A "Huge China Play" As Oil Giant Lists in New York
By Gabriella Faerber
Staff Writer
China's largest oil producer's plans to list in the US and Hong Kong has got investors buzzing. But analysts say that if investors want in, they should be ruled by their heads and not their hearts.
CNOOC Limited, the exploration and production division of China National Offshore Oil Corporation and China's largest offshore oil producer, plans a dual listing in Hong Kong and New York at the end of October.
"There is euphoria in the market. It's a huge listing. It's a huge China play. But it's unpredictable," says Eugene Choung, oil analyst with Morgan Stanley Dean Witter in Singapore.
The Deal
CNOOC plans to sell some two billion shares, about 25% of its share capital. The American Depositary Receipts (ADR) -- securities that represent a fixed number of local shares of a company but which trade in the US -- will likely be priced between $22 and $25. Each ADR will represent 20 shares.
In Hong Kong, the shares will likely be priced between HK$8.53 and HK$9.69 each.
CNOOC hopes to raise some US$2.5 billion through the listing. Salomon Smith Barney and BOCI Asia, a unit of Bank of China are joint coordinators of the sale.
The Risks
Investors should remember what they're getting into when buying stocks in China.
"The main risks are that it is a China stock. If I found a comparable stock in the US, I would rather invest in that stock which does not have all the China-type risks associated with it," says Choung.
First, there is the disclosure risk. "Investors wonder if CNOOC is telling them all they really need to know about the company, even though CNOOC is taking pains to adopt Western disclosure standards," says Choung.
CNOOC says the money it generates from the listing will pay for future projects and pay for future acquisitions.
But analysts are also quick to point out that a hefty proportion of the cash raised will likely go towards paying off a whopping HK$14.2-billion-worth of debt. A large chunk will also be used to pacify around 4,500 workers laid off as part of CNOOC's restructuring exercise prior to the listing.
Other observers point to the volatility of oil prices as reason to exercise some caution towards this offering. Opec's moves to slash output have pushed oil prices to a 32-month highs in recent weeks.
In the first half of this year, those price rises boosted CNOOC's earnings by some 32% over the year-ago period.
But oil's on the decline again now, and lower oil prices will put pressure on CNOOC's earnings in the second half of the year. Indeed, the company's profits slumped last year as a result of weak oil prices, analysts say. CNOOC's earnings fell some 68% from HK$4.58 billion in 1997 to HK$1.45 billion.
Choung downplays those concerns. "Oil prices are a regular industry risk. Investors have to live with that risk," he says.
But the political and economic uncertainties of investing in China linger. There is also the issue of China's eventual entry to the World Trade Organization (WTO) to bear in mind, say analysts.
"If competition comes in, margins will drop," says an oil analyst with a foreign brokerage in Singapore. Indeed political risks dull one of CNOOC's most attractive features: the company currently has exclusive rights to acquire up to 51% of joint-venture projects with foreign partners. "But the government could withdraw that 51% whenever it feels like it," says the analyst.
Pricing Precedent
Analysts suggest the success of the listing comes down to pricing. "The general consensus is that unless it's priced on the lower side, it's going to have little upside after the listing," says the oil analyst.
The general feeling is that at the indicated range CNOOC is a bit pricey. Nevertheless, he concludes by suggesting that New York investors will find CNOOC irresistible largely by virtue of the potential of its recent oil discoveries in the north of China.
The Hong Kong side of the listing may disappoint since there appears to be less appetite for oil and gas stocks in Asia. The general feedback is that Chinese fund managers don't have a clue about oil and gas," says the analyst. "There is a huge disparity in terms of the knowledge base around the investment community. That's why only 10% is being offered in Hong Kong," he says. |
