Royal Dutch Shell sold a 2.2% stake in Sinopec yesterday (Wednesday), raising $742 million from a 1.85 billion share sale. Pricing at HK$3.125 per share came towards the tighter end of a HK$3.088 to HK3.153 range and represented a 3.85% discount to the stock's spot close of HK$3.25.
The Goldman Sachs led offering follows a similar deal by BP in mid February, which raised $739 million via the sale of a 2.1% stake at HK$3.15 per share. Both companies purchased their stakes at the time of Sinopec's IPO in the autumn of 2000 and both have made nearly 200% on their investments.
The latest offering was completed at a wider discount than its predecessor, which came at 0.79% and was also priced off a higher spot close - HK$3.25 versus HK$3.175. However, the previous deal was priced against a stock, which had closed down 5.9% on the day, whereas the new one came on the back of a 1.6% appreciation.
The current deal was carefully timed to take advantage of one relatively strong day of strong trading in Hong Kong after a difficult week and ahead of a potentially volatile debut by Chinese foundry SMIC. Indeed, while the H-share sector was up 2% on the day, the Hang Seng Index remained fairly directionless, closing up just 0.35%. Analysts say the market remains in a holding pattern while it digests a string of earnings announcements.
The wisdom of Shell's timing started to become apparent as the order book closed, with SMIC opening in New York 10% down on its $17.50 issue price to hit $15.75 at one point during the morning's trading. Against this backdrop, some market participants believe the discount was fairly punchy, but was supported by an order book that closed just under two-and-a-half times subscribed.
About 125 accounts participated, a larger number than the BP trade, which attracted 88. The Shell trade also has a relatively high retail component (30%) and an institutional order book that split 50% Asia, 30% Europe and 20% US.
The deal comprises 11% of the outstanding H-share capital and about 30 days trading volume. A year ago, Sinopec was trading 30 million shares a day. This year the figure has doubled to 60 million and was hitting 70 million at the time BP sold its stake.
The remaining strategic shareholder of the big three is ExxonMobil, which holds a 3.65% stake. Some analysts believe the potential for strategic sell-downs has dampened sentiment in the stock so far this year and it is currently down 6.47%. On a one-year basis, it is up 136% and has outperformed the MSCI World Oil and Gas index by about 65%.
Sinopec is currently trading on a PE ratio of about 12 times forward earnings and on a price to book value of about 1.8 times. The majority of analysts still have a buy recommendation, but some are becoming more cautious.
In a research report published earlier this week UBS commented that, "despite our oil price upgrades ($32/bbl WTI 2004 average) signifying our expectation of higher earnings, we think the Chinese oil stocks have been over bought and valuations are either expensive or fair value at best."
Sinopec is the world's fourth larger oil refiner and has a 50% market share in China. During 2003, crude oil refining jumped 10.135 to 115.65 million tonnes and the company averaged a utilization rate of 87% up from 81% in 2002.
The company has four main areas of operation: E&P, refining (its major revenue contributor), marketing (via its petrol stations) and petrochemicals.
