CNPC (Hong Kong) raises $480 million of new capital

Investors flock to the deal believing it is a precursor to asset injections from controlling shareholder PetroChina.

CNPC (Hong Kong) last night raised HK$3.72 billion ($480 million) from a top-up placement that was very well received by investors who viewed the fundraising as the first concrete sign that a long-anticipated asset injection story may be about to unravel.

According to a source, the offering was fully covered within 30 minutes and attracted more than $1 billion of demand, predominantly from long-only funds. Almost 100 investors submitted orders.

CNPC (HK), a Hong Kong-listed red-chip which is active in the exploration and production of crude oil and natural gas in China, Kazakhstan, Oman, Peru, Thailand, Azerbaijan and Indonesia, has been majority-owned by Hong Kong-listed PetroChina since August last year when PetroChina acquired the shares from their mutual Chinese parent, China National Petroleum Corp. At the time, the companies said that the change of the shareholding structure would allow PetroChina and CNPC (HK) to jointly "exploit the the huge and rapidly growing natural gas end-user market in China", with PetroChina focusing on the upstream and midstream supply of gas, and CNPC (HK) being responsible for the distribution to the end-user.

Natural gas as a clean and efficient source of energy has drawn increasing attention and interest from the Chinese government and has become one of the most rapidly growing sectors in China's energy industry. The government is seeking to double the use of natural gas to 5.3% of the country's total energy consumption by 2010.

Since the takeover, it has been expected that CNPC (HK) would buy PetroChina's existing downstream gas distribution assets, and with the company now actually raising money, it isn't too far-fetched to believe such an acquisition is getting closer. CNPC (HK) told investors last night that the proceeds were intended to be used for future acquisitions as well as for working capital and other general corporate purposes.  

Another reason why the placement may have attracted such a strong response was that it offered a good opportunity for investors to buy the stock in size. Based on the average daily trading volume in the past three months, the placement accounted for 18.5 days' worth of trading. It also represented about 10% of the issued share capital.

The company offered 450 million shares at a price between HK$8.01 and HK$8.41, which equalled a discount of between 3.4% and 8% versus yesterday's closing price of HK$8.71. The share price has had a strong run this year as oil and gas prices have recovered and in anticipation of the potential asset injection and is currently up about 287% year-to-date. After a 3.7% rally yesterday, it closed only 2.8% below the year high of HK$8.96 that it reached a week-and-a-half ago.

Thus it wasn't too surprising that the placement price was fixed off the top of the range at HK$8.27, resulting in a discount of 5%.

Because this was a top-up placement, the shares on sale were secondary shares (sold by PetroChina). However, PetroChina will subscribe to the same number of new shares at the placement price to ensure the money ends up with CNPC (HK). Although the transaction will result in a slight dilution of PetroChina's holding in CNPC (HK), a top-up placement is the most efficient way for a Hong Kong-listed company to do a follow-on sale. After the two transactions, PetroChina's stake will fall to about 51% from 56% previously.

About 70% of the demand came from Asia, with European investors responsible for the remaining 30%.

The placement, which was arranged by Bank of America Merrill Lynch, was the largest follow-on offering by a Hong Kong-listed company since underground mall operator and developer Renhe Commercial Holdings raised $720 million in mid-July. However, only two-thirds of the Renhe transaction was made up of new shares, meaning that Renhe too raised about $480 million of new capital. The only other Hong Kong follow-on that has been larger this year is China Resources Land's $555 million offering in May. That deal was arranged by Credit Suisse, while UBS led the Renhe trade.

CNPC (HK) currently has 14 oil and gas projects in seven different countries, but continues to develop its gas distribution business. In September it bought a 49% stake in Zhongyou Zhongtai for Rmb615.5 million ($90 million) from its ultimate parent, CNPC, following a tender process. Zhongyou Zhongtai is principally engaged in the construction, operation and management of city gas pipeline networks and ancillary facilities, as well as the development and sale of liquefied petroleum gas and the provision of safety testing, maintenance and emergency repair of city gas transportation and distribution equipment.

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