20140512-杰富瑞-Oil_Services___Equipment_Industry_Model_Refresh__Trimming_Earnings_17页_996kb

Oil Services & Equipment Industry Model Refresh Summary

Core Content

This document provides an analysis of the oil services and equipment industry in China, focusing on PetroChina's performance in 2013 and the updated industry model. It also outlines the investment ratings and financial forecasts for several companies in the sector, including Anton Oil, SPT, Hilong, and Honghua.

Key Points

• PetroChina's 2013 Performance:

  • PetroChina reported lower than expected new wells drilled but higher than expected total productive wells.
  • The increase in productive wells was attributed to the resumption of retired wells due to a gas price hike.
  • Some 2012 new wells also started production in 2013.
  • Total productive natural gas wells at the end of 2013 exceeded the total new wells drilled in the past two decades.

• New Wells Drilled:

  • New development wells for natural gas increased by 12% year-over-year (YoY), but this was below the expected 35%.
  • The low growth in new wells is partially due to the resumption of retired wells and production enhancement techniques like fracking.

• Industry Model Refresh:

  • The model was updated to reflect changes in production growth, decline rate, and per well production.
  • The medium-term drilling profile remains intact, but the long-term outlook is more positive due to improved economics of 2013's new wells.
  • Production growth for 2014 and 2015 is forecasted at 10%, down from the previous 14%.
  • Natural gas production decline rate is estimated at 14–15% for 2013, with a projected increase in the coming years.
  • Per well production dropped to 0.55 mmcf/day, indicating that PetroChina required less volume to justify the drilling program due to higher gas prices.

• Investment Ratings and Target Prices:

  • Anton Oil and SPT remain top buys in the China OFS space.
  • Anton Oil's target price was raised by 4% to HK$7, due to higher margins and a strong backlog.
  • SPT's target price was cut to HK$5.6, reflecting concerns over the impact of the Kazakhstani tenge devaluation.
  • Hilong and Honghua are also considered buys, with Hilong expected to achieve high teen earnings growth in 2014 and 2015.

• Financial Highlights for Anton Oil:

  • 2013 results were solid, with operating profit beating expectations due to higher margins from sophisticated services and heavier asset structures.
  • Backlog at the end of Q1 2014 was more than double YoY, with most domestic contracts expected to be completed within one year.
  • 1Q2014 results were affected by project delays and longer construction periods, resulting in an unexciting interim result.
  • 2014 earnings were trimmed by 7%, while 2015 earnings remain unchanged.
  • 2016 and beyond earnings forecasts were raised due to improved drilling prospects.

• Key Assumptions and Metrics:

  • The model uses DCF (Discounted Cash Flow) to estimate value, with a target leverage of 10.0% (Debt/Total Asset).
  • WACC (Weighted Average Cost of Capital) is set at 11.0%, and the terminal FCF growth is assumed at 4.0%.
  • The risk-free rate is 4.0%, and the market risk is 9.2%.
  • Beta is 0.81, indicating a relatively low volatility compared to the market.
  • Current stock price for Anton Oil is HK$5.10, with an upside of 38% to the new target price.

Summary Table

Company Name	Ticker	Market Cap (HK$MM)	Rating	Price (HK$)	Price Target (HK$)	2014E EPS	2015E EPS	2016E EPS
Anton Oilfield Services Group	3337 HK	11,005.8	BUY	5.10	7.00▲	0.21	0.17	0.23
Hilong Holdings Ltd.	1623 HK	6,484.2	BUY	3.83	5.00▼	0.25	0.29	0.34
Honghua Group	196 HK	6,920.0	BUY	1.73	2.10▼	0.17	0.19	0.23
SPT Energy Group Inc.	1251 HK	6,504.4	BUY	4.03	5.60▼	0.25	0.28	0.39

Main Views and Key Information

• The resumption of retired wells due to the gas price hike was a major contributor to the increase in productive wells in 2013.
• Limited retired wells remain in China, and future growth in production will rely on new wells.
• Production enhancement may reduce the number of new wells drilled but still supports the oil services sector.
• Anton Oil and SPT are highlighted as top buys due to their strong position in the OFS space and potential for future growth.
• The DCF model for Anton Oil suggests a target price of HK$7, with an upside of 38% based on current stock price.
• Hilong is expected to benefit from strong offshore pipeline demand through 2015.
• Honghua is noted for its potential, despite a disappointing offshore rig project.

Conclusion

The updated industry model reflects the impact of gas price hikes on well resumption and the reduced number of new wells drilled in 2013. While short-term concerns exist, the long-term outlook for natural gas drilling in China remains positive, with a focus on new wells and production enhancement. Companies like Anton Oil and SPT are positioned well for future growth, with adjusted earnings and target prices reflecting the updated model.