COSL raises $759 million from private placement

The Chinese oilfield services provider becomes the first Hong Kong-listed company to raise new equity this year.

China Oilfield Services (COSL) pocketed HK$5.88 billion ($759 million) on Tuesday night from a private placement of new H-shares, making it the first Hong Kong-listed company to raise fresh capital this year.

The deal was placed with the maximum 10 investors allowed for such private placements and was announced to the broader market only after it was completed. According to sources, the placement received good traction from existing shareholders with some of them putting in orders that were well in excess of 10% of the transaction.

Most of the new shares did end up with investors that were already on the shareholder roster but there were also some new names among the buyers, the sources said. COSL noted in an announcement that in addition to raising capital for future business developments, the placement was also a good opportunity to broaden its shareholder base.

The final 10 buyers included long-only investors and hedge funds from Asia as well as Europe and the US.

The company, which is the largest integrated offshore oilfield services provider in China and a subsidiary of state-owned oil and gas producer China National Offshore Oil Corp (Cnooc), sold a total of 276.272 million new H-shares at a price of HK$21.30 each.

The price translates into a discount of 7% versus yesterday’s closing pricing of H$22.90 and a discount of 8.9% versus the average closing price in the past five sessions, which reflects the fact that the share price has been on a declining trend since the beginning of the year.

COSL has had a strong run in the past six months, however, as investors have become more optimistic about economic growth in China. The stock is up 63% since the low-point in late June and, although the share price curve has flattened out recently, it is currently trading just 8% below the record high of HK$24.90 that it hit in mid-November.

Despite the gains, sources said investors viewed the discounted placement price as a good entry point, particularly since the deal allowed them to buy a meaningful stake. Private placements are also quite popular with big investors since they are tightly allocated and therefore tend to have less negative impact on the share price in the aftermarket.

The new shares account for 18% of the existing H-share capital and 6.15% of the company as a whole, including its Shanghai-listed A-shares. On a post-deal basis, the placement accounts for 5.8% of the enlarged share capital and increases the portion of the company held through H-shares to about 38% from 34.1%. Cnooc’s stake will drop to 50.5% from 53.6%.

According to the sources, the five joint bookrunners started to approach a select group of investors just before Christmas, after COSL received regulatory approval for the deal, but they did not formally wall-cross anyone until Monday this week. By holding off until most investors were back from the holidays, they were able to get more price tension and the deal came together quite quickly, the sources said. The transaction was completed after the Hong Kong market closed on Tuesday.

By waiting a couple of weeks, COSL was also able to take advantage of the current portfolio repositioning for 2014. As a group, global investors are still underweight China and are looking for opportunities to increase their exposure to good-quality companies at the right price.

Although many analysts are still negative on the major Chinese oil producers, such as Cnooc and Sinopec, the oil and gas servicing sector is generally viewed as a more resilient and stable part of the value chain. At a market capitalisation of about $13.3 billion, COSL also has the advantage of size, while most other oil services companies tend to be small-caps.

According to its website, it has four main business segments – drilling, wells, geophysical & surveying services, and marine support & transportation services – and it supports the offshore oil and gas industry with regard to both exploration and development and production. Drilling is the biggest contributor by far to both revenues and operating profit.

Aside from the China offshore market, the company is also active in Southeast Asia, Australia, the Middle East, America, North Africa and northern Europe.

On Tuesday it announced it has recently entered into a long-term co-operation contract with Mexico’s Petróleos Mexicanos (Pemex) to operate another module rig in the Gulf of Mexico for a period of more than 1,700 days. COSL has co-operated with Pemex for the past six years and already has four module rigs and three high-end jack-up drilling rigs in the area, it said.

The announcement did not mention any financial details, but noted that the agreement has been struck at “higher contract day rates.”

In the first nine months of 2013, COSL posted a 24.4% increase in revenues year-on-year to Rmb20.3 billion ($3.3 billion) and a 40.1% gain in net profit to Rmb5.36 billion.

This was the first private placement by a Hong Kong-listed Chinese company since Huaneng Renewables raised $204 million in mid-October. These types of deals have become slightly more frequent in the past couple of years, however, as they allow Chinese-incorporated companies that have H-shares listed in Hong Kong to raise new capital without having to issue any shares to the National Social Security Fund (NSSF) in connection with the transaction.

If COSL had decided to carry out a public placement it would have had to issue new shares corresponding to 10% of the transaction to the NSSF free of charge.

Investment banks also like these deals since they put a bit of margin back into the overnight block trade/placement business that has been getting increasingly competitive in the past couple of years, resulting in lower fees. Companies are typically willing to pay a bit more for the banks to find the right investors to take up a private placement.

Notable H-share private placements last year included a $3.1 billion deal that Goldman Sachs arranged for Sinopec in February and which was awarded by FinanceAsia as the “Best Secondary Offering” in 2013 because of the smooth execution.

The Huaneng Renewables placement, which was led by Credit Suisse, was priced at a slightly wider discount to the latest close (7.5%) than yesterday’s COSL trade, while the significantly larger Sinopec deal came at a 9.5% discount.

The COSL deal was arranged by China International Capital Corp (CICC), Credit Suisse, Goldman Sachs, JP Morgan and Morgan Stanley.

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