The company, which is commonly known as Antonoil, provides oilfield services primarily within the areas of drilling, field, production and wells. It specialises in services that demand new and advanced technologies û it currently holds 32 patents and has 46 applications pending û and which complement the oilfield services provided by the three state-owned oil corporations, namely: China National Petroleum Corporation (CNPC), which is the parent of Hong Kong-listed PetroChina; China Petroleum & Chemical Corporation (Sinopec); and CNOOC.
ôIt is basically a play on the growth of the overall oil capex market. ItÆs not directly related to oil prices, but to the overall demand for oil,ö says a source. ôThe capital expenditures of PetroChina and Sinopec are expected to grow at a rate of 13% every year from now to 2010.ö
Rising oil prices are, however, a clear indication of the demand for oil. The West Texas Intermediate (WTI) crude future on the New York Mercantile Exchange, which is widely regarded as a benchmark, has been trading above $90 per barrel since late October and reached a record high of $96.70 on November 6.
The stocks of the Chinese oil giants hit historical highs slightly earlier than that with Sinopec peaking at HK$12.95 on October 15, CNOOC peaking at HK$16.92 on October 30 and PetroChina peaking at HK$19.9 on November 1. Since then, these stocks have been under pressure, partly due to concerns that the credit tightening that has followed on the heels of the subprime crisis may lead to a global slowdown. Their share prices have dropped by between 15.9% and 25.4%.
The Hong Kong market has also become increasingly volatile since the beginning of this month as indicated by the fact that falls in excess of 1,000 points in the Hang Seng Index on Monday and Friday last week were partially reversed by a more than 1,300-point gain on Wednesday. Yesterday, the HSI rallied more than 1,000 points in the afternoon, after losing as much as 3.8% in the morning session, and finished the day with a 1.1% gain.
Taking advantage of the oil price rally, Antonoil is offering 520 million new shares, or 25% of the companyÆs enlarged share capital, with 90% targeted at institutions. The rest will go towards the retail tranche, subject to normal clawback triggers that could boost this portion of the deal to 50% of the total if it is more than 100 times subscribed. There is also a greenshoe which could increase the total deal size by 15%. Credit Suisse and JPMorgan are the joint bookrunners.
There are no perfect comparables to the company, says a source, but investors could refer to Hong Kong-listed China Oilfield Services Limited (COSL) and Shandong Molong Petroleum Machinery to get some idea about the valuation. An integrated oilfield services provider in the offshore China market, COSL currently trades at 30 times its projected 2008 earnings, while Shandong Molong, which designs and manufactures oil extraction machinery and related accessories, is quoted at 24.8 times.
As of mid-October, COSLÆs share price had quadrupled from the beginning of the year, but since then, it has shed more than 13% to yesterdayÆs HK$18.10 - in line with the broader market direction and the downturn in the Chinese oil majors. Shandong Molong had been relatively stable around the HK$2.10 level since September, but over the past week or so it has dropped 19% to HK$1.69 yesterday.
In 2006, the majority of AntonoilÆs revenues came from drilling services, closely followed by field and well services. Its average margin is around 30%. According to a source close to the business, revenues are likely to double between 2007 and 2008, followed by a normalised 30% to 40% annual growth afterwards.
According to a syndicate report, the Rmb200 billion ($27 billion) oilfield services market in China grew by 26%-28% in 2005 and 2006, dominated by huge, but relatively low-tech, state-owned enterprises. The market for independent service providers is estimated to be around Rmb20 billion, with Antonoil accounting for about two-thirds of that. The company has about 0.5% of the overall Chinese oilfield services market in terms of revenue.
ôAs the overall revenue of the oilfield services in China is growing, what Antonoil is trying to do is to increase its share of the wallet,ö remarks a person familiar with the company.
Antonoil is well positioned to do this, he says, as it is high-tech enough to develop new areas away from the East coast which is more mature and heavily discovered. As oil becomes harder and harder to extract, companies that are able to provide the technology needed to increase the production from both new and mature fields will benefit.
The company has also built up a nationwide marketing network by providing drilling and field services. It will enjoy strong revenue growth, thanks to the recent launch of production and well services leveraging off the network. Over the past year, the company has formed alliances with international service companies for cementing, fracturing and acidisation, and has set up a joint venture with Northern Heavy, a Chinese heavy equipment producer, focusing on the manufacturing of drill pipe and casing.
There will not be any cornerstones in the deal, but private equity firms China Renaissance Capital and Chengwei Ventures already hold 24% and 9.5% of the company, respectively. Their combined stake will be diluted to approximately 25% after the IPO. Luo Lin, a former seasoned executive of CNPC, is the company's chief executive officer.
Antonoil plans to spend the proceeds on services expansion, building new manufacturing, research and development facilities as well as potential acquisitions.
The fickle secondary market has yet to dent the demand for Hong Kong IPOs even though a few of the recent newcomers have stumbled during their first few days of trading. Valuations are increasingly becoming a focus, however, and observers say issuers may have to trim down their expectations somewhat to ensure sufficient interest. Antonoil will set a price range just before the launch of a formal roadshow next Monday.
There are also still quite a few companies in the pipeline with the aim of completing a Hong Kong listing before the end of the year, which suggests there will be competition for funds.
Aside from Antonoil, other mid-sized offerings in the market include China-centric refrigerant producer Dongyue Group, which launched the institutional roadshow for its $220 million IPO on Monday, and China-based light-gauge aluminium foil producer Xiashun Holdings, which will kick-off its formal marketing on November 27.
Among the larger deals, China Railway Group has just launched a roadshow for the H-share portion of its combined $5 billion A- and H-share listing, while retail products producer Uni-President China is currently pre-marketing a deal that could be as large as $700 million to $800 million. Meanwhile, heavy truck manufacturer Sinotruk (Hong Kong) closed the books for its $1.2 billion IPO yesterday and was expected to fix the price in the early hours of this morning.
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