China Oilfield jacks up huge demand

The oil services company garners nearly twice the demand of China Telecom in one of the most successful international equity offerings from the Mainland in recent years.

China Oilfield was priced just off the top of its indicative range on Friday after receiving double digit oversubscription on both its retail and institutional tranches. The 1.334 billion share deal (pre shoe) saw its institutional book close 15 times oversubscribed and retail book close 18 times oversubscribed, triggering a clawback, which will result in a final allocation of 70% to institutions and 30% to retail.

Backed by Credit Suisse First Boston and Merrill Lynch, the company raised $287.5 million on pricing of HK$1.68 per share, against a marketed range of HK$1.40 to HK$1.70. Pre shoe, the company has sold 35% of its issued share capital, with BOCI, CLSA, ICEA and UBS Warburg acting as co-leads.

Observers say that over 400 institutions placed orders, although nearly 100 were left unfilled and all had been told that the leads would institute a $25 million cap on individual allocations. Nearly 30 investors placed 10% plus orders. Geographically the book was said to have split 45% Asia, 35% US and 20% Europe, with participation from China funds, regional funds and sector specialists.

There was also said to have been an 85% participation rate from one-on-one meetings, although roadshows had been cut short to curtail market risk and allow close the book early. This meant that a couple of days of presentations in Europe and one day in the US were cancelled.

Observers say the initial intention had been to build momentum with local accounts before drawing in the anchor orders and using both as a lever to bring final pricing down. "Having gone out very aggressively to Asian accounts, the book was oversubscribed from day one," one specialist comments. "Indeed by the time the management team left Asia, the whole deal was already significantly oversubscribed."

In terms of the deal's valuation, it was priced on an EV/EBITDA basis of 4.04 times forward earnings compared to a 4.5 times level for CNOOC and seven times average for global comparables such as Baker Hughes and Schlumberger. Typically the oil services sector trades through the global majors and in secondary market trading, bankers expect China Oilfield to do likewise relative to CNOOC.

Year-to-date, CNOOC is up 36.73%, closing Friday at HK$10.05 per share and significantly outperforming the Hang Seng Index, down 13.4% over the same period. However, CNOOC's outperformance relative to the Hang Seng Index has narrowed since China Oilfield started pre-marketing and its share price slid steadily during October to a low around the HK$9.5 level, before recovering slightly in November.

China Oilfield and CNOOC have a symbiotic relationship as the former provides all the grunt work for the latter- setting up rigs, drilling for oil and maintaining the wells, as well as providing supplementary shipping services and some seismic services.

Bankers say four main aspects of the deal stand out. "Firstly investors love the whole offshore China Oil story," says one. "In terms of growth potential, analysts see offshore China being where onshore China was 20 years ago and this company is recording net income growth of 22% per annum.

"Secondly," he adds. "They were comforted by the company's close relationship with CNOOC and its numerous joint-ventures with international competitors that mitigate future competition risk. Thirdly management has over 20 years experience and performed well over the roadshow. Fourthly, the valuation was also sensible."

China Oilfield has also said that it hopes to achieve a dividend pay-out ratio of 20% to 30% of net income during 2003, which will result in a dividend yield of 1% to 2%.

Trading of the H-share offering will begin on Wednesday in Hong Kong.

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