20131008-美银美林-Initiating_on_China_oil_and_gas_Initiating_on_China_oil_and_gas_75页_3mb

Summary of the China Oil and Gas Service Sector Analysis

Core Content

This report provides an analysis of the Chinese oil and gas service sector, focusing on the onshore services market. The report initiates coverage on the sector with a positive outlook, driven by increased capital expenditure (capex) in both China and global oil and gas companies, as well as the expansion of the service market due to rising unconventional and difficult gas well development. Two main types of firms are covered: oilfield service providers and oil equipment suppliers.

Main Points

• Sector View: Positive due to increased E&P spending and growth in the unconventional gas sector.
• Market Expansion: The service market is expanding, particularly in the area of non-API drill pipes, which are expected to grow in demand and offer better margins.
• Firms Covered:
  • Hilong (1623 HK): Initiated at Buy with a price objective of HK$6.5.
  • COSL (2883 HK): Maintained at Buy with a price objective of HK$23.4.
  • Anton Oil (3337 HK): Initiated at Neutral with a price objective of HK$5.2.
  • Honghua (196 HK): Rated Underperform with a price objective of HK$2.0.
• Growth Drivers:
  • Rising demand for drill pipes, especially non-API products.
  • Expansion into offshore and international markets.
  • Diversification of customer base and geographic reach.
• Valuation Considerations:
  • Hilong is expected to outperform Honghua due to more sustainable demand, better order visibility, diversified customer base, and higher margins.
  • Non-SOE service providers are expected to grow at 20-30% annually, outpacing SOE catch-up in the market.
• Catalysts for Hilong:
  • First offshore shallow-water pipeline coating contract.
  • Potential new partnership or sales agreement with global peers.
  • High-spec rig new-build plan for Nigeria.
  • Startup of new coating plants in Shaanxi in 2014.
• Catalysts for COSL:
  • Potential acquisition of additional offshore rigs in 4Q13.
  • Further growth in CNOOC's E&P capex in 2014.
• Catalysts for Anton:
  • Restoration of Iraq business in 1H14.
  • Continued localization efforts with SLB.
  • First IOC project order in Iraq.
• Risks:
  • Downside risks include order delays, unexpected cost increases, and potential impact from the PetroChina corruption probe.
  • Upside risks include sharp oil price increases, large new orders, and strategic cooperation with global peers.

Key Information

• Drill Pipe Demand: Expected to grow at 10% annually globally, with Hilong holding 16% of the market share.
• Non-API Products: Expected to grow from 29% to 38% of Hilong's total drill pipe sales by 2015, boosting margins to 42%.
• Customer Base: Hilong has a more diversified customer base compared to peers, with only 13% of revenue coming from PetroChina/CNPC.
• Valuation Metrics:
  • Hilong is expected to trade at a higher valuation due to its stronger growth prospects and margin profile.
  • The report includes detailed financial forecasts for Hilong, including revenue and earnings growth, as well as P/E, P/B, and ROE metrics.
• Market Share and Revenue:
  • Hilong is the largest drill pipe manufacturer and coating material supplier in China.
  • It has a significant presence in overseas markets with 12 land rig teams.

Investment Summary

The report recommends Hilong as the top pick due to its diversified business, sustainable growth, and higher valuation potential compared to peers. It also highlights the growth opportunities in the oilfield services and coating materials segments, driven by new projects and international expansion. COSL and Anton are also recommended, though with more conservative ratings. Honghua is viewed as underperforming due to limited growth potential and exposure to the rig market. The report emphasizes the importance of non-API products and the potential for higher margins in this segment.