March 1, 2012 / 10:36 AM / 6 years ago

Hong Kong's first major IPO of 2012 falls on debut

HONG KONG (Reuters) - China-backed Canadian oil explorer Sunshine Oilsands Ltd (2012.HK) saw its shares fall 3.1 percent on their trading debut in Hong Kong on Thursday, underscoring tepid demand for new listings after the company raised about $580 million in an initial public offering.

The Calgary-based company, backed by Chinese state-owned enterprises, including a unit of Bank of China Ltd (601988.SS) (3988.HK), saw its shares fall to HK$4.71, after pricing its IPO at HK$4.86 per share, the bottom of an indicative range. The benchmark Hang Seng index .HSI ended 1.35 percent lower on Thursday.

“For oil companies we are a new sector,” Sunshine Oilsands president and CEO, John Zahary, said in an interview in Hong Kong after the debut. “A Canadian oil company listing in Hong Kong is a bit of new story.”

The lackluster debut of Hong Kong’s biggest IPO since December was attributed to lingering concerns about the global economic outlook and lack of understanding among investors in Asia about oilsands and the company’s business outlook.

The company has been losing money since its establishment because its major oilsands projects are not yet up and running. It expects to move into the black in a few years, assuming international oil prices stay high.

“We are quite close to generating positive cash flow from the prospective that we now have production volume,” Zahary said.

PROFIT UNCERTAINTY

It is difficult for the company to make a precise profit forecast because of variables such as future oil prices and the price of natural gas, which is used as feedstock to produce oil from oilsands. Variables in royalties are also a problem, he added.

But company co-chairman Shen Songning said that Sunshine Oilsands would likely generate $2 billion in netback -- income after royalties, general and administration cost and operating costs -- in 10 years when the company’s daily production capacity reaches 200,000 barrels.

“We should keep in mind that based on today’s reserves we think in 10 years we can build up about 200,000 barrels daily production. That’s at least $2 billion netback every year,” he said.

Oil prices need to stay at $50 per barrel or more for its projects to be profitable, he said, far below the current price of more than $107.

Sunshine, which estimated a loss of C$68.7 million ($69.75 million) for 2011, says it owns 1.14 million acres of oilsand leases in the Athabasca region in Canada’s Alberta province and has already booked 419 million barrels of proven and probable reserves of oilsands that contains sticky, tar-like oil.

TOUGH IPO MARKET

Sunshine Oilsands came to market with the biggest IPO in Hong Kong since the $1.9 billion New China Life Insurance Co Ltd (601336.SS) (1336.HK) dual listing in the city and Shanghai in December. It was also one of the biggest offerings in the world so far in 2012, as new listings from Europe, the United States and Asia lag the mega offerings seen in 2011.

Ten companies have gone public in Hong Kong since the beginning of the year, mostly small deals that raised a combined HK$3.3 billion ($425.49 million), according to stock exchange data.

The IPO pipeline in Hong Kong could reach nearly $8.4 billion in the first half of 2012, according to figures from Thomson Reuters publication IFR, if demand for new issuance improves.

Sunshine Oilsands said in a securities filing it received orders worth one-quarter of the amount of shares set aside for retail investors, underscoring the weak appetite for new issues since the beginning of the year. Shares offered to investors outside of Hong Kong were “slightly oversubscribed,” the filing added.

CHINESE SUPPORT

Commitments from three cornerstone investors, including sovereign wealth fund China Investment Corp CIC.UL, covered nearly 60 percent of the IPO, helping offset lack of demand from retail investors.

China Petrochemical Corp (Sinopec Group), parent of listed China Petroleum & Chemical Corp (Sinopec) (600028.SS) (0386.HK) (SNP.N) and Washington-based asset manager, EIG Global Energy Partners, pledged a combined $350 million in the offering.

“Certainly we are comforted to have Sinopec and CIC taking a very significant amount of the offering,” Zahary added. “I think it is a good validation of what we are trying to do.”

The company said it is talks with Bank of China for a $200 million credit facility and that the company would likely team up with Sinopec Group to develop some of its projects.

Chinese state-run oil companies such as PetroChina (0857.HK) (601857.SS) (PTR.N) and CNOOC Ltd (0883.HK) (CEO.N) have been stepping up acquisitions in unconventional gas deposits, as part of the central government’s new five-year plan to focus on the development of domestic unconventional gas resources.

Canada, which boasts the world’s third-largest crude oil deposits behind Saudi Arabia and Venezuela, has been a focus of Chinese investment.

Since 2005, Chinese oil companies have spent more than C$18 billion on Canadian oilsands properties, mostly buying minority stakes in existing projects.

Sunshine Oilsands plans to use 64 percent of the IPO proceeds to develop its West Ells project, with the rest of the funds going to other smaller projects and on drilling.

BOC International, Deutsche Bank AG (DBKGn.DE) and Morgan Stanley (MS.N) were joint global coordinators and joint sponsors of the IPO.

($1 = 0.9850 Canadian dollars)

($1 = 7.7557 Hong Kong dollars)

Reporting by Alison Lui, Elzio Barreto and Charlie Zhu; Editing by Matt Driskill

Our Standards:The Thomson Reuters Trust Principles.
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