Second time lucky for Brightoil placement

Chinese energy company finally gets cash to expand further into the upstream oil and gas sector after pulling an earlier equity deal at the end of March.

China's Brightoil Petroleum Holdings finally managed to raise funds from a top up placement after Thursday's close in Hong Kong, one month after pulling a similar deal because it was unhappy with the demand generated. 

This time round, the Territory's second largest, listed independent oil and gas producer was able to buck difficult markets and raise HK$1.29 billion ($167 million) from a 590.1 million primary share deal. This comprised a base deal size of 475.6 million shares and 50% of an upsize option, which added a further 114.5 million shares.

The deal was marketed at a fixed price of HK$2.20 per share, which represented a 12.4% discount to the stock's HK$2.51 close according to a term sheet seen by FinanceAsia. Sole global co-ordinator Nomura is reported to have already brought enough investors over the wall to cover the entire book by the time it launched. 

The deal closed a few hours later with participation from about 15 to 20 investors, all hailing from Hong Kong and China. About 80% of the book went to the top six accounts.

BOCI was joint placing agent.

"This was more like a club deal," said one source close to the transaction. "Everyone who was in the book wanted to be there and had done their homework looking at the company over the past few weeks."

A few more additional orders filtered in from the UK and Europe later in the evening the source added. But they were not included, as the deal had already been allocated. 

Brightoil was particularly keen to make sure the deal was a success given the failure of its first attempt on March 31. This 325 million share deal was marketed on an indicative range of HK$2.35 to HK$2.39, equating to a discount of 9.1% to 10.6% compared the stock's then closing price of HK$2.63.

However, the company pulled the deal after failing to garner the full $150 million in proceeds it was expecting from both the base deal and 162.5 million share upsize option. Part of the problem was undoubtedly its unwieldy syndicate comprising six placing agents: BOCI, CCBI, CLSA, ICBC, JP Morgan and Nomura. 

"Everyone overpromised and said they could fill the entire deal including the upsize option," said one source close to the earlier deal. "But when it came down to it there was only demand to comfortably cover the base deal."

When the new deal was launched on May 7, Nomura and BOCI faced a new handicap thanks to the stock's unusual trading pattern in the hours preceding the new offering. From Thursday's open, the stock came under immediate and sustained short-selling pressure.

By the end of the trading day it had recorded a short to total turnover ratio of 34.27%, the 25th most actively shorted stock in Hong Kong. However, this downward pressure was suddenly reversed thanks to a late and very sharp spike in the stock's price 30 minutes before the close when it jumped 10.5% from its intra-day low of HK$2.27.

It subsequently closed up 2.87% on the day. This means investors taking part in the placement have effectively received a much slimmer 3.18% discount to Brightoil's trading price immediately prior to the spike.

Yet had the spike not occurred, the stock was on course to close down around 7.8%, underperforming all of its near comparables. The Hang Seng China Enterprises Index, for example, closed down a more modest 1.64%, while CNOOC (which Brightoil tends to track) dropped 1.22%. 

Both CNOOC and Brightoil are trading at about 20 times consensus 2015 earnings. The two fell heavily between August 2014 and February 2015, mirroring the sharp fall in oil prices. Brightoil dropped from a level of HK$2.92 in mid August to HK$1.73 six-months later.

Since then it has bounced back, rising 45% from its mid-February lows. 


The company has been in the process of transforming its business model since it employed former BP executive Bruce Yung as CEO in 2014. After starting life as a bunkering service provider, it has progressively been moving into the upstream oil and gas business.

Last year it spent $1.05 billion to gain a stake in CNOOC's Bohai Bay offshore oil project from US independent Anadarko. According to recent research from Nomura it is also bidding $400 million to $600 million to purchase a further 12% stake in the project from a second US independent, Newfield. 

Revenue from these assets helped to balance pressure on its international trade and bunkering business, which was down 64% year-on-year in the first half of FY2015 because of falling oil prices. However, thanks to a profitable hedging policy, the latter business line was still able to record an operating profit of HK$172 million in its first half results, released late February. 

The new oil assets contributed HK$357 million in operating profit, while the group's natural gas operations in Xinjiang (in partnership with CNPC) provided a further HK$436 million in operating profit. The oil tanker business also did well, up 30% to HK$103 million as a result of rising freight rates.

China has been trying to take advantage of falling crude oil prices to import and store more oil for its strategic reserves. Brightoil is trying to play to the trend, building oil storage operations at Zhoushan, which should come on stream in 2016. 

In a recent research report, Nomura estimated that Brightoil could become one of the world's top five oil storage providers by 2018. It has a HK$3.30 target price on the stock. 

BOCI also recently said it expects Brightoil to record 42% EPS growth over the coming three years. It wrote, "We expect the company to see decent EPS growth, a rare case in the sector given the recent sharp fall in the oil price."

The company has said it is on the lookout for more assets in China, with plans to spend up to $1 billion a year for the next three to four years. But some of the proceeds from the new transaction are likely to be used to pare down debt, which has risen in tandem with its acquisition spree.

Net debt to equity is up from 36.3% in 2014 to 107.5% as of February this year.

The company and its controlling shareholders will now be subject to a 90-day lock-up from raising further equity. 

¬ Haymarket Media Limited. All rights reserved.
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