Thursday, October 25, 2007

The Hunt For Red Petrochina In October

PetroChina has set a lower-than- expected indicative price range of 15 yuan (HK$15.50) to 16.7 yuan for its A-share initial public offering, despite receiving overwhelming support from institutional investors in the three-day bookbuilding period this week. That was surprising considering that that the lowest bid offered by investors already hit 18.5 yuan - not to mention the highest bid of 20.5 yuan. Of the 7 A-share listings by H-share companies this year the usual discount is 11 to 20 percent to the H shares. So in actuality, the IPO price is within the accepted boundaries. However, that was interpreted by the general public as a "negative".
I think the powers to be are also aware of the significant run-up in Petrochina's H-share price over the last 2 weeks as the planned IPO wheels began to turn.
Breaking News
PetroChina has discovered another major gasfield in western Xinjiang, a source from the company's Tarim unit confirmed Wednesday. "The gasfield, known as Dabei III, boasts an estimated reserve of as much as 130 billion cubic meters, and will serve as an important backup supply source for the west-east gas pipelines," he said on condition of anonymity.
PetroChina's Beijing office declined to comment but Xinhua quoted officials in the Xinjiang Uygur Autonomous Region as saying the Hong Kong and New York-listed giant had discovered 130 billion cu m of natural gas.
The discovery has the potential to be the third largest gas field in Xinjiang, after Kela II and Dina II Gas fields, said Dai Jinxin, a researcher with the Research Institute of Petroleum Exploration and Development affiliated with PetroChina, the country's largest oil and gas producer.
"Gas fields with reserves of more than 100 billion cu m are considered giant gas fields even globally," Dai said. Kela II and Dina II gas fields have proven reserves of 250 and 170 billion cu m. Since more exploration and evaluation are needed at the new field, it is too early to give any specific figures, the source added. "We will drill more appraisal wells to determine the final reserve at a cost of around 200 million yuan (US$26.6 million)," the insider said. The field has an initial estimated daily output capacity of 286,000 cu m.
Although Xinjiang currently lags Sichuan Province in terms of annual natural gas production, the autonomous region has more reserves, Dai said. Reserves in Xinjiang's Tarim Basin are expected to hit around 8 trillion cu m, compared with the Sichuan Basin's 4 trillion cu m, Dai told China Daily.
The powers to be probably also know that the run-up may not be justified, and hence adjusted the IPO price accordingly. Of course all this is moot because the IPO could be priced at HK$35.00 and still be 50x over-subscribed. Successful applicants of the IPO are basically as lucky as those who struck Consolation Prize for their 4-D tickets.

PetroChina's A-share trading debut is set for November 5. The expected range for first day of trading is 39-45 yuan. Assuming the H-shares stay at HK$19.40, we are looking at a 50% discount. However, in my assessment, I am optimistic that the A-share can reach 50 yuan, because there is only one Petrochina, and the company is the most well known to all manland Chinese investors.

China Shenhua Energy, the latest H-share company to have its A-share listing, sold its A shares at a 17 percent discount to its H-shares. China Shenhua attracted a record 2.7 trillion yuan in its Shanghai IPO on October 9. PetroChina - which plans to issue as many as four billion new A shares to raise up to 66.8 billion yuan - will shatter the record by freezing 3-4 trillion yuan. That may explain why some of the funds are tied up in the application process thus making Shanghai and HK-H shares a bit listless these few days. That's a big contributory factor to the 4.8% slide in the Shanghai index today, coupled with fears of further tightening following the release of the still robust 11.5% GDP growth for 3Q.

Institutional and retail investors can start subscribing today and tomorrow, respectively, while the final A-share price will be announced Tuesday. Beijing-based PetroChina, the mainland's largest oil and gas producer, has said it needs a total of 37.8 billion yuan for five projects to construct oil fields, upgrade technology and expand ethylene capacity. Surplus proceeds from the A-share IPO would be used as working capital. This could suggest the company may cut down the actual number of shares it ultimately decides to issue.

China Oilfield Services (2883), which listed A shares in Shanghai on September 29, trimmed its issued size of 820 million shares to 500 million after the bookbuilding period.

Templeton's baldy Mark Mobius said PetroChina is still a bargain at just 8x estimated five-year earnings. Besides being the biggest in its industry, the prospects for higher profits are there as Beijing will eventually allow oil to move towards global prices.

Seven other H-shares have debuted on the mainland this year. Premiums range from 28 percent for Ping An Insurance, China's second-biggest insurance company, to 257 percent for China Oilfield Services Ltd., the country's largest offshore-oil explorer. PetroChina plans to sell 4 billion shares in China. That amounts to less than a fifth of the 21.1 billion H shares now outstanding. The other small thing is the weakening USD and the stronger yuan over the last few days - this makes A-shares pricier and the corresponding H-shares cheaper. If Petro reaches 50 yuan in Shanghai, Petrochina can climb to HK$23-HK$24. You do the calculations for the covered warrants in HK and Malaysia.

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