The sale, which marked the largest overnight block-trade in Asia so far this year and the second largest equity offering after Lotte ShoppingÆs $3.74 billion IPO, was jointly arranged by Credit Suisse, Goldman Sachs and JPMorgan.
Demand was extremely strong even though CNOOCÆs is trading very near its record highs and the deal, which ended up being priced at the top end of the range, was said to have been comfortably covered even before the order book was opened to European investors.
At the final tally, the book was more than five times covered and had attracted over 250 investors, according to people familiar with the sale. One source noted that more than 70% of the orders came from institutional and corporate investors, while another described the order book as a list of ôwhoÆs who in the investor community.ö
Given that the earnings performance of CNOOC, which is ChinaÆs third largest oil and gas producer and the largest offshore explorer, is closely linked to the level of oil prices, the interest was likely underpinned by the fact that oil futures broke through their previous highs last week
Several investment banks have also recently upgraded their oil price forecasts for this year.
The 2.5 billion shares were sold at HK$6.15 apiece, which marked a 5.4% discount to WednesdayÆs closing price of HK$6.50 in Hong Kong and a 3.6% discount to the ADR close in New York on the same day. They were initially offered to investors in a price range between HK$6.05 and HK$6.15, or at a discount to the local close of 5.4-6.9%.
ôThe company has done a fair amount of investor relations work and itÆs a stock that investors like because of its strong earnings growth and due to the bullish views on oil,ö one observer said, noting that placement was a good opportunity to buy the stock because of its large size.
The new shares accounted for only about 5.5% of the existing share capital, but in terms of turnover the sale was more significant, accounting for about 26 days worth of Hong Kong trading.
About 60% of the deal went to Asia, 25% to Europe and about 15% to the US where some large institutions were offered shares on a limited basis.
The deal was launched in the Asian morning and was said to have had a very quick response from investors, which may have had something to do with the fact that close to 1,000 leading global investors happened to be assembled in one hotel in Beijing to attend JPMorganÆs annual China conference. At least this did make the distribution of the term sheet unusually smooth.
The bulk of the shares (90.9%) were offered to investors in the form of a top-up placement, which saw parent company China National Offshore Oil Corp first sell existing shares to the market and then subscribe to new shares issued by the company at the same price.
The remaining 9.1% of the shares were sold by the parent directly to ChinaÆs National Social Security Fund to comply with regulations that 10% of any funds raised from an overseas share sale, or 10% of the actual shares, needs to be transferred to the NSSF.
This means CNOOC itself raised $1.8 billion from the sale.
According to information provided by the company to investors, the money will be used to finance ongoing capital expenditures at an oil project in Nigeria in which it recently acquired a 45% stake and for other general corporate purposes.
Analysts took a more speculative view on the fundraising, however, noting that the company remains keen to expand its oil and gas reserves and a pile of cash would obviously come in handy should such opportunities arise.
ôThe management is very tight-lipped with regard to M&A, but IÆd say they definitely have something on the drawing board û probably overseas,ö said Gideon Lo, an oil sector analyst with DBS Vickers.
Other analysts agreed, noting that CNOOCÆs recent purchase of a 45% stake in an
offshore oil mining license in Nigeria for $2.7 billion had significantly depleted its cash and time deposit assets, which stood at Rmb21 billion ($2.6 billion) at the end of 2005.
ôBasically, I think the company wants to maintain a certain level of cash to give it the flexibility to pursue any acquisition opportunities that may come up without having to worry about the initial funding,ö said one analyst who declined to be named.
On top of its expected conquests overseas, CNOOC also has a hefty capital expenditure programme to tend to over the next five years. This year it forecasts total capex to reach $3.06 billion, or a 35% increase from 2005, and according to analysts the total capex plan for 2006-2010 amounts to an average $2 billion per year.
ôThe company cannot be sure that oil prices will remain high enough to generate sufficient revenue to cover the entire capex programme and - in any case - it is not a bad idea to have a mixed source of funding,ö argued one analyst.
CNOOCÆs share price was suspended from trading both in Hong Kong and New York yesterday, but rose 1.56% on in Hong Kong Wednesday after the company announced a 45.1% rise in first quarter revenues to Rmb16.7 billion ($2.07 billion). This brought the total 12-month gain to 50.2%.
The stock has outperformed the 20.4% gain in the Hang Seng Index during the same period but lags the performance of oil peers PetroChina and Sinopec, which have rallied 79.3% and 58.4% respectively in the past year.
Prior to WednesdayÆs gain the stock had dropped a combined 6.5% over three days after closing at a record high of $6.85 on Thursday last week. The decline came as the front-month oil futures on Nymex fell back from last weekÆs record high of $75.35 per barrel.
Most analysts who cover CNOOC are bullish about the company in the coming year and as more banks revise up their oil price forecasts they are likely to follow suit with higher earnings estimates for CNOOC, some observers say.
ôWe believe consensus earnings estimates for CNOOC are too low and that increases in these numbers will support the share price,ö Macquarie Securities analyst Scott Weaver said in a research note published yesterday, in which he announced an increase in his 12-month target price to HK$7.80 from $7.30.
Weaver, who has an outperform rating on all three of ChinaÆs oil majors, has attached a 10% premium to his sum-of-parts valuation on CNOOC partly because of this anticipation of more earnings revisions, partly due to the upside risk to the oil price.
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