Showing posts with label Oil and Gas. Show all posts
Showing posts with label Oil and Gas. Show all posts
Saturday, June 07, 2008
Oil continues its inexorable advance...
As a follow up to a post I made some time back about Lee Kuan Yew's comments on oil, here are a few articles recording the historic highs in oil prices reached earlier this week:
Saturday, May 10, 2008
Lee Kuan Yew Wrong Again! This Time, It's Oil.
Two months ago, Lee Kuan Yew, Minister Mentor of Singapore and Chairman of GIC, made the following statements about oil prices, as reported by the Straits Times:
Oil prices 'unlikely to rise further'Well, shortly after Lee Kuan Yew's pronouncement, Oil prices shot up above $110, and today is trading at above $125.
March 8, 2008 (Straits Times)
OIL prices are not likely to go higher, Minister Mentor Lee Kuan Yew said yesterday.
As crude oil prices hit US$105 (S$145) per barrel, MM Lee believes it is not likely to creep further up to US$110.
'The oil suppliers are testing the limits. They believe that China and India now form a new long-term base demand. They may be right,' he said.
'I don't think it can go up US$110, US$120, US$150 and the world economy goes on. Inflation will go through the roof.
'Economies of the West will go down, hyper-inflation in many developing countries. So it will go into reverse. There's no projection right to the end.'
On top of that, just a few days ago, respected Goldman Sachs Analysts have predicted that oil could spike up towards $150 and even maybe $200!
Goldman Says Oil `Likely' to Reach $150-200 a BarrelWell well, wrong again, Mr. Lee Kuan Yew.
By Nesa Subrahmaniyan
May 6 (Bloomberg) -- Crude oil prices may rise to between $150 and $200 a barrel within two years because of a lack of adequate supply growth, Goldman Sachs Group Inc. analysts led by Arjun N. Murti said in a report.
``The possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty,'' the Goldman analysts wrote in the report dated May 5.
Global fuel demand growth is outpacing gains in output. China, the world's fastest growing major economy, has more than doubled oil use since New York crude dropped to this decade's low of $16.70 a barrel on Nov. 19, 2001. That's soaked up most of the world's spare capacity amid supply cuts in Nigeria, Iraq and Venezuela.
Wrong on energy, and wrong on banking.
Not only are the industry's most respected analysts holding opinions diametrically opposite to you, the world's most respected investors, such as Warren Buffett and Jim Rogers, have also made the opposite investment decisions compared to you.
Seriously, what is Lee Kuan Yew doing as the Chairman of GIC, Singapore's $300 billion investment fund? The man isn't qualified for the post!
----------------
Related:
Lee Kuan Yew vs Warren Buffett: Part 2
Lee Kuan Yew Ain't No Warren Buffett
GIC, UBS & Jim Rogers
Tuesday, January 22, 2008
Swiber Holdings
Swiber Holdings Limited, through its subsidiaries, offers integrated offshore engineering, procurement, construction, installation, and commission (EPCIC) services to oil and gas companies. Its services include launching and/or installation of jackets in an offshore production platform at offshore production sites; engineering design and laying of offshore pipelines; Engineering design and mooring of FSOs and FPSOs on the seabed; engineering design, fabrication, and installation of single point mooring buoys; and maintenance, servicing and refurbishment of existing single point mooring buoys and their mooring systems. The company also offers a range of offshore marine engineering services, as well as owns and charters vessels. As of February 28, 2007, it operated a fleet of 13 operating vessels, comprising six tug boats and seven barges. Swiber Holdings Limited has operations primarily in Singapore, Malaysia, and Indonesia, as well as in Thailand, India, China, Australia, the United Kingdom, and the United States. The company was founded in 1996 and is based in Singapore.
Strategy Overview
The fortunes of oil services companies are tied to overall supply and demand issues as well as to prices. Not coincidentally, based on these factors the oil industry has experienced several cycles over the years. Changes in oil prices have different effects on different sectors. For example, while high oil prices benefit upstream exploration and production companies, they hurt down-stream refiners and marketers in the form of higher raw materials costs. Conversely, lower oil prices help refiners and marketers while hurting producers’ earnings. Integrated oil companies realize both sides of oil price fluctuations, but they generally benefit from higher oil prices, as they are usually more leveraged to the upstream. Swiber’s position in the upstream section of the value chain means that it has benefited from the recent surge in global oil prices.
For oil drilling & exploration services companies, the location of their operations is of prime importance. At any given time, some geographic areas might be experiencing a surge in drilling activity, while activity in other areas may be stagnant or declining. Offshore areas that have been leading the resurgence in offshore drilling over the past three years include the Gulf of Mexico, the North Sea, Southeast Asia, and West Africa; drilling contractors are paid more for their work in these areas than elsewhere.
Swiber’s Performance
Swiber’s operations are focused in Indonesia & Malaysia, which have seen a healthy growth in offshore exploration & production operations in recent years. The company has been on a rapid growth trajectory over the last two years, with revenues and net profits following a parabolic upward trajectory.
Which gives the following valuation (click for full image):
The valuation of $1.29 is still far below the recent traded price of about $2.20, and this may be because the revenue growth rates I have used, despite being quite aggressive relative to other companies, may be conservative.
In terms of relative multiples analysis:
The price appears to be about 17x FY08E earnings and about 6x book value.
I personally would like to wait a while to see if the recent market shock will continue and if Swiber's share price will drop further as i like to have a better margin of safety.
Strategy Overview
The fortunes of oil services companies are tied to overall supply and demand issues as well as to prices. Not coincidentally, based on these factors the oil industry has experienced several cycles over the years. Changes in oil prices have different effects on different sectors. For example, while high oil prices benefit upstream exploration and production companies, they hurt down-stream refiners and marketers in the form of higher raw materials costs. Conversely, lower oil prices help refiners and marketers while hurting producers’ earnings. Integrated oil companies realize both sides of oil price fluctuations, but they generally benefit from higher oil prices, as they are usually more leveraged to the upstream. Swiber’s position in the upstream section of the value chain means that it has benefited from the recent surge in global oil prices.
For oil drilling & exploration services companies, the location of their operations is of prime importance. At any given time, some geographic areas might be experiencing a surge in drilling activity, while activity in other areas may be stagnant or declining. Offshore areas that have been leading the resurgence in offshore drilling over the past three years include the Gulf of Mexico, the North Sea, Southeast Asia, and West Africa; drilling contractors are paid more for their work in these areas than elsewhere.
Swiber’s Performance
Swiber’s operations are focused in Indonesia & Malaysia, which have seen a healthy growth in offshore exploration & production operations in recent years. The company has been on a rapid growth trajectory over the last two years, with revenues and net profits following a parabolic upward trajectory.
Accordingly, the stock price has also risen meteorically since its listing, hitting a high of about $3.50 late in 2007. However, the recent dip in the stock markets and bloodletting has seen Swiber’s stock price follow the general market trends and dip accordingly:
Recent Developments
Musicwhiz is a current shareholder of Swiber and has been faithfully keeping up with the company. He has written very detailed and insightful analysis of the company’s strategy going forward so I shall refrain from my own analysis and refer you to his blog.
I have done a simple valuation using the abnormal earnings growth (AEG) model, so I have not forecast full balance sheets for this valuation.
The assumptions I have used for the valuation are as follows:
Which gives the following valuation (click for full image):
The valuation of $1.29 is still far below the recent traded price of about $2.20, and this may be because the revenue growth rates I have used, despite being quite aggressive relative to other companies, may be conservative.
In terms of relative multiples analysis:
The price appears to be about 17x FY08E earnings and about 6x book value.Conclusions
By conventional standards, Swiber is not priced conservatively. The market appears to have assumed massive growth rates in the next few years as oil & gas offshore exploration activity continues to grow to meet global demand for oil and as onshore resources decline. High energy prices also mean strong margins for the exploration services companies and Swiber seems poised for benefit.
I personally would like to wait a while to see if the recent market shock will continue and if Swiber's share price will drop further as i like to have a better margin of safety.
Saturday, October 13, 2007
Two Videos on Oil
Recently I wrote two posts on companies operating in China's Oil industry, China Oilfield Technology and RH Energy.
For those who are interested in this sector, below are two lengthy videos on the global oil industry: its business, economics, politics.
China vs US: The Battle for Oil (50mins)
Securing the International Oil Supply - Conference at Univ. of Chicago (1.5hrs)
For those who are interested in this sector, below are two lengthy videos on the global oil industry: its business, economics, politics.
China vs US: The Battle for Oil (50mins)
Securing the International Oil Supply - Conference at Univ. of Chicago (1.5hrs)
Wednesday, October 10, 2007
Mermaid Maritime: IPO Summary and Valuation
Business Overview
Mermaid Maritime (MM) is a leading provider of drilling and sub-sea engineering services for the oil and gas industry in South East Asia. Over the last five years, MM has grown significantly in the areas of sub-sea engineering, and, more recently, drilling services for the offshore oil and gas industry as well as in training and technical services. MM has established ourselves as a company recognized by the industry for high quality services, delivered safely and efficiently. MM has developed a strong blue chip client base that includes some of the world’s largest oil and gas-related companies. Clients such as Chevron, CUEL and PTT Exploration and Production PCL each accounted for 5.0% or more of MM’s sales in any one of the periods under review. Some of MM’s other clients include BP, Shell, ExxonMobil, Saipem, Transocean, Petronas and Amerada Hess. MM operates throughout South East Asia, primarily in Thailand, Indonesia, Malaysia and Vietnam.
MM provides drilling services through its majority-owned (95.0%) subsidiary, Mermaid Drilling Ltd. (“MDL”), which currently has two tender rigs. MM provides sub-sea engineering services through its wholly owned subsidiary, Mermaid Offshore Services Ltd. (“MOS”). MOS provides sub-sea inspection, repair and maintenance services, light construction services and emergency repair and call out services in South East Asia. MOS’ fleet consists of four vessels which it owns, in addition to one DP construction vessel and one ROV/air dive support vessel, both of which it charters. The flagship vessel in its fleet is the DP DSV Mermaid Commander, which has an in-built saturation diving system and rough weather capabilities. In addition, MOS owns one portable saturation diving system, seven air diving systems and seven ROVs.
MM has built and now operate a world class facility at our operational base in Chonburi, Thailand. This facility allows MM to control its own maintenance and refurbishment requirements of equipment and, more importantly, the facility’s geographical location allows us to mobilize expeditiously and efficiently to MM clients’ locations. MM has also established shore base support functions in (i) Kuala Lumpur, Malaysia; (ii) Songkhla, Thailand; and (iii) Jakarta, Indonesia to support our geographical expansion. To support MM’s mobile operations, these shore base support functions can be moved at short notice.
Major Risk – Tiny Fleet
MM only has two tender rigs, and downtime of one or both of these rigs could adversely affect MM’s results of operations. For example, MTR-2 is experiencing a period of downtime that commenced in July 2007 as a result of an agreement with Chevron Thailand Exploration and Production Ltd (“Chevron Thailand”) to meet certain technical specifications upon the transfer of MTR-2 from its previous client. To meet these specifications, MM relocated MTR-2 to inland facilities in July 2007. In addition to completing these specifications, MM also decided to commence the dry-docking and SPS for MTR-2. MTR-2 is expected to resume operations in November 2007. Further, MM’s tender rigs may experience downtime for other reasons, such as the crane boom incident on MTR-1 in September 2006 and the fire on MTR-1 in June 2007
Competition
The market segments and region in which MM operates are highly competitive. Pricing is often the primary factor in determining which contractor is awarded a contract. Some of MM’s competitors are larger than it is, have more diverse fleets or fleets with generally higher specifications, have greater resources, have greater brand recognition and greater geographic reach and/or lower capital costs than MM has. This allows them to withstand industry downturns better, compete on the basis of price or relocate, build and/or acquire additional assets, all of which may affect MM’s sales or profitability. If other companies in MM’s industry relocate or acquire vessels for operations in South East Asia, levels of competition in South East Asia may increase and MM’s business could be adversely affected. Local oil and gas services competitors in each country MM operates in may have more domestic experience and better relationships with clients.
Industry
MM’s business is dependent upon the conditions of the oil and gas industry, in particular the level of activity in oil and gas exploration, development and production and sub-sea inspection and maintenance programs in South East Asia where we are active. The level of capital expenditures for oil and gas exploration, development and production largely depends on prevailing oil and gas prices and our clients’ expectations of prices in the future, each of which is influenced by a variety of factors, including the actual and anticipated production, supply and demand for oil and gas, and worldwide economic conditions. Oil and gas prices are volatile, which have historically led to significant fluctuations in expenditures by clients for oil and gas drilling and related services. A sustained period of low drilling and production activity or the return of lower oil and gas prices could impact the level of oil and gas exploration, development and production, as well as result in the cancellation of current and planned projects and impact MM's business and results of operations.
The niche market in which MM operates is less sensitive to slowdowns in the industry as compared to oil and gas exploration activities. Even in the event of a slowdown in oil and gas exploration activities, MM clients’ planned projects may not be curtailed. Further, our sub-sea engineering services also perform inspection and maintenance services. MM anticipates that there would be a continued demand for such services even during periods of low drilling and production activity as many of MM’s clients would have to continue to meet their committed production levels under their supply contracts as well as comply with subsea infrastructure inspections requirements.
Accordingly, demand for services is subject to fluctuations that generally affect the oil and gas industry, with periods of high demand, short supply and high rates often followed by periods of low demand, excess supply and low rates. Further, the entry into the market of newly constructed, upgraded or reactivated tender rigs or vessels would increase market supply and may curtail the strengthening of rates or reduce them. Periods of low demand intensify the competition in the industry and often result in assets being idle for periods of time or being utilized at low rates. In addition, in depressed market conditions, a client may no longer need a tender rig or vessel that is currently under long-term contract or may be able to obtain a comparable service at a lower rate. Clients may then seek to renegotiate the terms of their contracts or avoid their obligations under those contracts.
Financials
The following information is extracted from the very detailed information provided in the prospectus, with the exception of FY2007E. Assuming the IPO priced at its maximum of $1.56:
(click for full image)
The projection and IPO pricing gives a pre-IPO trailing P/E pf 45.01 and P/B of 9.06. The extrapolation of HY07 results to FY07 gives the IPO a pricing a forward P/E of 18.52 and P/B of 8.18.
It should be noted that the 2H07 projection seems quite aggressive. This gives an ROE of about 44% and ROA of about 24%. I am not sure that this is sustainable in the long run. Even with this aggressive projection, the IPO pricing is not cheap at 18.5x forward earnings. The company's investment bankers seem to be extremely confident that Mermaid will continue to grow rapidly in the future.
To be sure, Mermaid is still a small company and has plenty of room for growth. The IPO valuation may come to look conservative in the future. However, significant risks abound for a company with only two drilling rigs.
This looks like a high risk/high reward IPO.
Mermaid Maritime (MM) is a leading provider of drilling and sub-sea engineering services for the oil and gas industry in South East Asia. Over the last five years, MM has grown significantly in the areas of sub-sea engineering, and, more recently, drilling services for the offshore oil and gas industry as well as in training and technical services. MM has established ourselves as a company recognized by the industry for high quality services, delivered safely and efficiently. MM has developed a strong blue chip client base that includes some of the world’s largest oil and gas-related companies. Clients such as Chevron, CUEL and PTT Exploration and Production PCL each accounted for 5.0% or more of MM’s sales in any one of the periods under review. Some of MM’s other clients include BP, Shell, ExxonMobil, Saipem, Transocean, Petronas and Amerada Hess. MM operates throughout South East Asia, primarily in Thailand, Indonesia, Malaysia and Vietnam.
MM provides drilling services through its majority-owned (95.0%) subsidiary, Mermaid Drilling Ltd. (“MDL”), which currently has two tender rigs. MM provides sub-sea engineering services through its wholly owned subsidiary, Mermaid Offshore Services Ltd. (“MOS”). MOS provides sub-sea inspection, repair and maintenance services, light construction services and emergency repair and call out services in South East Asia. MOS’ fleet consists of four vessels which it owns, in addition to one DP construction vessel and one ROV/air dive support vessel, both of which it charters. The flagship vessel in its fleet is the DP DSV Mermaid Commander, which has an in-built saturation diving system and rough weather capabilities. In addition, MOS owns one portable saturation diving system, seven air diving systems and seven ROVs.MM has built and now operate a world class facility at our operational base in Chonburi, Thailand. This facility allows MM to control its own maintenance and refurbishment requirements of equipment and, more importantly, the facility’s geographical location allows us to mobilize expeditiously and efficiently to MM clients’ locations. MM has also established shore base support functions in (i) Kuala Lumpur, Malaysia; (ii) Songkhla, Thailand; and (iii) Jakarta, Indonesia to support our geographical expansion. To support MM’s mobile operations, these shore base support functions can be moved at short notice.
Major Risk – Tiny Fleet
MM only has two tender rigs, and downtime of one or both of these rigs could adversely affect MM’s results of operations. For example, MTR-2 is experiencing a period of downtime that commenced in July 2007 as a result of an agreement with Chevron Thailand Exploration and Production Ltd (“Chevron Thailand”) to meet certain technical specifications upon the transfer of MTR-2 from its previous client. To meet these specifications, MM relocated MTR-2 to inland facilities in July 2007. In addition to completing these specifications, MM also decided to commence the dry-docking and SPS for MTR-2. MTR-2 is expected to resume operations in November 2007. Further, MM’s tender rigs may experience downtime for other reasons, such as the crane boom incident on MTR-1 in September 2006 and the fire on MTR-1 in June 2007
Competition
The market segments and region in which MM operates are highly competitive. Pricing is often the primary factor in determining which contractor is awarded a contract. Some of MM’s competitors are larger than it is, have more diverse fleets or fleets with generally higher specifications, have greater resources, have greater brand recognition and greater geographic reach and/or lower capital costs than MM has. This allows them to withstand industry downturns better, compete on the basis of price or relocate, build and/or acquire additional assets, all of which may affect MM’s sales or profitability. If other companies in MM’s industry relocate or acquire vessels for operations in South East Asia, levels of competition in South East Asia may increase and MM’s business could be adversely affected. Local oil and gas services competitors in each country MM operates in may have more domestic experience and better relationships with clients.
Industry
MM’s business is dependent upon the conditions of the oil and gas industry, in particular the level of activity in oil and gas exploration, development and production and sub-sea inspection and maintenance programs in South East Asia where we are active. The level of capital expenditures for oil and gas exploration, development and production largely depends on prevailing oil and gas prices and our clients’ expectations of prices in the future, each of which is influenced by a variety of factors, including the actual and anticipated production, supply and demand for oil and gas, and worldwide economic conditions. Oil and gas prices are volatile, which have historically led to significant fluctuations in expenditures by clients for oil and gas drilling and related services. A sustained period of low drilling and production activity or the return of lower oil and gas prices could impact the level of oil and gas exploration, development and production, as well as result in the cancellation of current and planned projects and impact MM's business and results of operations.
The niche market in which MM operates is less sensitive to slowdowns in the industry as compared to oil and gas exploration activities. Even in the event of a slowdown in oil and gas exploration activities, MM clients’ planned projects may not be curtailed. Further, our sub-sea engineering services also perform inspection and maintenance services. MM anticipates that there would be a continued demand for such services even during periods of low drilling and production activity as many of MM’s clients would have to continue to meet their committed production levels under their supply contracts as well as comply with subsea infrastructure inspections requirements.
Accordingly, demand for services is subject to fluctuations that generally affect the oil and gas industry, with periods of high demand, short supply and high rates often followed by periods of low demand, excess supply and low rates. Further, the entry into the market of newly constructed, upgraded or reactivated tender rigs or vessels would increase market supply and may curtail the strengthening of rates or reduce them. Periods of low demand intensify the competition in the industry and often result in assets being idle for periods of time or being utilized at low rates. In addition, in depressed market conditions, a client may no longer need a tender rig or vessel that is currently under long-term contract or may be able to obtain a comparable service at a lower rate. Clients may then seek to renegotiate the terms of their contracts or avoid their obligations under those contracts.
Financials
The following information is extracted from the very detailed information provided in the prospectus, with the exception of FY2007E. Assuming the IPO priced at its maximum of $1.56:
(click for full image)The projection and IPO pricing gives a pre-IPO trailing P/E pf 45.01 and P/B of 9.06. The extrapolation of HY07 results to FY07 gives the IPO a pricing a forward P/E of 18.52 and P/B of 8.18.
It should be noted that the 2H07 projection seems quite aggressive. This gives an ROE of about 44% and ROA of about 24%. I am not sure that this is sustainable in the long run. Even with this aggressive projection, the IPO pricing is not cheap at 18.5x forward earnings. The company's investment bankers seem to be extremely confident that Mermaid will continue to grow rapidly in the future.
To be sure, Mermaid is still a small company and has plenty of room for growth. The IPO valuation may come to look conservative in the future. However, significant risks abound for a company with only two drilling rigs.
This looks like a high risk/high reward IPO.
Tuesday, October 09, 2007
RH Energy
BUSINESS OVERVIEW
RH Energy (RHE) offers a full suite of integrated customised design, engineering, procurement, construction, installation and commissioning services (EPCIC) to the oil and gas pipeline and storage operators and oil companies. Currently, RHE’s main business focus is to fabricate and install equipment and systems which form an integral component of a gas or oil pipeline in the PRC. RHE uses products from reliable and reputable international principals such as Cameron, Goodwin, Siemens and Ruhrpumpen, in order to meet the stringent requirements of RHE’s customers.
Within the PRC, pipelines are used to transport crude oil from the oil fields to the oil refineries for processing. After which, the refined oil is then supplied to the various towns and cities in the PRC via pipelines. Similar method is adopted to transport natural gas to the various towns and cities in the PRC. Pipeline is an economical, efficient (with minimum product loss during transfer) and safe method to transport the oil or gas produced from the oil or gas field to the refinery, and for distribution of the refined product or town gas from refinery and petrochemical plant to consumers. It is one of the main infrastructures that oil companies rely on for product transportation to reduce hazard, improve efficiency and maximise profit. This business connects RHE with both the upstream and downstream players in the oil and gas sector, hence providing RHE with a platform to expand its customer base.
The upstream activities cover exploration and production of oil and gas while the downstream activities include the transportation of oil and gas to the refineries, oil and gas refining activities, storage facilities and managing the distribution and marketing of the refined products to users. Having constant contact with companies involving in the upstream activities increases our chances of receiving more tender invitations and customers’ enquires. On the other hand, RHE also receives jobs referrals from companies engaging in the downstream activities who are satisfied with our products and services.
RHE’s principal activities can be broadly classified as follows:
(a) Equipment integration services – These services include (i) the engineering, procurement, fabrication, installation and commissioning of emergency shut down valve system, directional flow control valve system and flow control valve system; (ii) the design, engineering, procurement, fabrication, installation and commissioning of CNG pressure regulating system, custody transfer metering system and online natural gas analyser system; and (iii) the engineering, fabrication, installation and commissioning of pump and electromotor system;
(b) Manufacture and procurement services – These services comprise the manufacture of coating products (liquid form). The main function of coating products is to protect against corrosion of the surface of oil and gas pipelines and storage tanks, and other industrial metal surface. In addition, at the request of RHE’s customers, RHE may also assist them in sourcing and procuring the requisite equipment and spare parts for their use; and
(c) Consultancy services – RHE provides consultancy services to its principals and suppliers such as Cameron, Siemens International Trading Ltd, Ruhrpumpen, Flowserve Pumps and Emerson. Such consultancy services may include technical advice, on-site installation and commissioning works, and after-sale services.
RHE’s major customers are mainly from or affiliated to the three PRC major oil companies, namely the PetroChina Group, Sinopec Group and CNOOC Group.
(click for full images)
COMPETITION
RHE operates in a competitive industry. RHE’s competitors are companies who manufacture and/or supply equipment and systems to the oil and gas industry in the PRC. RHE competes based on pricing, product and service quality, reliability and durability of our products as well as technical competence.
The following are RHE’s main competitors:
• Best Petroleum & Natural Gas Equipment Co., Ltd , a PRC company who is principally engaged in providing equipment integration services for oil and gas projects.
• Sulzer Pumps (China) Limited is an entity of Sulzer Pumps Ltd, a company based in Switzerland. Sulzer Pumps Ltd develops and supplies centrifugal pumps and operates a network of service centres, offering maintenance, repair, spare parts and upgrading services for pumps.
• Schuck Armaturen, a company based in Germany that supplies pipeline and valves.
INDUSTRY PROSPECTS
Growing Oil Demand in the PRC
The demand for oil in the PRC has grown rapidly over the past decade driven by sustainable strong economic growth. Given the strong economic growth in the PRC over the past years, demand for oil has soared. The PRC is now one of the largest oil consuming countries in the world.
Demand and consumption of oil in the PRC is expected to increase in the future, driven by the expected continuing economic growth, industrialisation, urbanisation and growing affluence of the population. It is generally expected that in the next ten years, the daily demand for oil in the PRC will double its present demand and by 2020, more than half of the PRC’s oil demand will have to be met through imports from overseas.
For the above reasons, the PRC is putting together a comprehensive plan to include the carrying out of more oil exploration, development and production activities in the PRC, setting up of strategic oil reserves, acquisition of overseas oil resources, and the building of a country-wide oil and gas pipeline network. Our Directors believe that, in view of our Group’s competitive strengths, these initiatives will result in an increase in demand for our services and products.
Development of Natural Gas Market in the PRC
In light of the committed effort of the PRC Government to ensure more efficient use of energy and to identify alternative energy sources, the PRC Government has taken initiatives to promote the wider use of natural gas as an alternative form of energy, and its usage in the industrial and power generation, residential and transportation sectors, is expected to grow.
The PRC Government’s initiatives to promote the use of natural gas in the PRC have resulted in rising expenditures in the gas equipment market over the last few years. The substantial investments made by the PRC Government in respect of the construction of gas pipelines and LNG import terminals and port infrastructure are poised to have a significant impact on the supply and thus the widespread usage of natural gas in regions where such source of energy was generally unavailable before.
FINANCIALS
The following is some information that helps in making forecasts and estimates for RH Energy
Profit Margins (from HY07 report)
Order Book - HY07 Announcement
Order Book - End Aug Announcement
Based on the above announcements i have forecast 7.6m revenues in 2H07 and the remaining outstanding contracts as revenue in FY08. Naturally we expect RH to secure more contracts going forward so the forecast for FY08 will be conservative.
As for profit margins I have taken the average of FY04, 05 and 06. The margins in 06 appear to be anomalously high with some high margin contracts secured. With increasing competition and a different contract mix, margins are expected to drop drastically from FY06 to a more normalised level.
At the current market valuation of $0.70, RH Energy is very aggressive valued. It seems that the market is expecting the company to secure many more contracts going forward and/or secure contracts with high margins. This is a very optimistic scenario for the company because even though the oil extraction/transportation market is robust, RHE's industry is competitive and this is expected to have a negative pressure on margins.
It is interesting to note that market price of $0.70 is more than twice the IPO pricing of $0.32 earlier this year.
At the moment, the market appears to have very aggressive expectations for the 'China' and the 'Oil' stories to have a drastic positive impact on RHE's income statement; this stock is definitely not for the conservative investor.
RH Energy (RHE) offers a full suite of integrated customised design, engineering, procurement, construction, installation and commissioning services (EPCIC) to the oil and gas pipeline and storage operators and oil companies. Currently, RHE’s main business focus is to fabricate and install equipment and systems which form an integral component of a gas or oil pipeline in the PRC. RHE uses products from reliable and reputable international principals such as Cameron, Goodwin, Siemens and Ruhrpumpen, in order to meet the stringent requirements of RHE’s customers.Within the PRC, pipelines are used to transport crude oil from the oil fields to the oil refineries for processing. After which, the refined oil is then supplied to the various towns and cities in the PRC via pipelines. Similar method is adopted to transport natural gas to the various towns and cities in the PRC. Pipeline is an economical, efficient (with minimum product loss during transfer) and safe method to transport the oil or gas produced from the oil or gas field to the refinery, and for distribution of the refined product or town gas from refinery and petrochemical plant to consumers. It is one of the main infrastructures that oil companies rely on for product transportation to reduce hazard, improve efficiency and maximise profit. This business connects RHE with both the upstream and downstream players in the oil and gas sector, hence providing RHE with a platform to expand its customer base.
The upstream activities cover exploration and production of oil and gas while the downstream activities include the transportation of oil and gas to the refineries, oil and gas refining activities, storage facilities and managing the distribution and marketing of the refined products to users. Having constant contact with companies involving in the upstream activities increases our chances of receiving more tender invitations and customers’ enquires. On the other hand, RHE also receives jobs referrals from companies engaging in the downstream activities who are satisfied with our products and services.
RHE’s principal activities can be broadly classified as follows:
(a) Equipment integration services – These services include (i) the engineering, procurement, fabrication, installation and commissioning of emergency shut down valve system, directional flow control valve system and flow control valve system; (ii) the design, engineering, procurement, fabrication, installation and commissioning of CNG pressure regulating system, custody transfer metering system and online natural gas analyser system; and (iii) the engineering, fabrication, installation and commissioning of pump and electromotor system;
(b) Manufacture and procurement services – These services comprise the manufacture of coating products (liquid form). The main function of coating products is to protect against corrosion of the surface of oil and gas pipelines and storage tanks, and other industrial metal surface. In addition, at the request of RHE’s customers, RHE may also assist them in sourcing and procuring the requisite equipment and spare parts for their use; and
(c) Consultancy services – RHE provides consultancy services to its principals and suppliers such as Cameron, Siemens International Trading Ltd, Ruhrpumpen, Flowserve Pumps and Emerson. Such consultancy services may include technical advice, on-site installation and commissioning works, and after-sale services.
RHE’s major customers are mainly from or affiliated to the three PRC major oil companies, namely the PetroChina Group, Sinopec Group and CNOOC Group.
(click for full images)
COMPETITION
RHE operates in a competitive industry. RHE’s competitors are companies who manufacture and/or supply equipment and systems to the oil and gas industry in the PRC. RHE competes based on pricing, product and service quality, reliability and durability of our products as well as technical competence.
The following are RHE’s main competitors:
• Best Petroleum & Natural Gas Equipment Co., Ltd , a PRC company who is principally engaged in providing equipment integration services for oil and gas projects.
• Sulzer Pumps (China) Limited is an entity of Sulzer Pumps Ltd, a company based in Switzerland. Sulzer Pumps Ltd develops and supplies centrifugal pumps and operates a network of service centres, offering maintenance, repair, spare parts and upgrading services for pumps.
• Schuck Armaturen, a company based in Germany that supplies pipeline and valves.
INDUSTRY PROSPECTS
Growing Oil Demand in the PRC
The demand for oil in the PRC has grown rapidly over the past decade driven by sustainable strong economic growth. Given the strong economic growth in the PRC over the past years, demand for oil has soared. The PRC is now one of the largest oil consuming countries in the world.
Demand and consumption of oil in the PRC is expected to increase in the future, driven by the expected continuing economic growth, industrialisation, urbanisation and growing affluence of the population. It is generally expected that in the next ten years, the daily demand for oil in the PRC will double its present demand and by 2020, more than half of the PRC’s oil demand will have to be met through imports from overseas.
For the above reasons, the PRC is putting together a comprehensive plan to include the carrying out of more oil exploration, development and production activities in the PRC, setting up of strategic oil reserves, acquisition of overseas oil resources, and the building of a country-wide oil and gas pipeline network. Our Directors believe that, in view of our Group’s competitive strengths, these initiatives will result in an increase in demand for our services and products.
Development of Natural Gas Market in the PRC
In light of the committed effort of the PRC Government to ensure more efficient use of energy and to identify alternative energy sources, the PRC Government has taken initiatives to promote the wider use of natural gas as an alternative form of energy, and its usage in the industrial and power generation, residential and transportation sectors, is expected to grow.
The PRC Government’s initiatives to promote the use of natural gas in the PRC have resulted in rising expenditures in the gas equipment market over the last few years. The substantial investments made by the PRC Government in respect of the construction of gas pipelines and LNG import terminals and port infrastructure are poised to have a significant impact on the supply and thus the widespread usage of natural gas in regions where such source of energy was generally unavailable before.
FINANCIALS
The following is some information that helps in making forecasts and estimates for RH Energy
Segment Information
Profit Margins (from HY07 report)
Order Book - HY07 Announcement
Order Book - End Aug Announcement
Based on the above announcements i have forecast 7.6m revenues in 2H07 and the remaining outstanding contracts as revenue in FY08. Naturally we expect RH to secure more contracts going forward so the forecast for FY08 will be conservative.
As for profit margins I have taken the average of FY04, 05 and 06. The margins in 06 appear to be anomalously high with some high margin contracts secured. With increasing competition and a different contract mix, margins are expected to drop drastically from FY06 to a more normalised level.
At the current market valuation of $0.70, RH Energy is very aggressive valued. It seems that the market is expecting the company to secure many more contracts going forward and/or secure contracts with high margins. This is a very optimistic scenario for the company because even though the oil extraction/transportation market is robust, RHE's industry is competitive and this is expected to have a negative pressure on margins.It is interesting to note that market price of $0.70 is more than twice the IPO pricing of $0.32 earlier this year.
At the moment, the market appears to have very aggressive expectations for the 'China' and the 'Oil' stories to have a drastic positive impact on RHE's income statement; this stock is definitely not for the conservative investor.
Monday, October 08, 2007
China Oilfield Technology: IPO Summary and Valuation
China Oilfield Technology (COT) is an IPO in process.
Business
COT provides customised technical solutions for Its customers, incorporating its proprietary technology and techniques in tertiary oil recovery to enhance the extraction of oil. COT is principally engaged in the research, development, manufacture and sales of customised integrated equipment and products, which are used during chemical flooding and during treatment of resultant residual liquids. In addition, COT provides energy saving and other equipment. Its customers are mainly located in the PRC.
COT’s production and research facilities are located in the Hi-Tech Development Zone, Daqing City, Heilongjiang Province, PRC. COT also has research and development facilities in Beijing.
COT’s products can be categorised under the following segments:-
I. Enhanced Oil Recovery
a) Polymer injection equipment
b) ASP injection equipment
II. Environmental Protection
a) ASP residual liquid treatment system
b) Mobile underground water treatment equipment
III. Energy Saving and Others
a) Integrated electrical control station
b) Energy saving equipment for oil pumping units
c) Customised pumps and parts
COT’s direct materials comprise mainly steel plates, steel pipes, pumps, valves, electrical components, meters and spare parts. Some of these components are manufactured in-house, while others are outsourced to third party manufacturers who will produce these components according to COT’s specifications. The various components are fabricated in our Daqing production facility and assembled in accordance with COT’s blueprints and later delivered to the site where they are to be installed. Installation is performed by independent contractors hired by COT's customers and supported on-site during installation by COT’s customer support staff.
Most of COT’s products are sold to customers in the upstream oil industry. COT’s major customers comprise mainly operating units of Daqing Oilfield Co., Ltd., a wholly-owned subsidiary of PetroChina. COT’s production facilities are located in Daqing while our research and development activities are conducted primarily in Beijing.
The revenue breakdown above shows that COT’s business overwhelmingly comes from oil recovery services.
Competition
China Oilfield operates in a competitive environment where players in its industry generally compete by providing integrated tertiary oil recovery equipment and technical services to adequately address the needs of PRC’s oil extraction companies. The barrier to entry is relatively high due to high research and development cost, extensive oilfield experience and technological know-how required for the business. As such, there are only a limited number of companies providing integrated tertiary oil recovery equipment and technical services. China Oilfield’s main competitors are:-
(i) for Polymer Injection Equipment, Daqing Long Di Petrochemical Technology Co., Ltd; and
(ii) for ASP Injection Equipment, Daqing City Pu Luo Petroleum Technology Co., Ltd
.
Industry
Increasing demand for tertiary oil recovery technology and equipment in the PRC
• The PRC is one of the largest oil producing countries in the world, but is a net importer of oil because of continued growth in consumption as a result of strong economic growth
• Prolonged use of water injection as a means of secondary oil recovery technique has caused a slowdown in extraction efficiency in some of the major PRC oilfields
Favourable development trend for tertiary oil recovery technology
• Daqing Oilfield Co., Ltd. plans to extend the use of tertiary oil recovery technique in more than 80% of its oil extraction sites in Daqing oilfield in the next 15 to 20 years
• By the end of 2006, tertiary oil recovery in Daqing oilfield had reached an output of more than 10 million tonnes per year, accounting for approximately a quarter of the total crude oil output in Daqing oilfield
• Other PRC oilfields, such as Shengli, Changqing and Xinjiang, have gradually expanded the scale of their tertiary oil recovery processes as their oilfields approach maturity
• Leveraging on Daqing oilfield’s established record in tertiary oil recovery, COT believes it can further enhance its credibility and reputation in the industry to attract potential domestic and overseas customers
Notes
China Oilfield has a long accounts receivable period of 225 days, but this is matched by an accounts payable of about 200 days.
Financials
A simple extrapolation of FP2007’s performance to FY2007 gives an EPS of RMB 22.62 cents (=2.89/2.08 * 16.28), based on a 15% revenue growth rate and a 39% increase in earnings. It appears that China Oilfield is going through the economies of scale stage where operating leverage increases and profitability per marginal revenue dollar increases.
At 31 May 2007 China Oilfield has net assets of 261044 on 396571 of total assets for a debt/assets ratio of 34.17%.
Rough Valuation
The projected EPS of FY2007 pre-IPO is RMB 22.62 cents = 4.5 sg cents. At the IPO price of $0.60 this gives the pricing a forward pre-IPO P/E of 13.3.
The NAV per share pre-IPO at 31 May 2007 is $0.43 RMB. The $3 RMB offering price is a P/B of 7x. Post offering this translates into a P/B valuation of 300/91 = 3.3.
Post IPO the market cap of the company is RMB$3 * 728595000 = RMB $2185785000. This gives a projected forward P/E of $2185785000/$135935596 = 16.08.
This is not necessarily a cheap valuation, but that should be weighed against the strong growth prospects of the tertiary oil extraction industry in China, and COT's competitive positioning in this industry.
Business
COT provides customised technical solutions for Its customers, incorporating its proprietary technology and techniques in tertiary oil recovery to enhance the extraction of oil. COT is principally engaged in the research, development, manufacture and sales of customised integrated equipment and products, which are used during chemical flooding and during treatment of resultant residual liquids. In addition, COT provides energy saving and other equipment. Its customers are mainly located in the PRC.COT’s production and research facilities are located in the Hi-Tech Development Zone, Daqing City, Heilongjiang Province, PRC. COT also has research and development facilities in Beijing.
COT’s products can be categorised under the following segments:-
I. Enhanced Oil Recovery
a) Polymer injection equipment
b) ASP injection equipment
II. Environmental Protection
a) ASP residual liquid treatment system
b) Mobile underground water treatment equipment
III. Energy Saving and Others
a) Integrated electrical control station
b) Energy saving equipment for oil pumping units
c) Customised pumps and parts
COT’s direct materials comprise mainly steel plates, steel pipes, pumps, valves, electrical components, meters and spare parts. Some of these components are manufactured in-house, while others are outsourced to third party manufacturers who will produce these components according to COT’s specifications. The various components are fabricated in our Daqing production facility and assembled in accordance with COT’s blueprints and later delivered to the site where they are to be installed. Installation is performed by independent contractors hired by COT's customers and supported on-site during installation by COT’s customer support staff.
Most of COT’s products are sold to customers in the upstream oil industry. COT’s major customers comprise mainly operating units of Daqing Oilfield Co., Ltd., a wholly-owned subsidiary of PetroChina. COT’s production facilities are located in Daqing while our research and development activities are conducted primarily in Beijing.
The revenue breakdown above shows that COT’s business overwhelmingly comes from oil recovery services.Competition
China Oilfield operates in a competitive environment where players in its industry generally compete by providing integrated tertiary oil recovery equipment and technical services to adequately address the needs of PRC’s oil extraction companies. The barrier to entry is relatively high due to high research and development cost, extensive oilfield experience and technological know-how required for the business. As such, there are only a limited number of companies providing integrated tertiary oil recovery equipment and technical services. China Oilfield’s main competitors are:-
(i) for Polymer Injection Equipment, Daqing Long Di Petrochemical Technology Co., Ltd; and
(ii) for ASP Injection Equipment, Daqing City Pu Luo Petroleum Technology Co., Ltd
.
Industry
Increasing demand for tertiary oil recovery technology and equipment in the PRC
• The PRC is one of the largest oil producing countries in the world, but is a net importer of oil because of continued growth in consumption as a result of strong economic growth
• Prolonged use of water injection as a means of secondary oil recovery technique has caused a slowdown in extraction efficiency in some of the major PRC oilfields
Favourable development trend for tertiary oil recovery technology
• Daqing Oilfield Co., Ltd. plans to extend the use of tertiary oil recovery technique in more than 80% of its oil extraction sites in Daqing oilfield in the next 15 to 20 years
• By the end of 2006, tertiary oil recovery in Daqing oilfield had reached an output of more than 10 million tonnes per year, accounting for approximately a quarter of the total crude oil output in Daqing oilfield
• Other PRC oilfields, such as Shengli, Changqing and Xinjiang, have gradually expanded the scale of their tertiary oil recovery processes as their oilfields approach maturity
• Leveraging on Daqing oilfield’s established record in tertiary oil recovery, COT believes it can further enhance its credibility and reputation in the industry to attract potential domestic and overseas customers
Notes
China Oilfield has a long accounts receivable period of 225 days, but this is matched by an accounts payable of about 200 days.
Financials
A simple extrapolation of FP2007’s performance to FY2007 gives an EPS of RMB 22.62 cents (=2.89/2.08 * 16.28), based on a 15% revenue growth rate and a 39% increase in earnings. It appears that China Oilfield is going through the economies of scale stage where operating leverage increases and profitability per marginal revenue dollar increases.At 31 May 2007 China Oilfield has net assets of 261044 on 396571 of total assets for a debt/assets ratio of 34.17%.
Rough Valuation
The projected EPS of FY2007 pre-IPO is RMB 22.62 cents = 4.5 sg cents. At the IPO price of $0.60 this gives the pricing a forward pre-IPO P/E of 13.3.
The NAV per share pre-IPO at 31 May 2007 is $0.43 RMB. The $3 RMB offering price is a P/B of 7x. Post offering this translates into a P/B valuation of 300/91 = 3.3.
Post IPO the market cap of the company is RMB$3 * 728595000 = RMB $2185785000. This gives a projected forward P/E of $2185785000/$135935596 = 16.08.
This is not necessarily a cheap valuation, but that should be weighed against the strong growth prospects of the tertiary oil extraction industry in China, and COT's competitive positioning in this industry.
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