisions — — — — Other non-current liab. 2,501 2,504 2,506 2,508 Total liabilities 11,511 12,318 13,082 13,965 Shareholders' equity 16,594 19,605 23,203 27,534 Minority interests 10.2 10.2 10.2 10.2 Total liabilities & equity 28,104 31,933 36,295 41,510

Per share data 12/13A 12/14E 12/15E 12/16E

Shares (wtd avg.) (mn) 3,978 4,421 4,421 4,421 EPS (Credit Suisse) (Rmb)

0.69 0.81 0.97 1.17 DPS (Rmb) 0.10 0.13 0.16 0.19 BVPS (Rmb) 4.17 4.43 5.25 6.23 Operating CFPS (Rmb) 0.81 1.99 1.31 1.55

Key ratios and valuation

12/13A 12/14E 12/15E 12/16E

Growth(%) Sales revenue 64.3 15.3 11.6 12.1 EBIT 163 30 21 21 Net profit 224 31 20 20 EPS 216 18 20 20 Margins (%) EBITDA 20.6 23.0 25.0 26.7 EBIT 16.0 18.0 19.5 20.9 Pre-tax profit 16.0 18.2 19.4 20.9 Net profit 13.5 15.3 16.4 17.6 Valuation metrics (x) P/E 11.7 10.0 8.3 6.9 P/B 1.94 1.82 1.54 1.30 Dividend yield (%) 1.24 1.62 1.93 2.33 P/CF 9.9 4.1 6.2 5.2 EV/sales 1.68 1.33 1.15 0.92 EV/EBITDA 8.12 5.76 4.60 3.46 EV/EBIT 10.5 7.4 5.9 4.4 ROE analysis (%) ROE 20.4 19.8 20.0 20.4 ROIC 21.0 23.8 26.4 28.4 Asset turnover (x) 0.72 0.73 0.72 0.71 Interest burden (x) 1.00 1.01 1.00 1.00 Tax burden (x) 0.84 0.84 0.84 0.84 Financial leverage (x) 1.69 1.63 1.56 1.51 Credit ratios Net debt/equity (%) (9.9) (23.4) (24.2) (31.3) Net debt/EBITDA (x) (0.39) (0.85) (0.86) (1.10) Interest cover (x) 25 44 100 152

Source: Company data, Thomson Reuters, Credit Suisse estimates.

0

5

10

15

20

25

30

35

40

45

50

2009 2010 2011 2012 2013 2014

12MF P/E multiple

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2009 2010 2011 2012 2013 2014

12MF P/B multiple

Source: IBES

23 September 2014


(600583.SS / 600583 CH) 5

A key beneficiary of CNOOC’s deepwater development COOEC likely to benefit from CNOOC’s deepwater capex boom over the next five

years. CNOOC has started to put increased focus on deepwater exploration and

development in the 12th Five-Year Plan given maturing shallow water production

particularly in Bohai Bay. The ultra-deepwater semi-sub HYSY981 owned by CNOOC

Group and operated by COSL commenced operations in 2012 and has been servicing

CNOOC in deepwater exploration in South China Sea. CNOOC’s deepwater exploration

campaign has resulted in four deepwater discoveries after the landmark Liwan gas project.

After the start-up of Liwan in March 2014 we believe CNOOC will focus on developing the

next four deepwater discoveries in the next five years, and COOEC shall benefit from the

deepwater development capex boom from CNOOC, in our view.

Liwan 3-1 – landmark deepwater project in Offshore

China

Liwan 3-1 is China’s first deepwater project and CNOOC’s first in Offshore China.

The Liwan gas project is situated 270 kilometres from Guangdong in the Pearl River

Mouth Basin, Eastern South China Sea. The project is jointly owned by CNOOC (51%)

and Husky Energy (49%) with Husky as the operator. It was first discovered in 2006 by

Husky, and CNOOC exercised its rights to farm-in for a 51% stake in 2010. Husky began

the Front End Engineering Design (FEED) work in 2009 and completed in early 2010. The

project’s Overall Development Plan (ODP) was submitted to the Chinese government in

2011 and approved towards the end of 2012. Gas is produced via eight development wells

into the Central Processing Platform (CPP), and is then transferred to Gaolan Onshore

Receiving Facility via the main 30-inch 270km trunkline.

Figure 6: Liwan gas project infrastructure

Source: Husky Energy

23 September 2014


(600583.SS / 600583 CH) 6

Gas supplied to Guangdong at US$11-13/mcf. Total 2P commercial recoverable

reserve of Liwan is estimated to be 1Tcf before the inclusion of Liuhua 34-2 & 29-1, based

on the estimate of industry consultant Wood Mackenzie. A Gas Sales Agreement (GSA)

was signed with CNOOC Gas & Power Group, whereby the Liwan project will supply gas

to the gas grid in Guangdong at US$11-13/mcf (Rmb2.4-2.8/cm) gas sales price for the

first five years, and will then be pegged to the Guangdong city-gate gas prices from 2018

onwards. This is at par to the Rmb2.74/cm Guangdong city-gate gas price as announced

by the NDRC back in 2011 (the NDRC has raised Guangdong existing gas prices to

Rmb2.86/cm effective 1 September 2014). Note that offshore gas sales price does not fall

under the NDRC’s gas price reform and is negotiated on a project-by-project basis.

Figure 7: Liwan gas production profile (gross)

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50

100

150

200

250

300

350

400

450

500

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Liwan 3-1 Liuhua 34-2 Liuhua 29-1

(mmcfd)

Source: Husky Energy, Wood Mackenzie, Credit Suisse estimates

Liwan’s success has built up COOEC’s track record

in deepwater operations

COOEC has demonstrated its deepwater capability in the Liwan 3-1 project. The

central platform of the Liwan gas project was built and installed by COOEC, a good

demonstration of COOEC’s capability for design, manufacturing and installation of offshore

platform as well as project management. The 30,000-tonne central platform is Asia’s first

and the world’s second platform support, and was constructed in a mere 21-month time

span. In addition, COOEC was involved in the laying of 79km deepwater subsea pipeline

for the Liwan project by utilising its deepwater pipe-laying crane vessel Offshore Oil 201. A

maximum water depth of 1,409 meters was reached and has set new highs in the daily

pipe-laying efficiency in Offshore China. The success at the Liwan project has built up

COOEC’s track record in deepwater operations.

23 September 2014


(600583.SS / 600583 CH) 7

Figure 8: Liwan’s 30,000-tonne central platform that was built & installed by COOEC

Source: Husky Energy

Four more deepwater projects in the pipeline after

Liwan

Four more deepwater projects in South China Sea to commence production in 2016-

20. Following Liwan's first gas in March 2014 there will be four more deepwater projects

scheduled to come on stream in the 13th Five-Year Plan. Liuhua 34-2, 29-1 & 29-2 are

adjacent to Liwan and will be developed in parallel with Liwan, tieing in to Liwan’s

infrastructure by subsea pipelines. Based on Husky’s guidance, it is expected that Liwan’s

production will increase to 340 mmcf/day (gross) following the Liuhua 34-2 tie-in, and rise

to a range of 400-500 mmcf/day (gross) once Liuhua 29-1 is online. Wood Mackenzie

estimates that Liuhua 34-2 & 29-1 will increase total Liwan 2P reserves by close to 50%.

Lingshui 17-2 is an independent discovery in 2014, CNOOC’s first 100%-owned

deepwater project, and is likely to be developed separately given its location (150km south

of Hainan). CNOOC is particularly excited about this discovery as it proves that they are

technologically capable of drilling at any place and water depth in the entire South China

Sea. Initial test flow suggests that the well could produce 56.5mmcf/d (equivalent to

9,400boe/d), the highest daily flow of all CNOOC’s gas wells during testing.

Figure 9: CNOOC’s current deepwater projects in Offshore China

Project CNOOC stake

Year of

discovery Start-up

Water depth

(meters) Stage Remarks

Liwan 3-1 51% 2006 2014 1,500 Production

Liuhua 34-2 100% 2009 2016 1,145 Development Scheduled to tie in to Liwan infrastructure in 2H14

Liuhua 29-1 100% 2010 2017 723 Development Also to tie in to Liwan infrastructure in 2016/17

Liuhua 29-2 100% 2012 n/a 765 Development

Lingshui 17-2 100% 2014 n/a 1,500 Exploration CNOOC's first 100%-owned deepwater project

Source: Wood Mackenzie, company data, Credit Suisse estimates

23 September 2014


(600583.SS / 600583 CH) 8

Figure 10: Liuhua 29-1 will be tied in to Liwan

infrastructure and developed in parallel

Figure 11: Lingshui 17-2 is CNOOC’s first 100%-owned

deepwater project in Offshore China

Source: CNOOC Ltd Source: CNOOC Ltd

COOEC is highly geared to CNOOC capex cycle

COOEC’s revenue is highly correlated to CNOOC’s development capex trend.

CNOOC is COOEC's largest customer with c.80% of revenue generated from CNOOC.

Both companies are under CNOOC Group which holds a 58% stake in COOEC. Figure 9

shows that the R2 between COOEC’s revenue and CNOOC’s development capex is 0.91.

The single customer concentration risk is high in that should CNOOC cut back in capex

spend beyond its current 12th Five-Year Plan, it will have a significant impact on COOEC’s

revenue. However, we think this is unlikely.

Figure 12: COOEC’s revenue is highly correlated to

CNOOC’s development capex trend historically

Figure 13: A high correlation between the two

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40

60

80

100

-

5

10

15

20

25

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

COOEC revenue (LHS) CNOOC development capex (RHS)

(Rmb bn) (Rmb bn)

y = 0.283x - 15.269R² = 0.9077

-

5

10

15

20

25

- 10 20 30 40 50 60 70 80

CNOOC development capex (Rmb bn)

COOEC revenue (Rmb bn)


23 September 2014


(600583.SS / 600583 CH) 9

CNOOC’s capex spend is likely to remain elevated

beyond 2015

We believe it will be difficult for CNOOC to cut back on capex spend going forward.

In our CNOOC report Unsustainable growth, if any published on 4 July 2014, we analysed

CNOOC’s historical reserve life and F&D cost trend, and conclude that CNOOC’s capex

spend is likely to remain at elevated levels beyond 2015 even after tripling over the past

four years. Here are the reasons why:

1) A structurally lower reserve base. Our analysis shows that should CNOOC achieve

its five-year production growth target by 2015 (6-10% CAGR), its offshore China oil

reserve life will fall to 6.3 years, the lowest level since its IPO. This compares to an

average of ten years reserve life against its global peers. The structural lower reserve

base means that CNOOC will have to continue to throw capex on exploration &

development in order to replenish its reserves portfolio and maintain a healthy asset

base. In addition, given the mature nature of Bohai Bay these exploration &

development capex are likely to be spent on deepwater exploration in South China Sea.

Figure 14: Offshore China oil reserve life to fall to six

years by 2015, lowest level since CNOOC’s IPO…

Figure 15: …same goes for gas reserve life

6.3

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Offshore China

(Years)


2) Cost of new reserves on the rise. Finding & development (F&D) costs are key

metrics for an E&P company – it shows the capex required for adding one barrel of

new reserves to its reserve base. COOEC is more exposed to CNOOC’s development

capex. It means that CNOOC has to spend US$21/boe of development capex for

every barrel of oil & gas that CNOOC discovers.

CNOOC’s development costs appear to have reaccelerated in 2013 after softening

between 2010 and 2012, and the re-acceleration brought its development cost to a

historically high level. This uptrend is coupled with the increase in the number of

development wells drilled in offshore China. CNOOC drilled 509 development wells in

2013, up 54% YoY.

https://doc.research-and-analytics.csfb.com/docView?language=ENG&source=ulg&format=PDF&document_id=1034843381&serialid=w50VqcEv50odObDVg8%2bxC05x5f%2fTgMv7vHHsXE2I7jA%3d

23 September 2014


(600583.SS / 600583 CH) 10

Figure 16: CNOOC—offshore China development cost (3-

year average)

Figure 17: CNOOC—Offshore China development wells

drilled

8

10

12

14

16

18

20

22

2006 2007 2008 2009 2010 2011 2012 2013 2014E

Development cost - Offshore China (3yr avg.)

(US$/boe)

138 113 121 115

284 335

370 330

509

680

780

-

100

200

300

400

500

600

700

800

900

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E

Development wells drilled - Productive

(No. of wells)


23 September 2014


(600583.SS / 600583 CH) 11

Zhuhai base will double COOEC’s capacity COOEC is the offshore engineering construction arm of CNOOC Group. COOEC

provides EPCI (Engineering, Procurement, Construction and Installation) services to

CNOOC and international oil companies. Between the two oilfield service entities COSL

and COOEC within the CNOOC Group, COSL is primarily exposed to the exploration &

development capex cycle of CNOOC, while COOEC is exposed to development &

production capex cycle.

Figure 18: CNOOC Group’s upstream E&P and OFS entities

CNOOC Group

CNOOC Ltd

(0883.HK)

COSL

(2883.HK)

COOEC

(600583.SS)

58.2%50.5%64.4%

Source: Company data, Credit Suisse

Figure 19: Oil & Gas exploration & development value chain

Purpose

Fixed

Max water

depth

Global fleet /

population

Newbuild

cost

Drilling rigs Production systems

FPSO TLP / SPAR

Support

vesselDrill shipsJack-ups Semi-sub

Oil & gas

exploration and

development

450 ft

652 rigs

514 operating

138 under const.

Recent contracts

US$180-240m

(max US$650m)

Oil & gas

exploration and

development

10,000 ft

239 rigs

218 operating

21 under const.

Recent contracts

US$425-800 m

(max US$820 m)

Oil & gas

exploration and

development

12,000 ft

157 rigs

96 operating

61 under const.

Recent contracts

US$600-840 m

(max US$1.15 b)

Multiple functions:

seismic survey to

supply, rescue

pipe-laying and

heavy lift vessels

N/A. Can support

deepwater ops

Over 7,000

vessels

Not meaningful to

compare across

product range

Fixed, field

specific

production

platform

Generally up to

1,500 ft (max

3,500 ft)

N/A

N/A

Floating

production,

storage and

offload vessels

Generally up to

6,000 ft

In service:

175 FPSOs

51 semis/barges

Up to US$1.2 b

(conversion can

be <US$250 m)

Floating systems

suitable for deep

water production

TLP (6k); SPAR

(10k); Subsea for

deeper water

In service:

24 TLPs

20 SPARs

In excess of

US$1.0-1.5 b

Field

developmentExploration Production Storage

COSL COOEC

Source: Company data, Credit Suisse

23 September 2014


(600583.SS / 600583 CH) 12

Zhuhai equipment base to be a game changer to

COOEC’s deepwater construction capability

Zhuhai equipment base to be a game changer to COOEC’s deepwater construction

capability. COOEC is building up its construction capacity to meet the wave of deepwater

capacity demand from CNOOC. COOEC’s Zhuhai base is the company’s third

construction base in China after Tanggu and Qingdao. Upon completion, the Zhuhai base

will rank first globally in terms of construction scale (2,070,000 sq m) and will double

COOEC’s construction capacity.

Figure 20: COOEC’s capacity at its three construction bases

140

120

-

50

100

150

200

250

300

Tanggu Qingdao Zhuhai

60

200

(ktpa)

260

Phase I & II

Phase III & V

Source: Company data, Credit Suisse estimates

Phase II completion by the end of 2014. Phase I of the Zhuhai base has a designated

production capacity of 40,000 tonnes per annum, and Phase II at 100,000 tonnes per

annum. Construction of the Zhuhai base began in 2010 and is currently into Phase II of

development. Phase I has been completed in November 2013 and Phase II is expected to

be completed by the end of 2014. We estimate the capex for each phase to be at Rmb2

bn. Upon completion, the construction capacity of the Zhuhai equipment base will improve

significantly, providing a strong support to COOEC’s deepwater business development.

Phase I & II combined could generate Rmb2.2 bn of revenue. COOEC’s Qingdao base,

which has a designated capacity of 200,000 tonnes per annum, is able to generate

Rmb4.3 bn of revenue on an annual basis on full utilisation. Taking Qingdao as a

reference we estimate the Zhuhai base Phase I & II combined will be able to bring in an

incremental Rmb2.2 bn of revenue to COOEC.

Phase III to V construction will depend on market environment. Based on our

conversation with COOEC, we understand the development of Phase III to V will be

tailored according to market demand. If demand is strong COOEC can start the Phase III

development as soon as 2015.

Total capex for Zhuhai base is estimated at Rmb9.5 bn. Full capacity of the Zhuhai

base Phase I to V will include: two semi-subs, one TLP, two FPSO Top modules (300kt

each), 20 sets of Christmas Tree, five sets of Subsea Manifold and 230ktpa of subsea

pipeline capacity.

23 September 2014


(600583.SS / 600583 CH) 13

Multiple competitiveness of Zhuhai base

In our view, there are multiple competitive advantages of the Zhuhai equipment base,

including:

■ Location advantage. Compared with its Qingdao base, Zhuhai is much closer to

South China Sea which will be the main area of development within Offshore China

over the next 5-10 years, in our view. The location advantage means that logistics

process could be shortened by 1-2 weeks as well as lower transportation costs. This is

also beneficial to COOEC’s expansion into SE Asia, Australia and the Middle East

market.

■ Favourable climate condition. The location of Zhuhai base makes it more

competitive compared to other construction bases around the region and even within

COOEC. Zhuhai has a warm winter so there is no severe winter break, which makes

continuous operation throughout the year possible. The only downside is typhoon

which is common in summers in South China Sea.

■ Superior natural condition. The Zhuhai base is at the long coastline along Gaolan

Port Economic Zone; the 14-meter water depth at the coastline means that the base

could accommodate semi-sub operation.

■ Economics of scale. Zhuhai base being the world’s largest construction site could

bring economics of scale. This is much larger than bases in Europe and the US.

Among its regional peers, this is comparable to Korean bases and much larger than

bases in Singapore and Indonesia.

■ Unique workflow design. The Zhuhai base is designed to accommodate a fully

integrated workflow – starting from raw material, pre desegment, assembling to

transportation, and optimises all bridging process.

Building up deepwater vessel capacity for subsea

pipe-laying

At the same time COOEC has built up its deepwater vessel capacity, building or

purchasing four deepwater vessels and planning for another three in the next two years.

These vessels will be able to support COOEC's deepwater subsea pipe-laying capability.

Figure 21: COOEC’s deepwater vessel fleet

Name Delivery Description

Offshore Oil 201 In operation 3,000 meters deepwater pipe-laying crane vessel

Offshore Oil 278 In operation 50,000 tons semi-submersible self-propelled vessel

Offshore Oil 289 In operation Multi-function deepwater support vessel

Offshore Oil 286 Early 2015 3,000 meters multi-function underwater engineering vessel

TBC 3Q14 Multi-function deep trenching engineering vessel

TBC 3Q15 Saturation diving support vessel

TBC Newbuild feasibility study Deepwater semi-submersible pipe-laying crane vessel


23 September 2014


(600583.SS / 600583 CH) 14

Overseas expansion COOEC has expanded its international business, winning EPC contracts from Gorgon &

Ichthys LNG projects in Australia, plus in Yamal recently. Overseas only contributes to

10% of COOEC’s revenue currently but the company targets a 50% contribution in the

long run.

Ichthys LNG project

Ichthys is a mega LNG project in the Browse Basin on the West Coast of Australia. Ichthys

is expected to produce 8.4 mn tonnes of LNG and 1.6 million tonnes of LPG per annum,

along with approximately 100,000 barrels of condensate per day at peak. Total capex is

estimated at US$34 bn. Inpex is the operator of the project with a 62% equity interest,

followed by Total at 30% stake. In June 2014, Inpex announced to the market that the

project has reached the 50% completion mark.

COOEC is involved in the construction of 49,000 tonnes heavy steel modules for the

onshore LNG facility alongside its JV partner JKC. Construction work was kick-started in

its Qingdao yard in April 2013.

Figure 22: Ichthys LNG project—outline of development concept

Source: Inpex Corporation

23 September 2014


(600583.SS / 600583 CH) 15

Yamal LNG project

The Yamal LNG project is a three-train 5.5mmtpa LNG development in Russia. Gas is

produced at the giant South Tambeiskoye gas condensate field located on the remote Yamal

Peninsula in West Siberia, 600 kilometres north of Salekhard. Novatek is the operator of the

project with a 60% stake, followed by CNPC and Total each having a 20% stake.

In July 2014, COOEC announced that it has signed a contract with Yamgaz SNC, the

contractor of Yamal LNG project for the construction of Module Fabrication Work Package

1 (MWP1), which includes 36 core modules of an LNG factory – major facility at the Yamal

LNG project. The total value of the contract is worth US$1.6 bn and it is COOEC’s largest

overseas contract by far. Construction will start in September 2014 and is due for

completion in July 2017.

Figure 23: Yamal LNG project in Russia

Source: Total

Gorgon LNG project

The Gorgon LNG project is a 15.6 mmtpa LNG development off the northwest coast of

Australia. Gas from Gorgon and Io/Jansz will be supplied through 18 subsea-completed

wells to three 5.2 mmtpa LNG processing trains located on Barrow Island. The project has

witnessed significant cost blowout since FID – initial cost estimate at FID were at US$37

bn, but were increased by 40% to US$52 bn in 2012, and then rising to US$54 bn in late-

2013. Chevron is the operator of the project with a 47.33% equity interest, followed by

ExxonMobil and Shell each having a 25% stake.

COOEC has signed a contract with Chevron Australia back in 2010 on the fabrication of

the process module of the Gorgon Barrow Island LNG Plant Project worth about

US$180mn. The Gorgon LNG project is COOEC's first LNG modularised plant

construction project as well as first practice of applying modularised fabrication to a LNG

chemical plant construction project, which opens up a new road for product diversification

in the field of modularised fabrication.

23 September 2014


(600583.SS / 600583 CH) 16

Initiate coverage with OUTPERFORM, TP Rmb10 Our Rmb10 target price represents 24% potential upside. We set our target price

based on 10x 2015E P/E, in line with our target multiple for COSL and at a discount to

global EPC peers. This is more than 1 S.D. below its historical P/E range – COOEC’s five-

year P/E average was 21x, and 1 S.D. below was 13.4x. Furthermore, we believe COOEC

will benefit from the upcoming Shanghai-HK Stock Connect as global investors look for

ways to play the deepwater South China Sea theme. We initiate coverage on COOEC

with an OUTPERFORM rating.

Figure 24: COOEC—forward P/E chart

-

5

10

15

20

25

30

35

40

2009 2010 2011 2012 2013 2014

(x)

Avg. = 21.2x

+1 S.D. = 29.1x

-1 S.D. = 13.4x


Closest comp McDermott trades at 26x 2015E P/E. Globally, McDermott is one of the

world’s largest EPCI providers for upstream field developments, and is the closest comp to

COOEC. As of 30 June 2014, McDermott had US$4.1 bn (Rmb25 bn) of order backlog on

hand of which 53% is in Asia Pacific region. McDermott currently trades at 26x 2015 P/E,

which implies that COOEC is at a 65% discount to its closest peer globally.

Also at a discount to US integrated OFS and Japan EPC players. US integrated OFS

companies trade at 13x 2015E P/E on average, and Japan EPC companies trade at 23x

on average.

23 September 2014


(600583.SS / 600583 CH) 17

Figure 25: COOEC P/E valuation vs global peers—at a discount

8.3 8.7 9.3 10.0

12.7

22.5

25.7

-

5

10

15

20

25

30

COOEC @Current price

COSL European OFS COOEC @ CSTP

US integratedOFS

Japan EPC McDermott

2015 P/E (x)

Source: Datastream, company data, Credit Suisse estimates

Sector valuation

Figure 26: Valuation comparison—COOEC vs global peers

Up/(down) Mkt cap P/E (x) EV/EBITDA (x) P/B (x) ROE (%)

Company Ticker FX Rat. Price TP vs TP (US$ mn) 14E 15E 14E 15E 14E 14E 15E

China OFS

COSL 2883.HK HK$ O 20.45 24.0 17% 13,894 9.5 8.7 7.9 7.3 1.70 17.9% 17.1%

COOEC 600583.SS Rmb O 8.08 10.0 24% 5,820 9.0 8.3 5.8 4.6 1.58 19.8% 20.0%

US EPC

McDermott MDR US$ O 6.34 9.0 42% 1,507 -10.2 25.7 52.7 5.1 1.10 -10.8% 4.3%

US Integrated OFS

Baker Hughes BHI US$ O 67.74 97.0 0.43 29,470 16.2 11.9 6.6 5.4 1.51 9.3% 11.1%

Halliburton HAL US$ O 66.51 95.0 0.43 56,569 16.3 12.0 8.5 6.6 2.30 14.0% 19.2%

Schlumberger SLB US$ O 103.21 142.0 0.38 133,805 18.2 15.2 9.9 8.7 3.11 16.6% 17.7%

Weatherford WFT US$ O 21.85 30.0 0.37 16,904 18.8 11.7 7.6 6.1 2.02 10.7% 14.1%

Average 17.4 12.7 8.1 6.7 2.23 12.7% 15.5%

European OFS

Technip TECF.PA € O 65.72 92.0 40% 9,584 14.2 10.0 6.2 4.8 1.89 13.3% 17.4%

Saipem SPMI.MI € U 16.68 18.0 8% 9,443 23.5 11.3 8.5 6.3 1.49 6.3% 11.9%

Subsea 7 SUBC.OL US$ N 91.15 144.0 58% 5,048 7.6 7.6 4.2 3.8 0.65 9.5% 9.1%

Petrofac PFC.L US$ N 1,048 1,340 28% 5,904 10.1 8.4 6.4 5.4 2.47 24.4% 24.5%

Average 13.9 9.3 6.3 5.1 1.62 13.4% 15.7%

Japan EPC

JGC 1963.T ¥ U 2,943 2,700 -8% 6,823 15.7 17.3 5.2 6.2 1.98 12.6% 10.6%

Chiyoda 6366.T ¥ U 1,198 1,000 -17% 2,850 23.1 27.7 11.7 13.5 1.58 6.8% 5.5%

Average 19.4 22.5 8.4 9.9 1.78 9.7% 8.0%

Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM, NR = NOT RATED


23 September 2014


(600583.SS / 600583 CH) 18

Key risks ■ A cutback in CNOOC’s capex spend: COOEC’s earnings are highly dependent on

CNOOC’s capex spend historically. Our bullish view on COOEC is hinged on our

positive view on CNOOC’s capex spend in 2015 and beyond, based on our analysis of

CNOOC's historical reserve life and F&D cost trend. A reduction in capex by CNOOC

vs our expectation would have a material impact on our earnings forecast for COOEC.

■ A slowdown in CNOOC’s deepwater development effort: Another bullish view of

ours on COOEC is hinged on our view of CNOOC’s development in deepwater

Offshore China. A slowdown in CNOOC’s deepwater development effort will have a

negative impact on our earnings forecast for COOEC.

■ Sharp correction of oil and gas prices: Sharp change of commodities prices have a

positive correlation and profound impact on upstream companies’ capex, which is the

revenue for upstream service providers. A sharp correction in oil price would have a

negative effect on CNOOC’s capex outlook, which in turn have a material impact on

COOEC's earnings outlook.

■ Overseas expansion: Overseas projects tend to be subject to higher geopolitical

and/or economical risks. So far, COOEC’s overseas exposure have primarily focused

on less sensitive countries/regions such as Australia; however its recent expansion in

Yamal will carry higher geopolitical risk given the Russia sanctions.

23 September 2014


(600583.SS / 600583 CH) 19

Company financials Figure 27: COOEC—income statement

(Rmb mn) 2012 2013 2014E 2015E 2016E

Revenue 12,371 20,278 23,399 26,120 29,275

Other income 12 62 62 62 62

Total revenue 12,383 20,339 23,460 26,181 29,337

YoY% 67.7% 64.3% 15.3% 11.6% 12.1%

COGS (10,073) (15,564) (17,315) (18,937) (20,785)

% of revenue 81% 77% 74% 73% 71%

Gross profit 2,310 4,775 6,145 7,244 8,551

Taxes other than income tax (339) (514) (592) (661) (740)

% of revenue 2.7% 2.5% 2.5% 2.5% 2.5%

SG&A (736) (1,159) (1,334) (1,489) (1,668)

% of revenue 5.9% 5.7% 5.7% 5.7% 5.7%

Finance income/(expense) (139) (186) (131) (175) (185)

Impairment gain/(loss) (195) (14) - - -

Gain/(loss) on fair value through P&L 3 32 - - -

Investment income 2 153 - - -

Operating profit 907 3,087 4,089 4,920 5,957

YoY% 270.7% 240.3% 32.5% 20.3% 21.1%

OP margin (%) 7.3% 15.2% 17.4% 18.8% 20.3%

Non-operating income/(expense) – net 142 170 170 170 170

Profit before tax 1,049 3,257 4,260 5,091 6,128

Tax expense (192) (505) (660) (789) (950)

Effective tax rate (%) 18% 16% 16% 16% 16%

Minority interest (9.2) (7.8) (10.2) (12.2) (14.7)

Net profit 848 2,744 3,589 4,289 5,163

YoY% 368.7% 223.6% 30.8% 19.5% 20.4%

Net margin (%) 6.8% 13.5% 15.3% 16.4% 17.6%

EPS (basic) 0.22 0.69 0.81 0.97 1.17

EPS (diluted) 0.22 0.69 0.81 0.97 1.17

EBITDA 2,096 4,195 5,407 6,549 7,830

EBIT 1,237 3,255 4,220 5,095 6,142

Weighted average number of shares 3,889 3,978 4,421 4,421 4,421

Dividend 117 442 578 691 832

Payout ratio (%) 14% 16% 16% 16% 16%

DPS 0.03 0.10 0.13 0.16 0.19


23 September 2014


(600583.SS / 600583 CH) 20

Figure 28: COOEC—balance sheet

(Rmb mn) 2012 2013 2014E 2015E 2016E

Current assets

Cash & cash equivalents 1,034 1,780 6,203 7,237 10,225

Financial assets held for trading 2 34 34 34 34

Bills receivable 13 - - - -

Accounts receivable 2,215 4,334 5,142 5,738 6,430

Prepayment 297 576 576 576 576

Other receivable 152 289 304 319 335

Inventories 1,444 1,716 1,928 2,152 2,411

Other current assets 0 4,109 - - -

Total current assets 5,158 12,838 14,187 16,057 20,012

Non-current assets

Financial assets available for sale 277 256 256 256 256

Long-term investment 71 71 71 71 71

Investment property 281 269 269 269 269

PP&E 8,358 10,965 13,789 16,335 17,648

Property under construction 3,673 1,357 1,357 1,357 1,357

Disposal of fixed assets 307 288 - - -

Intangible assets 2,004 1,904 1,851 1,797 1,744

Goodwill 13 13 13 13 13

Long-term expenses to be amortised 53 52 52 52 52

Deferred tax assets 166 90 90 90 90

Other non-current assets 7 1 - - -

Total non-current assets 15,210 15,266 17,746 20,239 21,498

Total Assets 20,368 28,104 31,933 36,295 41,510

Current liabilities

ST borrowings 100 - - - -

Bills payable - - - - -

Accounts payable 3,327 5,633 6,427 7,173 8,037

Receipts in advance 1,289 791 806 822 839

Salaries payable 258 264 264 264 264

Tax payable 433 581 581 581 581

Interest payable 13 12 12 12 12

Dividend payable 6 - - - -

Other payables - 111 111 111 111

LT borrowings due <1 year 137 1,480 - - -

Other current liabilities 6 6 - - -

Total current liabilities 5,571 8,878 8,202 8,964 9,845

Non-current liabilities

LT borrowings 1,932 132 1,612 1,612 1,612

Bills payable 1,193 1,194 1,194 1,194 1,194

Special payables 43 37 37 37 37

Deferred tax payable 137 70 72 75 77

Other non-current liabilities 1,183 1,200 1,200 1,200 1,200

Total non-current liabilities 4,488 2,634 4,116 4,118 4,120

Shareholders’ equity 10,242 16,583 19,605 23,203 27,534

Minority interest 68 10 10 10 10

Total Equity 10,309 16,593 19,615 23,213 27,545

Total Liabilities & Equity 20,368 28,104 31,933 36,295 41,510


23 September 2014


(600583.SS / 600583 CH) 21

Figure 29: COOEC—cash flow statement

(Rmb mn) 2012 2013 2014E 2015E 2016E

Net income 848 2,744 3,589 4,289 5,163

Adjustment for:

Income tax expense - - 660 789 950

DD&A 906 994 1,241 1,507 1,741

Interest income - - (18) (62) (72)

Interest expenses - - 113 113 113

Change of working capital (66) (369) 3,885 (74) (86)

A/C receivable, prepaid expenses & other

current assets

482 (2,523) 3,287 (612) (707)

Inventories (735) (272) (213) (224) (259)

Accounts payable and accrued liabilities 905 1,919 810 762 881

Others (46) (135) (3) 2 2

Cash generated from operations 1,643 3,235 9,467 6,565 7,810

Income tax paid - - (660) (789) (950)

Net cash generated from operating activities 1,643 3,235 8,806 5,776 6,860

Disposal of Fixed Assets 258 40 278 - -

Capital Expenditures (1,362) (1,516) (4,000) (4,000) (3,000)

Increase in Investments (46) (6,271) - - -

Decrease in Investments 4 2,242 - - -

Interest received 18 62 72

Other Investing Activities (23) 62 1 - -

Net cash used in investing activities (1,168) (5,443) (3,703) (3,938) (2,928)

Dividends Paid (134) (96) (578) (691) (832)

Change in Short-Term Borrowings - - -

Increase in Long-Term Borrowings 2,418 545

Decrease In Long-Term Borrowings (2,945) (647)

Increase in Capital Stocks - - - - -

Decrease in Capital Stocks - -

Interest paid (113) (113) (113)

Other Financing Activities (10) 3,151 - - -

Net cash generated from financing activities (671) 2,953 (691) (804) (945)

Net increase in cash and cash equivalents (196) 745 4,412 1,034 2,988

Cash and cash equivalents – Beginning 1,230 1,034 1,780 6,203 7,237

Effect of FX changes - - 11 - -

Cash and cash equivalents – Ending 1,034 1,780 6,203 7,237 10,225


23 September 2014


(600583.SS / 600583 CH) 22

Companies Mentioned (Price as of 22-Sep-2014)

CNOOC Ltd (0883.HK, HK$14.1, NEUTRAL, TP HK$13.5) China Oilfield Services Ltd (2883.HK, HK$20.45, OUTPERFORM, TP HK$24.0) McDermott International (MDR.N, $6.34) Offshore Oil Engineering Co. Ltd. (600583.SS, Rmb8.08, OUTPERFORM, TP Rmb10.0)

Disclosure Appendix

Important Global Disclosures

I, Horace Tse, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for CNOOC Ltd (0883.HK)

0883.HK Closing Price Target Price

Date (HK$) (HK$) Rating

03-Oct-11 12.16 20.28 O

04-Oct-11 11.34 *

19-Oct-11 13.18 16.60 O

26-Oct-11 14.54 16.15

07-Nov-11 14.92 15.95

08-Jan-12 15.08 17.60

23-Feb-12 17.38 17.60 N

13-Apr-12 15.82 18.30 O

11-Jul-12 15.38 17.80

15-Oct-12 15.78 18.60

05-Nov-12 16.28 20.00

04-Apr-13 14.94 20.20

15-Aug-13 14.68 20.00 *

20-Aug-13 14.82 21.00

06-Jan-14 13.84 20.00

21-Jan-14 13.08 16.00 N

28-Mar-14 12.32 12.00

24-Jun-14 13.56 12.60

03-Jul-14 14.04 11.00 U

18-Aug-14 15.24 13.50 N

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

N EU T RA L

U N D ERPERFO RM

3-Year Price and Rating History for China Oilfield Services Ltd (2883.HK)

2883.HK Closing Price Target Price

Date (HK$) (HK$) Rating

03-Oct-11 9.01 13.10 O

04-Oct-11 8.80 *

31-Oct-11 13.20 16.80 O

18-Jan-12 12.54 14.60

26-Mar-12 11.10 13.20

27-Apr-12 12.46 14.00

03-Sep-12 12.44 14.80

08-Oct-12 14.54 15.90

17-Dec-12 16.00 14.50 N

22-Jul-13 16.28 21.00 O

19-Aug-13 18.64 23.00

25-Oct-13 20.20 25.00

29-Apr-14 18.70 24.00

11-Jun-14 19.78 23.00

26-Aug-14 20.10 24.00


O U T PERFO RM

N EU T RA L

23 September 2014


(600583.SS / 600583 CH) 23

3-Year Price and Rating History for McDermott International (MDR.N)

MDR.N Closing Price Target Price

Date (US$) (US$) Rating

27-Oct-11 10.97 14.00 O

01-Mar-12 14.86 22.00

11-May-12 11.37 20.00

15-Oct-12 11.43 19.00

07-Nov-12 10.62 15.00

10-May-13 9.40 13.00

06-Aug-13 6.93 9.00

15-Jan-14 9.13 10.00

08-May-14 6.73 9.00


O U T PERFO RM

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non -Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An anal yst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 44% (54% banking clients)

Neutral/Hold* 40% (51% banking clients)

Underperform/Sell* 14% (43% banking clients)

Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (P lease refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, curre nt holdings, and other individual factors.

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Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for Offshore Oil Engineering Co. Ltd. (600583.SS)

Method: Our Rmb10/share target price for Offshore Oil Engineering Co Ltd. (COOEC) is based on 10x 2015E P/E (price-to-earnings), in line with the target multiple for its sister company in Offshore China - China Oilfield Services Ltd (COSL). This is more than 1 standard deviation below its own P/E average - COOEC's historical average P/E range was 21x, and 1 S.D. below was 13.4x. Global EPC peers are trading at 13-15x 2015 P/E.

Risk: Risks to our Rmb10/share target price for Offshore Oil Engineering Co Ltd. (COOEC) include: 1) A significant cutback in capex spend from CNOOC Ltd who is its largest customer (c.80% of revenue contribution), having a negative impact to COOEC's revenue; 2) A slowdown in deepwater development effort by CNOOC than we expect; 3) Oil price correcting sharply causing global oil companies to cut back on upstream capex spend going forward; 4) Volatility in the China A-share market post the Shanghai-HK Stock Connect scheme.

Price Target: (12 months) for China Oilfield Services Ltd (2883.HK)

Method: Our target price of HK$24.0/share for China Oilfield Services Ltd (COSL) is based on 10x 2015E earnings. This is at 0.5 standard deviation below COSL's 5-year average P/E.

Risk: Risks to our HK$24.0/share target price for China Oilfield Services Ltd (COSL) include a slower-than-expected rig purchases plan compared to our assumptions. Moreover, a delay in deliveries for its upcoming rigs and vessels as compared to its announced timeline will also impact our earnings estimates. Moreover, a sharp correction in the Chinese market would derate overall market multiples.

Price Target: (12 months) for CNOOC Ltd (0883.HK)

Method: Our target price of HK$13.5/share for China National Offshore Oil Corp (CNOOC) is DCF (discounted cash flow)-based, using a WACC (weighted average cost of capital) of 8.7%, perpetual growth rate of 2% and long-term oil price of US$90/bbl. Our target price implies 8.8x and 9.5x 2014E and 2015E P/E (price-to-earnings), respectively.

Risk: The primary risk to our target price of HK$13.5/share for China National Offshore Oil Corp (CNOOC) is a spike in oil prices. The political uncertainty in the Middle East (Iraq, Libya), concerns on Europe's debt crisis and the global economic recovery also pose risks to our oil price assumption and overall equity market.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (600583.SS, 2883.HK, 0883.HK) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (600583.SS, 2883.HK, 0883.HK) within the past 12 months.

Credit Suisse has managed or co-managed a public offering of securities for the subject company (600583.SS, 2883.HK, 0883.HK) within the past 12 months.

Credit Suisse has received investment banking related compensation from the subject company (600583.SS, 2883.HK, 0883.HK) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (600583.SS, 2883.HK, 0883.HK, MDR.N) within the next 3 months.

As of the date of this report, Credit Suisse makes a market in the following subject companies (MDR.N).

As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (2883.HK).

Credit Suisse has a material conflict of interest with the subject company (0883.HK) . Credit Suisse is acting as financial advisor to both CNOOC Ltd. and SINOPEC on the acquisition of Marathon Oil Corporation's 20% interest in Block 32, offshore Angola.

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

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The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (600583.SS, 2883.HK, 0883.HK, MDR.N) within the past 12 months

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (600583.SS, 2883.HK, 0883.HK) within the past 3 years.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Credit Suisse (Hong Kong) Limited ..........................................................................................................Horace Tse ; Thomas Wong ; Kelly Chen

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

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