CHINA China Oil & Gas

Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our

website www.macquarie.com.au/disclosures.

CHINA

Inside

2014 Considering Risk: 5 to Own, 2 to Avoid 2

A Supportive Macro Backdrop 4

The Large Caps: CNOOC to deliver. Sinopec

supported by multiple tailwinds. 11

Oilfield Services: Five reasons to own Petro-

king, Anton and SPT 16

Defensive Growth: Buy Kunlun, NewOcean 20

Two to Avoid: COSL and Honghua 22

Valuation – Considering risk 25

Appendices 27

Order of preference (adjusted for risk)

Source: Bloomberg, Macquarie Research, January 2014.

Note: Order of preference based on risk-adjusted returns using Sharpe ratio. Share prices as of 6-Jan

Analyst(s) James Hubbard, CFA +852 3922 1226 [email protected] Aditya Suresh, CFA +852 3922 1265 [email protected]

8 January 2014 Macquarie Capital Securities Limited

China Oil & Gas 2014 Considering Risk: 5 to Own, 2 to Avoid 2014 – A positive macro backdrop

Our positive outlook for regional equity markets, oil prices, China gas prices,

refining and petchems margins all support our outlook for rising EPS through

2014 for the China oil and gas sector, despite continued cost inflation pressures.

Mid/large caps – Kunlun, CNOOC, Sinopec then PetroChina

We think the key value driver themes will be: CNOOC committing to double digit

production growth in 2014; Sinopec gaining from better refining, petchems, gas

production and its Fuling shale gas success; and continued uncertainty over

PetroChina’s operational performance and executive investigation outcome. We

continue to like Kunlun for its discounted gas substitution thematic exposure.

We raise our Kunlun price target to HK$20 and add it to the Marquee Buy list.

Onshore oilfield services – five reasons to own

We expect the onshore OFS sector to re-rate from 13-15x one yr fwd PE back to

20x+ on the back of: 1) Robust Mar results and 2014 guidance, 2) SOE

customers likely guiding to rising upstream capex, 3) Sinopec likely announcing

50-100 horizontal shale wells vs. c.10 last year, 4) the 3rd

shale gas licence

round reboot and, 5) more supportive gas policy with the 13th NPC meeting

(early Mar). Our top picks are Petroking and Anton.

Avoid COSL (downgrade to Underperform) and Honghua

We think COSL’s 44% 2013 EPS growth will prove to be an anomaly, and

forecast a slowdown to single digit levels in 2014 and 2015, leaving the current

premium valuation to global peers unsupported. We continue to see rising

execution and funding risks for Honghua and reiterate our Underperform rating.

Risk adjusted expected returns – 5 to own, 2 to avoid

In this report we also look at our implied expected one-year share price returns

in the context of risk. Kunlun, Petro-king, CNOOC, Sinopec, and Anton have the

best risk adjusted expected returns, while MIE, Honghua, and COSL the worst.

Risk-adjusted order of preference

Source: Macquarie Research, January 2014. Sharpe Ratio = (TSR – Rf)/Std Dev

CompanyOLD

Rating

NEW

Rating

OLD PT

(HK$)

NEW PT

(HK$)

TSR

Upside %

2014E

EPS MQ

vs. Cons

Kunlun OP OP 17.0 20.0 ▲ 52% 12%

Petro-king OP OP 7.2 7.2 76% 4%

CNOOC OP OP 19.0 19.0 41% 10%

Sinopec OP OP 7.0 7.8 ▲ 34% 14%

Anton OP OP 7.5 7.5 49% 5%

SPT Energy OP OP 5.4 6.5 ▲ 43% -13%

NewOcean OP OP 6.7 8.0 ▲ 30% 2%

PetroChina OP OP 10.0 9.0 ▼ 18% 7%

Hilong OP OP 6.0 7.2 ▲ 16% -3%

MIE OP OP 2.6 1.8 ▼ 16% -23%

Green Dragon OP OP £6.5 £6.5 132% nmf

Honghua UP UP 1.8 1.8 -17% -22%

COSL N UP ▼ 19.5 18.0 ▼ -20% -1%

-10

-5

0

5

10

15

20

25

30

Sharpe Ratio Risk-Adjusted Returns - Sharpe Ratio

Most Preferred Least Preferred

5 to own...

...2 to avoid

[email protected] FIRST LAST 01/08/14 01:47:12 PM Hong Kong Highpower

Macquarie Research China Oil & Gas

8 January 2014 2

2014 Considering Risk: 5 to Own, 2 to Avoid A fundamentally bullish outlook with undemanding valuations. We have a bullish outlook

for China oil and gas stocks in 2014; we expect macro support from a modestly rising equity

market, higher oil and China gas prices, improved refining and petchems margins and a

positive step change in China shale gas newsflow and sentiment. Continued cost and capex

inflation and likely drawn out government investigations into SOE management may take

some of the gloss away, but against a relativity attractive valuation backdrop we see more

reasons to be bullish than bearish over the next twelve months.

Incorporating risk into our order of preference. On the valuation side in this report we

consider our expected share price upsides in the context of risk, as measured by historical

share price volatility and the Sharpe and Sortino ratios. This risk-adjusted-returns mindset

drives our top five picks at the start of 2014:

CNOOC (Outperform, PT HK$19.0, 41% upside): Our top large cap pick on the back of a

return to material production growth in 2014/15, globally top quartile ROACE, Nexen

operational progress and an undemanding valuation versus PetroChina or global peers.

Sinopec (Outperform, PT HK$7.8, 39% upside): Should re-rate on the back of

improving refining, petchems, conventional gas production and shale gas, all for a 15%

discount to PetroChina (which slips to 3rd

in our large cap order of preference).

Kunlun (Outperform, PT HK$20, 52% upside): Kunlun remains a key beneficiary of

China’s gas for coal/oil substitution thematic, we see no business impact related to

executive investigations, and the shares trade at a 40% discount to the gas utility peers.

We are raising our price target to HK$20/sh and adding it to the Marquee Buy list.

See associated note Kunlun – Raising The Bar for details.

Petro-king (Outperform, PT HK$7.2, 76% upside) and Anton (Outperform, PT HK$7.5,

49% upside): We expect both to re-rate back to 20x 1 yr fwd PE levels as Mar results

reassure growth is real, SOE capex continues to rise and China shale gas makes material

progress in H1. We also like SPT (Outperform, PT HK$6.5, 43% upside), but expect a

relative catch-up in H1 by the other two names.

At this point we would avoid both:

COSL (Downgrading to Underperform, PT HK$18, 20% downside): We think the c.30%

premium to the US peers and Asia’s PVD is likely to narrow given our single digit 2014/15

EPS growth forecast, poor disclosure and rising CNOOC emphasis on cost control.

Honghua (Underperform, PT HK$1.8, 17% downside): We continue to see rising

execution and funding risks for Honghua and reiterate our Underperform rating with 17%

downside. Honghua is a Marquee Sell Idea.

Fig 1 2014 – Five to Own, Two to Avoid (adjusted for risk)

Source: Bloomberg, Macquarie research, January 2014. Note: Share prices as of 6-Jan.

Company TickerMkt Cap

(US$, bn)Rating

Current

Price (HK$)

OLD Target

Price (HK$)

NEW

Target

Price (HK$)

TSR Upside

%

Risk-

adjusted

returns -

Sharpe

Ratio

2014E PE

OLD MQ

2014E EPS

(LC)

NEW MQ

2014E EPS

(LC)

MQ 2014E

EPS vs.

Cons

Most Preferred Kunlun 135 HK 13.7 OP 13.4 17.0 20.0 52% 24.1 11.3 1.17 1.17 12%

Petro-king 2178 HK 0.6 OP 4.1 7.2 7.2 76% 23.7 14.4 0.29 0.31 4%

CNOOC 883 HK 79.6 OP 13.8 19.0 19.0 41% 19.1 6.4 1.67 1.63 10%

Sinopec 386 HK 90.7 OP 6.0 7.0 7.8 34% 18.3 6.4 0.74 0.74 14%

Anton 3337 HK 1.4 OP 5.1 7.5 7.5 49% 14.0 15.3 0.25 0.24 5%

SPT Energy 1251 HK 0.9 OP 4.6 5.4 6.5 43% 12.8 14.1 0.25 0.25 -13%

NewOcean 342 HK 1.2 OP 6.2 6.7 8.0 30% 12.3 9.7 0.66 0.61 2%

PetroChina 857 HK 193.5 OP 8.1 10.0 9.0 18% 8.5 7.5 0.85 0.79 7%

Hilong 1623 HK 1.4 OP 6.4 6.0 7.2 16% 3.6 15.4 0.32 0.32 -3%

MIE 1555 HK 0.6 OP 1.6 2.6 1.8 16% 3.4 6.0 0.21 0.18 -23%

Green Dragon GDG LN 0.6 OP 272.5 £6.5 £6.5 132% 38.4 44.1 0.10 0.10 nmf

Honghua 196 HK 0.9 UP 2.3 1.8 1.8 -17% -6.7 8.6 0.20 0.20 -22%

Least Preferred COSL 2883 HK 13.5 UP 23.1 19.5 18.0 -20% -9.7 12.1 1.50 1.53 -1%

Most Preferred:

Kunlun, Petro-king,

CNOOC, Sinopec,

Anton

Least Preferred:

COSL, Honghua



8 January 2014 3

Fig 2 One-year implied total shareholder returns versus ‘risk’ (std deviation) – Buy: Kunlun, Petro-king, CNOOC, Sinopec, Anton; Sell: Honghua, COSL

Source: Bloomberg, DataStream, Macquarie Research, January 2014

Fig 3 2013 share price performance: Chinese large caps underperform global peers…

Fig 4 … but, a good year for Chinese oilfield services (ex Honghua) and NewOcean

Source: Bloomberg, Macquarie Research, January 2014 Source: Bloomberg, Macquarie Research, January 2014

PetroChina

SinopecCNOOC

COSL

Kunlun

MIE

NewOcean

Anton

Honghua

SPT Energy

Petro-king

Hilong

-40%

-20%

0%

20%

40%

60%

80%

1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0%

TS

R U

psid

e/D

'sid

e

'Risk' (standard deviation of historic daily returns) Lower Risk HigherRisk

Avg riskadj

returns

MOST PREFERRED

LEAST PREFERRED

27%

19%

13%

13%

12%

9%

3%

2%

1%

1%

-4%

-5%

-7%

-16%

-14%

-20%

-27%

BG

Conoco

BP

Repsol

Exxon

Total

Statoil

ONGC

RD Shell

RIL

MSCI ex Jpn

Brent

ENI

Sinopec

Petrobras

CNOOC

Petrochina

Global Large Cap Oils 2013 Share Price Performance

129%

40%

36%

24%

18%

13%

9%

-4%

-5%

-14%

-20%

-20%

-27%

-37%

-38%

Hilong

COSL

NewOcean

Jpn Petro

Petro-king

NPC

Anton

SPT Energy

Inpex Corp

FCFC

GDG

JX Holdings

PTT Global

FPC

Aban Offshore

ONGC

Oil India

RIL

Cairn India

MSCI Asia (ex Japan)

Brent

BPCL

PTT E&P

Sinopec

Bangchak

Kunlun

CNOOC

PTT

Petronet LNG

SK Innovation

HPCL

IOCL

GS Holdings

Petrochina

Thai Oil

S-Oil

MIE

Honghua

Esso Thailand

Asia Oil & Gas 2013 Share Price Performance



8 January 2014 4

A Supportive Macro Backdrop For the key macro drivers of the China oil and gas sector’s equity performance in 2014 we

see a generally positive backcloth, with cost and capex inflation being the key negatives:

Positive # 1: Supportive equity markets – we forecast MSCI Asia-Ex to rise 9%

Macquarie expects the MSCI Asia-ex index to yield a return of 9% (12% including dividends)

in 2014 following a more modest year of 4% returns in 2013. Within MSCI Asia-ex our

strategist (Viktor Shvets) recommends being overweight China and Korea and underweight

ASEAN and India (see “Out with the old and in with the new”, 11 Dec 2013). We won’t re-

hash our strategy team’s analysis here but suffice to say that we take our lead on equity

markets from them, and see a rising regional equity market led by China as particularly

supportive for China oils, at least if history is anything to go by as shown in figure 5 below.

Fig 5 Beta to MSCI Asia ex Jpn (2005-2013) – China oil names are relatively highly geared to equity markets

Source: Datastream, Macquarie Research, January 2014. Note: % refers to correlation of stock returns to MSCI Asia ex Japan

Positive # 2: Oil prices – we believe 2014 forward Brent needs to rise by $5/bbl (and by $17/bbl for 2016+)

Dubai is the main benchmark crude relevant to most Asian oil producers and since it is

strongly linked to Brent, forecasting Brent is key. WTI matters to a much more limited extent

(CNOOC has some Texas and Canadian production).

A supply-led, not demand-driven, oil price at the margin. For Brent we continue to forecast

another 1.1mb/d in demand growth in 2014, following 0.9mb/d in 2013 despite a misfiring

global economy. The potential surprise for 2014 oil prices is not really demand in our view,

but rather supply, and the fact that we see more disruption risk than large new supply risk.

We forecast another 1mb/d US production growth from shale oil in 2014 but elsewhere

around the globe we see multiple, rising supply risks – Nigeria, Algeria, Libya, Iraq, North

Sea, Venezuela to name a few. We are far more concerned with rising oil supply risks than

with the potential impact of the US shale boom.

Recent progress between Iran and the U.N. Security Council could conceivably lead to 0.8mb/d

of embargoed crude returning to the market in the second half of 2014 in a best case scenario,

but not before some difficult hurdles have been overcome. Even if this crude did return, we

believe that OPEC, mainly via Saudi Arabia, can comfortably absorb it by cutting elsewhere.

We continue to forecast $112/b and $116/b Brent for 2014/15, and for those that look closer

at North America, a steep WTI discount to this as shown below. Our oil deck turns out to be

particularly bullish versus the forward curve (which has a long track record of being a highly

inaccurate indicator of future oil prices…), and as shown in figure 7 below this is important – if

oil prices are going to be strong then in general the large cap China oil names are the more

geared plays in Asia oil and gas.

65%

69%46%56%

50% 66% 54%56% 67%34%

57%

23%

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Beta to MSCI Asia ex Jpn (2005-2013)


https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7220276&file_name=InvestmentOutlook110913e167213.pdf&uid=MjcwODU&


8 January 2014 5

Fig 6 Macquarie Brent oil price assumption US$5.0/13.5/bbl ahead of the forward curve in 2014/15e

Fig 7 The forward curve doesn’t help with forecasting oil prices, in our view

$/bbl 2013A 2014E 2015E Normal

Brent - Macquarie 108.7 112.0 116.0 115.0

Brent - Bberg median 107.0 107.0 107.0

Brent - Forward curve

107.0 102.5 95.9

WTI - Macquarie

96.0 98.8 109.0

Source: Bloomberg, Macquarie Research, January 2014 Source: Bloomberg, Macquarie Research, January 2014

Fig 8 Asia Oil & Gas – Share price beta relative to Brent oil prices: COSL, CNOOC, PetroChina share price sentiment most geared to oil price changes

Source: Macquarie Research, January 2014. Note: % refers to correlation of stock returns to Brent

A longer term global oil price risk – oil majors are talking of cutting upstream capex. TOTAL has won investor

appreciation with its July 2013 announcement that it intends to cut upstream capex in 2014. BG, BP and ENI have hinted at

the same (although if we adjust for acquisition capex we don’t see any major reduction), and talked of using the cash

‘released’ to fund buybacks. Short-term driven stock markets may like this kind of newsflow, but there is only one possible

longer-term consequence: more challenged oil supply and hence even higher oil prices (you can see why the oil companies

think it might make sense…). The last time the IOCs cut capex (again in a misguided response to equity investor demands)

was the late 1990s – when the seeds of the 400% increase in oil prices endured in the 2000’s were sown.

It is worth noting that we definitely do not expect any NOC, including the Chinese to follow the same path. In fact they stand

to benefit by buying the IOC assets as they are disposed, and then reaping the rewards of higher oil prices down the line.

25

50

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125

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Jan-1

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Jul-

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Jan-1

5

Jul-

15

($/bbl) Brent Forward Curve

Spot T-1 month

T-3 months T-1 year

At 2008 peak ($145/bbl) At 2008 trough ($35/bbl)

MQe

26%41% 50%

34% 15%

17%

17% 13%

1% 2%

-10%-15%

-0.80

-0.60

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

SP

T E

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CO

SL

CN

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Beta to Brent (2013)



8 January 2014 6

Positive # 3: Chinese gas prices – to rise at an 11% cagr 2013-20e

Our forecast for Chinese wellhead gas prices is based on a netback of the weighted average

of ‘new’ (i.e. post 2012) and ‘old’ citygate gas volumes, using the June 2013 NDRC new gas

pricing announcement. The net result is a ceiling city-gate price that should show an 11%

cagr 2013-20e, and a wellhead price that should show a 12% cagr, assuming transmission

tariffs rise 5% pa with the ramp-up in supply via the West-East pipelines. Reports of

difficulties in pushing through these price rises seem to be unfounded; PetroChina realised

wellhead prices rose by 11% q/q in Q3 and the distributors all reported success in passing on

price increases to customers with the Q3 results season. See China’s Gas Choices – Light

My Fire (15 Oct)

Fig 9 City-gate ex-residential gas prices to continue to rise steadily as more ‘new’ gas comes on-stream

Source: NDRC, Macquarie Research, January 2014

Fig 10 We forecast city-gate gas prices to rise 11% cagr 2013-20E…

Fig 11 …and expect pipe import losses to gradually decline, but persist till 2016e

Source: NDRC, CEIC, PetroChina, Macquarie Research, January 2014 Source: NDRC, CEIC, PetroChina, Macquarie Research, January 2014

4.5

6.3

8.2

10.1

11.9

13.8

15.6

1.0

1.5

2.0

2.5

3.0

3.5

US$/mscfRmb/cu.m Ceiling city-gate gas prices (ex residential)

Wt avg ceiling price for existing gas supply ("old gas" or 2012 supply )

Wt avg ceiling price for incremental gas supplied ("new gas" or 2013+)

Bottom Bar = "Old Gas"Top End = "New Gas"

0.0

0.7

1.3

2.0

2.7

3.4

4.0

4.7

0.0

3.0

6.0

9.0

12.0

15.0

18.0

21.0

2002 2004 2006 2008 2010 2012 2014E 2016E 2018E 2020E

Rmb/cu.m$/mscf China Gas Cost vs Ceiling Citygate price

Ceiling Citygate Wellhead Pipe Imports

LNG imports

Pipe imports breakeven 2017E

LNG imports gets a

free market price

-1.3

-0.9

-0.4

0.0

0.4

0.9

1.3

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Rmb/cu.mUS$/mscf China Pipe Gas Import (Loss)/Profit

Losses to decline as city-gate prices rise; and pipe import

cost stays essentially flat


https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7215060&file_name=ChinasGasChoices151013Re163961.pdf&uid=MTMyNTM2&



8 January 2014 7

Positive # 4: Chinese refining margins – to be back in black

The March 2013 NDRC move to a more active gasoline and diesel price reset period (10

days versus 22 days prior) helped reduce speculative hoarding but the real improvement in

underlying margins we have seen since then has actually come from the government simply

passing through oil price moves fully rather than partially.

Assuming this new found adherence to ambiguous guidelines persists, and after factoring in

some ability to capture higher margins related to increased introduction of higher priced

Euro4 gasoline in 2014, we expect to see Chinese gross refining margins rise by $2.4/bbl y/y

to average $6.2/bbl in 2014, implying a return to positive refining segment EBIT for the first

time since 2010, and for only the third time in the last ten years. This positive GRM

momentum is a positive for Sinopec 2014 EPS and to a lesser extent for PetroChina.

Fig 12 China refining margins to be back in black in 2014

Fig 13 Sinopec, PetroChina refining EBIT to improve in 2014/15e

Source: Company data, CEIC, Macquarie Research, January 2014

Source: Company data, Macquarie Research, January 2014. Note: PetroChina combines refining and chemicals in its segment financials.

Beware of ‘inventory losses’ in Q4. The Chinese SOE’s report FIFO refining EBIT, which inherently includes losses and

gains due to the movement in value of crude inventory (COGS) between crude purchase date and diesel/gasoline sale (we

assume an average of 60 days). These inventory gains and losses distort the reported EBIT and the companies do not help

by giving either the LIFO figure or separate out the gains. The underlying (LIFO) GRM’s are fine, but that didn’t stop a

negative headline figure being reported in Q2 and we expect the same in Q4 – unnecessary headwinds to sentiment around

results time, but real nonetheless.

Fig 14 China Refining Margins - FIFO (as reported) vs LIFO (spot)

Source: Bloomberg, CEIC, Macquarie Research, January 2014

7.4

6.0

1.6 1.7

3.8

6.2 6.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2009A 2010A 2011A 2012A 2013F 2014F 2015F

$/bbl China Refining Margin Outlook

EBIT Breakeven

-80

-60

-40

-20

0

20

40

60

2009A 2010A 2011A 2012A 2013F 2014F 2015F

Rmb, bn Sinopec, PetroChina Refining & Chems EBIT

Sinopec Refining Sinopec Refining & Chems

PetroChina Refining & Chems

-8.0

-4.0

0.0

4.0

8.0

12.0

Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14

$/bblChina Refining Margins - FIFO (as reported) vs LIFO (spot)

FIFO GRM (as reported, using 55day lagged crude price) LIFO GRM (spot crude price)



8 January 2014 8

Positive # 5: NE Asia petchems margins – robust Q4 margins levels should be supported through 2014

North East Asia naphtha cracking centre margins strengthened to five year highs over the

course of 2013 (fig 15), mainly on the back of improved Ethylene margins in Q4 and

surprisingly robust PE margins through the year. We think it’s likely that robust PE margins

will persist through 2014 and 15 on the back of: 1) an improving China and developed market

demand outlook (PE demand up, destocking seems over), 2) changes in global trade flows

(less inflow of cheap gas based products from the US and Middle East to Asia); and, 3)

limited supply additions (1-2 new Asian plants in 2014 vs. 4 in 2013). Sinopec is again the

geared EPS play on this theme – PetroChina’s petchems business is relatively less material

to the group and is operationally more geared to lower-value urea production.

Fig 15 Asia petchem NCC margins have rebounded to seasonally adjusted 5Y highs…

Fig 16 … helped by stronger ethylene-naphtha spreads

Source: Datastream, Macquarie Research, January 2014 Source: Datastream, Macquarie Research, January 2014

A negative: Capex and costs….

We little chance of upstream capex cuts in 2014 in the upstream for the Chinese SOE’s,

despite the nascent government and PetroChina Chairman talk of an increased focus on cost

control and returns. Certainly cutting capex into refining, petchems, coal-to-chemicals and

perhaps retail (i.e. petrol stations) expansion is desirable and indeed likely, but the upstream

is a different matter; Chinese needs more gas and oil production and the incremental projects

are in ever deeper, less productive reservoirs that are inherently more expensive to exploit

than existing production.

Fig 17 PetroChina capex outlook: upstream to gradually rise, downstream to decline

Fig 18 Sinopec Capex Outlook – essentially flat

Source: Company data, Macquarie Research, January 2014 Source: Company data, Macquarie Research, January 2014

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Ju

l

Aug

Sep

Oc

t

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De

c

$/tonEthylene - Naphtha

Ethylene-Naphtha Range (2007-12)Avg (2007-12) 20122013

-5%

-4%

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-1%

0%

1%

2%

3%

4%

0

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2010 2011 2012 2013E 2014E 2015E

Rmb, bn PetroChina Capex Outlook

E&P Ref & Chems

Marketing Pipelines & gas

Other FCF Yield (RHS)

-15%

-10%

-5%

0%

5%

10%

15%

-

20

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2010 2011 2012 2013E 2014E 2015E

Rmb, bn Sinopec Capex Outlook

E&P Refining

Marketing Chemicals

Corporate & other FCF Yield (RHS)



8 January 2014 9

Fig 19 CNOOC Capex Outlook

Fig 20 Opex per bbl outlook: expect ~5% upstream production cost inflation, in-line with the global trend


… but with a silver lining for the OFS sector

If you put together the likelihood of another upstream capex up-year and an increasing focus

on shareholder returns at PetroChina and Sinopec then given that the parent oilfield service

arms of the SOE’s still undertake 80-90% of all onshore China upstream work, listco

management needs to put pressure on the sister OFS arms to do work faster, with less

people and for less cost.

One way to speed up such internal reform is to simply accelerate the trend of putting more

such work out to competitive tender. We have no doubt that in such an environment the likes

of Anton, Petro-king and SPT (and indeed other local OFS suppliers) would flourish, due to

their superior cost efficiency and technical proficiency.

Also see China’s Gas Choices – Light My Fire (15 Oct), China OFS – A Decade Of Structural

Growth Ahead (22-Apr) and China OFS – Men At Work, Business As Usual (9-Sept)

Fig 21 China onshore well capex to at least double over the next decade…

Fig 22 …and SOE outsourcing to continue rising


-15%

-10%

-5%

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10%

15%

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2010 2011 2012 2013E 2014E 2015E

Rmb, bn CNOOC Capex Outlook

E&P FCF Yield (RHS)

0

3

6

9

12

15

18

21

2001 2003 2005 2007 2009 2011 2013e 2015e

$/boeOpex per barrel

CNOOC PetroChina Sinopec Global avg

CNOOC -Nexen consolidation effect

0

10

20

30

40

50

60

70

2003 2007 2011 2015E 2019E 2023E

US$bn

Annual oil well capex (lhs) Annual gas well capex (lhs)

China upstream gas capex +2.4x, oil capex +1.8x in next 10 yrs

0

5

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2006 2008 2010 2012E 2014E 2016E 2018E 2020E 2022E

'000 wells p.a.Independent vs SOE onshore China drilling

activity

Actual/forecast CNPC/CPC OFS drilling Implied base case indep wells drilled

Independent OFS drilling

activity to increase 3.6X



https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7200612&file_name=ChinaOnshoreOilSvcs220413Re146596.pdf&uid=MTMyNTM2&

https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7200612&file_name=ChinaOnshoreOilSvcs220413Re146596.pdf&uid=MTMyNTM2&

https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7212703&file_name=ChinaOFS090913e159260.pdf&uid=MTMyNTM2&


8 January 2014 10

Others to watch

Oil prices: US shale oil ramp up and Iran’s return (and Israel’s reaction) versus: Algeria

elections, China/Japan tensions, US/EU recovery, Nigeria steady self destruction, North

Sea declines, Venezuela post-Chavez, Syria, Egypt, Libya, IOC capex cuts - the list of

‘potential supply problems’ goes on and on.

Russia-China gas pipe deal: A Q1 agreement on price for the first 38bcm would not be a

huge surprise, but any firm commitment above this volume level before 2020 could call into

question China’s need for additional LNG, or how much effort it needs to put into its own

shale gas resource development.

Others: Large cap oil China SOE capex plans, shale gas large scale development with

Sinopec, the 3rd

shale gas licensing round, the Mar 13th NPC meeting – all discussed more

fully in the following section.



8 January 2014 11

The Large Caps: CNOOC to deliver. Sinopec supported by multiple tailwinds. Top pick – CNOOC. With this report we reiterate CNOOC as our top large cap China oil pick,

with an eye on the January strategy day (23rd

– tbc) and the early March full year results to be

the catalysts to start the process of unlocking material shareholder value.

Fig 23 China large cap oils – order of preference and valuation summary

Source: Bloomberg, Macquarie Research, January 2014. Share prices as on 6-Jan

Raising Sinopec in our order of preference to above PetroChina. We think Sinopec’s

weakness since late early Dec adequately reflects the risks of a likely negative Q4 refining

EBIT. Excluding this minor fly in the ointment we think the respective one-year equity

investment cases of Sinopec and PetroChina are now biased towards the former, and we

expect the valuation gap between the two, as measured by 2014 PE, to materially close in

Sinopec’s favour as the year progresses. PetroChina has little in the way of positive catalysts

ahead in 2014 but following steep declines in Dec is simply too inexpensive to be anything

other than an Outperform in our rating system (i.e. >10% TSR on a one year view).

Fig 24 China large cap oil cos underperform global peers and Hang Seng in 2013; we see good reasons for a re-bound in 2014

Source: Bloomberg, Macquarie Research, January 2014

Company Rating

OLD Price

Target

(HK$)

NEW Price

Target

(HK$)

Share Price

Upside

2014e

Dividend

Yield

TSR Upside 2014E PEMacQ 2014

Target PE

OLD MQ

2014E EPS

(LC)

NEW MQ

2014E EPS

(LC)

MQ 2014E

EPS vs.

Cons

2014E EPS

Growth Y/Y

2014E

ROACE

2014E FCF

Yield

2014E

ND/NDE

CNOOC OP 19.0 19.0 38% 4% 41% 6.4x 9.2x 1.67 1.63 10% 8% 15% 7% 21%

Sinopec OP 7.0 7.8 28% 5% 34% 6.4x 8.3x 0.74 0.74 14% 29% 11% -3% 32%

PetroChina OP 10.0 9.0 12% 6% 18% 7.5x 9.0x 0.85 0.79 7% 17% 10% 2% 25%

70

75

80

85

90

95

100

105

110

Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13

Share Price Perf Rebased

CNOOC PetroChina Sinopec Brent HSI Global Integrated Oil & Gas

"Reform" underwhelming; but more active NDRC price resets

CNOOC: weak 2013 pdtn

guidance

Post leadership reform exuberence for Sinopec and PetroChina

CPC Nov Plenum -Pro SOEs

CNOOC

Sinopec

P'China

HSI



8 January 2014 12

CNOOC (Outperform, target price HK$19.0) – Q1 catalysts to unlock value

Our CNOOC investment thesis remains simple; it will re-rate to a large cap oil production

‘growth’ PE over the next few months. Specifically, following 2-3% p.a. production growth

over the last three years we forecast 13.1% and 8.5% in 2014/15e, as shown in figure 27-28.

We expect the company to guide to 2014 production and hence confirm this growth outlook

with its 2014 strategy presentation.

Globally leading production growth of c.13% in 2014 - and likely leading growth again

in 2015 (figure 25).

A large inventory of unbooked oil and gas resource offshore China and in Canada

(from Nexen) to support top quartile post 2015 production growth.

Global top quartile ROE of 19%.

Costs inflation fears overdone – we forecast CNOOC group opex/bbl and dda/bbl will

continue to rise but at a lower rate than the global peers due to low opex gas start-ups in

the South China Sea and our expectation of improved utilisation at the high cost Long Lake

project in Canada.

A supportive oil macro backdrop – the Brent curve remains in steep backwardation with

spot $25/bbl above longer-term forward prices, whereas we forecast an almost flat oil price

curve. We think supply risks are not adequately reflected in forward prices and that as this

corrects itself it will drive EPS upgrades and improve sentiment towards oil geared

producers such as CNOOC.

MQ EPS vs consensus – our CNOOC EPS forecasts are 10% and 15% above

Bloomberg consensus 2014 and 2015 EPS estimates respectively.

Valuation upside: CNOOC is currently trading at 6.4x 2014e EPS versus our ‘growth’

target multiple of 9.2x, implying a price target of HK$19.0/sh and supported by out DCF

valuation of HK$18.8/sh.

Free cash flow positive down as low as $82/bbl, unlike Sinopec or PetroChina, both of

which are FCF negative even on our base 2014 Brent deck of $112/bbl.

Catalyst in Jan: January strategy day to be the catalyst event, as it should set 2014

production growth expectations.

Fig 25 CNOOC to lead 2014 global large cap oil production growth…

Fig 26 … whilst delivering globally top quartile ROE

Source: Macquarie Research, January 2014 Source: Bloomberg, Macquarie Research, January 2014

0%

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8 January 2014 13

Fig 27 The projects that drive CNOOC’s 2014 production growth – a diverse mix of oil, gas, China and international projects

Source: WMAC, Company Data, Macquarie Research, January 2014

Fig 28 A return to organic production growth in 2014/15e…

Fig 29 … should re-rate CNOOC shares back to a growth multiple


Sinopec - the PE gap to the big sister to close through 2014

For the two other China oil SOE large caps we are trimming our PetroChina price target by

10% to HK$9.0/sh, so implying 12% share price upside and a TSR of 18%. It technically

remains an Outperform in our rating system but it slips in order of preference to behind both

CNOOC and Sinopec in the large caps. For Sinopec we are raising our price target to

HK$7.8, implying 28% upside and 34% TSR. We reiterate our Sinopec Outperform rating.

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40

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MacQ Target 2014 PE

avg 2% prodngrowth

avg 25% prodn growth 10% prodngrowth



8 January 2014 14

Sinopec (Outperform, target price raised to HK$7.8) – four drivers of a 2014 PE re-rating

Sinopec trades at a 15% discount to PetroChina on our 2014e PE estimates, slightly better

than the 25% average of the last five years but still material, especially when we consider that

following eight years of returns erosion, both companies now have an almost identical 2014e

ROACE of 10%. Looking into 2014 however, it is clear to us that it is Sinopec that has

catalysts to improve its earnings visibility, investor sentiment and hence further close the

ratings gap versus its larger SOE sister. We see tailwinds from:

1) Improving refining profitability, on the back of more sympathetic NDRC gasoline

and diesel price resets and higher gasoline pricing from EuroIV introduction. We

forecast benchmark Chinese refining margins to rise to $6.2/bbl in 2014 from

$3.8/bbl in 2013 and for this to add 13% to Sinopec’s overall EBIT.

2) Rebounding petchems profitability. NCC margins have hit 5-year highs since end

Oct – we believe the long awaited China restocking (or just the end of destocking)

has started and will continue to be supportive through 2014. We forecast better

petchems margins to add 11% to group EBIT in 2014 vs. 2013.

3) Double digit conventional gas production growth. Sinopec has material

production growth at its giant Sichuan Puguang gas field and the start-up of nearby

Yuanba to look forward to in 2014. These should help drive company gas production

growth of 13% and support its overall oil and gas production growth in the relatively

high 3-4% range.

4) Leading the shale gas charge. Q4 Fuling (Chongqing) newsflow indicates Sinopec

has overtaken PetroChina in the race to bring on-stream a major local shale gas

development.

The last two points above do not have a material impact on our 2014 near term EPS

forecasts, however we believe that both are still supportive differentiators of Sinopec’s 2014

investment case (and the PE the market will attribute) versus PetroChina. Our 2014 EPS

forecasts are 14% ahead of Bloomberg consensus.

None of the China large cap SOE’s are sustainably high EPS growth stocks and we think it is

therefore sensible to stay with 2014 target PE’s for now (where there is higher EPS visibility),

unlike for the fast growing onshore OFS sector. We have raised our target Sinopec 2014 PE

to 8.3x from 7.4x previously, a modest 8% discount to our PetroChina target of 9.0x. Our new

Sinopec one year price target is HK$7.8/sh, implying 34% TSR. Our revised price target is

supported by our updated DCF and SOTP valuations of HK$7.4/sh and HK$9.4/sh

respectively.

Fig 30 China refining margins to be back in black in 2014

Fig 31 Asia petchem NCC margins have rebounded to seasonally adjusted 5Y highs

Source: Bloomberg, CEIC, Macquarie Research, January 2014 Source: Datastream, Macquarie Research, January 2014

-15.0

-10.0

-5.0

0.0

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Ma

r

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r

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($/bbl)MacQ China GRM

MQ China GRM 5Y Range 5Y Ave

2012 2013 Fwd Margin

MacQ 2014e China GRM

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$/tonNCC Margins

NCC Margin Range 2007-12 Avg2012 2013



8 January 2014 15

PetroChina (Outperform, target price lowered to HK$9.0) – Slow, steady improvement may be too slow for many

We expect a steady improvement in PetroChina’s ROACE over the next three years as the

headwinds from material refining and gas import losses ameliorate, but the reality is that this

improvement is of the order of 200bp and it is not enough to differentiate its investment case

over the one we see currently offered by the less costly Sinopec.

We hence trim our target 2014 PE to 9.0x (an 8% premium to our Sinopec target and a 2%

discount to CNOOC’s) from 9.3x and set our price target at HK$9.0, in-line with our DCF

valuation of HK$8.9, but at a large discount to our updated SOTP valuation of HK$18.4/sh.

Suffice to say that the SOTP valuation merits a stand-alone report, but for now we see little

chance (at least over the next year) of the market moving to a PetroChina breakup value

approach.

Fig 32 2014E PE vs ROE: CNOOC is the most compelling in global large cap oil

Source: Bloomberg, Macquarie Research, January 2014

Exxon

RD Shell

BP

Chevron

Total

Conoco

ENI

PetroChinaSinopec

CNOOC

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

8% 10% 12% 14% 16% 18% 20% 22%

PE

(2014E

)

ROE (2014E)

LEAST PREFERREDHigh valued, but lower returns

MOST PREFERREDValue and returns



8 January 2014 16

Oilfield Services: Five reasons to own Petro-king, Anton and SPT The onshore OFS shares delivered a roller coaster ride in 2013, with over-exuberant China

shale gas optimism (on top of genuinely strong FY12 results) helping to drive a rally to all-

time highs in Q2, and a 2H shale reality check taking some of the froth away but still leaving

all names well above their Q4 2012 levels (except for Petro-king, which IPO’d in Mar 2013).

Fig 33 China OFS share price performance since 4Q12: Hilong wins; SPT Energy has closed the valuation gap; Anton, Petro-king have given back some of the strong gains in 1H13; Honghua has under-whelmed

Source: Datastream, Macquarie Research, January 2014

We believe the current share prices of Anton, Petro-king and SPT are all currently materially

below their fundamental equity value and this should fix itself in H1 14. The main problem is

not longer term fundamentals (which remain very strong), but that only Hilong can be said to

have any reasonable earnings visibility – the rest suffer from opaque near-term EPS visibility

which the various management teams do little to alleviate (no quarterly results, no US$

backlog published).

We think this is why the stocks tend to swing wildly around the longer-term fundamental

valuation. The 3m newsflow (or rumour) outlook becomes all important in driving near term

share price movements, and in that regard 2H 13 turned out to be uninspiring; PetroChina

executive investigations, 3rd

shale licence round delays, a falling reported Q3 Anton job count

and continual rumours of SOE capex cuts and OFS margin compression.

However we see five reasons to be optimistic that H1 14 newsflow will de-risk the investment

case and so be more supportive for sentiment, and hence drive a sector PE re-rating:

1. Full year results early to mid March – to calm an overly nervous market: The market

is currently worried that Anton, Petro-king etc may miss consensus FY 13 EPS forecasts.

The concern is to some extent understandable but ignores the bigger picture, in our

opinion; these companies are leaders in a multi-year high growth segment and if some of

the 30% EPS growth we forecast for 2013 slips into 2014 our positive fundamental view

will not change at all. Nevertheless, we expect that on top of a delivery of robust 2013 EPS

growth management will paint an outlook for another strong growth year in 2014, and that

this newsflow will allow the market to move on from its current short-term skittishness.

2. PetroChina and Sinopec upstream capex guidance to rise in March: With the key

customer SOE full year results we expect 2014 upstream capex guidance to indicate an

increased spend versus 2013. In contrast, we believe the market has taken press reports

that PetroChina will cut capex to mean all its investments will be cut, whereas its pretty

clear to us that any cuts will focus on refining and petchems, whereas as we discuss on pa

8-9, there is no scope to cut upstream capex without incurring politically unacceptable oil

and gas production declines.

100

150

200

250

300

350

400

Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13

Share price performance rebased, Oct-12

Share Price Performance Rebased

Anton SPT Hilong Honghua Petro-king



8 January 2014 17

3. Sinopec committing to 50-100 horizontal shale gas wells versus 10 in 2013: The

Fuling shale gas block in Chongqing is proving a big success for Sinopec (see ‘China

Shale Gas progress!’, 5th Dec 2013) and various press reports indicate that 50-100 wells

are planned for 2014. At Rmb50m per well this represents a material source of potential

contract awards for the OFS sector, with Petro-king probably the front runner due to its

historic success in winning Sinopec/CPCC work.

4. The 3rd

shale gas licence round reboot: Just as the market has turned universally

negative on China shale gas things are picking up – not just the Sinopec development

mentioned above but also the fact that the delayed 3rd

licence round is likely to move

forward in Q1, most likely with better acreage, data and participants than the much

maligned 2nd

round of Nov 2012. Any entry of credible new players to the China shale

game will be taken positively by investors, we believe.

5. The 13th NPC March 3-8th

meeting (dates tbc) – expect an anti-pollution and gas

emphasis: The 13th National People’s Congress will essentially rubber stamp the party’s

decisions, but it is still a significant event in that it’s a time when policy gets publically

fleshed out a bit more and the press has unusually high access to leaders. For the China

Oil & Gas sector we expect an even greater emphasis on policies that help to encourage

gas use to help with both energy security and reducing pollution. Residential gas price

rises, increased non-conventional gas production subsidies, tax rebates and opening of

pipeline access are all credible possibilities, and they all support an outlook of higher OFS

activity.

EPS changes – Anton and Petro-king 2015e EPS increases

Our Anton 2014e EPS forecast falls by 4% on slightly lower ‘Downhole Operations’

segment (Ordos fracking) expectations, but our 2015e forecasts rise by 9% as we expect

that recent shale progress will prolong the company’s high growth (+30%) phase by at

least two years.

Our Petro-king 2014/15e EPS forecasts rise by 8% and 11% on higher ‘Oilfield Project

Services’ segment growth assumptions linked to Sinopec’s shale success in Fuling.

We are making no changes to our SPT, Hilong, Honghua EPS forecasts.

Fig 34 China OFS – EPS change summary

Fig 35 2014/15E EPS MacQ vs Consensus – maximum EPS downside for Honghua

Company 2014E

EPS (OLD)

2014E EPS

(NEW)

% change

2015E EPS

(OLD)

2015E EPS

(NEW)

% change

Petro-king 0.29 0.31 7% 0.34 0.37 9%

Anton 0.25 0.24 -5% 0.28 0.31 9%

SPT Energy 0.25 0.25 0% 0.31 0.31 0%

Hilong 0.32 0.32 0% 0.39 0.39 0%

Honghua 0.20 0.20 0% 0.19 0.19 0%


-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

Petro-king Anton SPT Energy Hilong Honghua

MacQ vs Consensus EPS

2014E 2015E


https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7219867&file_name=ChinaOilGas051213e166781.pdf&uid=MjcwODU&

https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7219867&file_name=ChinaOilGas051213e166781.pdf&uid=MjcwODU&


8 January 2014 18

Valuation and price targets – 56% average upside at our top picks Anton, Petro-king and SPT

We continue to use the framework of the historical US OFS sector fwd PE vs EPS growth to

set a target PE and move to a target 2015e PE, as in figure 38.

Our Anton and Petro-king (Marquee Buy Idea) price targets are unchanged, based on a

20x 2015e target PE (previously a 25x 2014e target). The investment case for both names

is very similar: 1) we forecast China upstream gas drilling and related completion activity to

show a 12% cagr to at least 2020; 2) within that growth industry we expect the share

executed by the independents to grow from c.5% today to at least 10% by 2020; 3) this

implies 22% top line growth for the leading China gas OFS names, i.e. Petro-king, Anton

and SPT; and, 4) margins will be maintained by the regular introduction of improved

services (this is not a new approach - SLB has been doing it for 80 years – we think the

common belief that all China OFS margins have to collapse at some point is a basic

misunderstanding of the OFS industry).

The nuances between our two top picks are: 1) Petro-king has a more extensive

international track record; 2) Petro-king has a long Sinopec history whereas Anton is more

CNPC geared; 3) Anton has an implicit corporate governance stamp of approval by being

20% owned by SLB; and, 4) wee see c.30% EPS growth on average in 2014/15 for both

names, with Anton generating 23% 2015e ROACE versus a more modest 15.7% for

Petro-king.

We increase our SPT price target to HK$6.5 from HK$5.4/sh, by maintaining a 17x

target multiple but on 2015 instead of 2014. We have implicitly cut the discount that we

think SPT should trade on relative to Anton and Petro-king, recognising the fact that

despite a large Kazakh oil service business, it is still more similar than different to those

two peers and is arguably almost as well positioned to gain from any China shale/non-

conventional take off. We forecast an average of 22% EPS growth in 2014/15 for SPT and

a sector-leading 2015 ROACE of 26%.

Hilong - PE re-rating to continue. Within the OFS sector, Hilong was the stand-

out outperformer, with the shares rising c.130% in 2013 as its multiple re-rated to that of its

global peers (NOV, Tenaris, Vallourec). Given the strong earnings visibility for Hilong we

now roll forward by one year our target PE multiple to 15x 2015e PE (+1s.d. above the 10-

year average for its peers). Consequently, we increase our price target to HK$7.2/sh

from HK$6.0/sh. In a more bullish scenario, we think Hilong’s PE could easily re-rate to 18-

20x, if the market views Hilong more as an “oilfield services play” rather than an

“equipment play”. Our blue sky fair value for Hilong is HK$11.2/sh with 75% upside.

For Honghua, as we detail in Murky outlook trumps potential upside (4-Sept) and The Big

Short (6-Dec) we continue to see rising execution and funding risks and we reiterate our

Underperform rating with 17% downside. Honghua is a Macquarie Marquee Sell Idea.

Fig 36 China OFS Valuation Summary



(US$, bn)Rating

Current

Price (HK$)

OLD Target

Price (HK$)

NEW

Target

Price (HK$)

TSR

Upside %

Risk-

adjusted

returns -

Sharpe

Ratio

2014E PE 2015E PE

Implied

2014E

Target PE

Target

2015e PE

2Y NI cagr

(2013-15E)

2Y avg

ROACE

(2013-15E)

2Y avg

ND/ND&E

(2013-15E)

Petro-king 2178 HK 0.6 OP 4.1 7.2 7.2 76% 23.7 14.4 12.1 23.2 20.0 30% 12% -15%

Anton 3337 HK 1.4 OP 5.1 7.5 7.5 49% 14.0 15.3 13.4 26.5 20.0 29% 18% -7%

SPT Energy 1251 HK 0.9 OP 4.6 5.4 6.5 43% 12.8 14.1 11.5 21.8 17.0 28% 19% -23%

Hilong 1623 HK 1.4 OP 6.4 6.0 7.2 16% 3.6 15.4 12.6 18.7 15.0 22% 14% 7%

Honghua 196 HK 0.9 UP 2.3 1.8 1.8 -17% -6.7 8.6 8.9 7.6 7.5 -1% 8% 48%


https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7212424&file_name=Honghua040913e158953.pdf&uid=MTMyNTM2&




8 January 2014 19

Fig 37 China OFS net income growth outlook: 20-30% growth easily achievable for all ex Honghua

Fig 38 2015E Target PE vs Net Income Growth

Source: Macquarie Research estimates, January 2014 Source: Datastream, Macquarie Research, January 2014

Risks to our onshore OFS thesis

Macro: The main risks are around gas drilling activity growth and gain in market share of

such work at the expense of the incumbent SOE OFS arms of CNPC (PetroChina) and CPCC

(Sinopec). There are of course scenarios whereby China gives up totally on gas or where the

SOE’s continue to ignore ROE and keep putting nearly all development work to their sister

OFS companies, but both these outcomes seem very unlikely today.

Margins: many believe that margins will inevitably fall just as seen in numerous previously

attractive China industries. We don’t agree – we see high-end OFS activities as inherently

hard to enter and high value-add for the clients – a perfect recipe for sustained high margins.

If we see these companies trying to become large scale commodity drilling rig owners,

cementing providers or similar then our attitude would change, but as yet we no such move.

Working capital: At the stock level a more credible risk is to the days receivables and hence

working capital requirements of all the OFS names, especially with the SOE’s new-found

desire to improve their cost management.

Capex and fund raising: It may be that we have under-estimated the scale of demand

growth for the independent OFS services, in which case an increased capex requirement

could potentially drive equity issues. We would see this as a long-term positive, but it is

unclear how the short-term market would react.

Acquisitions: All of the names are looking for bolt on businesses that can extend their

technology, tools or service offerings. Such deals may require equity issues as above.

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Petro-king Anton Hilong SPT Honghua

2013-15E Net Income CAGR

Petro-kingAnton

China OFS Average

Hilong

SPT

Honghua

US OFS all (10yr mean)

US OFS (+1 std dev)

6x

8x

10x

12x

14x

16x

18x

20x

22x

0% 10% 20% 30%

2015E PE

2Y Net Income Growth CAGR (2013-15E)

US OFS sector 10Y line of best fit (R2 = 93%)



8 January 2014 20

Defensive Growth: Buy Kunlun, NewOcean Kunlun Energy (135 HK, Outperform, target price increased to HK$20.0/sh, 52% upside)

We are upgrading our Kunlun 12-month price target to HK$20.0/sh with 52% TSR upside, as

we roll forward our target PE to 2015e to better reflect the rapid growth outlook and

consequently rising contribution of Kunlun’s gas businesses. See associated note Kunlun –

Raising The Bar, published in tandem.

1) A winner of the strong structural gas growth thematic. Kunlun’s Shaanxi-Beijing

pipeline is the only major conduit of gas supply to Beijing-Tianjin-Hebei, and Kunlun is the

key market maker selling LNG for truck/buses across China. Consequently, even with the

ex growth legacy E&P assets, we forecast group EPS to show a 20% cagr (2013-15e).

2) Likely catch-up trade in 2014... Kunlun shares have underperformed the gas sector

25% 2013TD due to temporary distortions (slower 1H volumes, nervousness following the

senior executive resignations). Kunlun remains a key beneficiary of the gas for coal/oil

substitution theme and we see no fundamental business impact related to senior executive

investigations, yet the shares trade at a 40% discount to its gas peers.

3) … and, a justified natural re-rating as the contribution of Kunlun’s gas businesses

ramps up. We model the contribution of Kunlun’s gas businesses to rise to 77%/94% in

2015/20e, from 65% in 2013e. Our new HK$20/sh price target implies that Kunlun re-rates

to 14.8x 2015e PE, essentially in-line with Kunlun’s average one-yr forward multiple since

2010.

Fig 39 50%+ upside to our new HK$20 price target

Source: Macquarie Research, January 2014. Under “Gas Distribution” we exclude LNG sales to trucks/buses

Fig 40 We expect a justified re-rating towards 17x as the contribution of its gas business ramps up…

Fig 41 …2013TD de-rating driven by ‘temporary’ factors; we expect a re-rating back towards 15x over the next 12 months

Source: Company data, Macquarie Research, January 2014 Source: Datastream, Macquarie Research, January 2014

HK$/sh% 2014E

EPS

2014E Base

EPS

(HK$/sh)

% 2015E

EPS

2015E Base

EPS

(HK$/sh)

Implied

Target 2014

PE

MacQ Target

2015 PE

Target Price

(HK$/sh)Base Case Comments

E&P 27% 0.32 22% 0.30 3.7x 4.0x 1.2Legacy ex-growth assets;

50% disc to oilco multiple

Gas Transmission 44% 0.51 44% 0.60 19.9x 17.0x 10.2 Inline w current sector avg

Gas Distribution 11% 0.13 12% 0.16 21.3x 17.0x 2.7 Inline w current sector avg

LNG 18% 0.21 22% 0.29 28.4x 20.0x 5.9Premium multiple to reflect

stronger growth outlook

Kunlun Fair Value 1.17 1.35 17.1x 14.8x 20.0

8.0

10.0

12.0

14.0

16.0

18.0

0%

20%

40%

60%

80%

100%

2010A 2012A 2014E 2016E 2018E 2020E

Justified PEEPS

contribution

Gas (Pipelines/LNG/CGD) Oil (E&P) Justified Target PE

8x

10x

12x

14x

16x

18x

20x

22x

24xKunlun 12M Fwd PE vs Gas Distributors

Kunlun Gas Distributors Avg since 2010

+1 s.d. -1 s.d

MacQ Target PE



8 January 2014 21

Attractive 4-to-1 Bull-to-Bear risk-reward skew

Bear case HK$11.1/sh: 17% downside assuming Kunlun loses ownership of its pipelines

(an unrealistic scenario in our view – also see 3:1 better to buy 28-Oct), and its LNG

business trades on a 25% lower multiple.

Bull case HK$24.8/sh: 85% upside if Beijing gets more aggressive on anti-pollution

measures and consequently the market ascribes a higher multiple to reflect the stronger

than expected volume growth outlook.

Fig 42 50-85% fundamental share price upside versus c.20% downside in a low probability bear scenario

Source: Macquarie Research, January 2014. Based on 2015e target PE multiples. Share price as on 6-Jan

NewOcean Energy (342 HK, Outperform, price target increased to HK$8.0/sh, 30%

upside)

We are increasing our price target for NewOcean (NOE) to HK$8.0/sh (from HK$6.7) as we

roll forward to 2015 and target a re-rating to 10x 2015e PE, from 7.4x currently.

Delivering on promises. Over the past two years, NOE has successfully – integrated the

17 auto-gas retail stations acquired in Jan-12 and seen a near doubling in group gross

margins; started HK bunker fuel distribution (May-12); signed a JV with Sinopec for

LPG/LNG/bunker fuel distribution (April-13); and now started the HK bottle LPG business

(albeit this has come nine months later than management first expected).

Robust earnings growth outlook. We forecast NOE’s clean net income to show a 30%

cagr 2013-15e, driven by: 1) further growth in industrial LPG volumes (27% cagr) as new

petchem/industrial plants start-up in Zhuhai; 2) growth in autogas LPG volumes in

partnership with Sinopec (5 stations will be injected to the JV in 2014; 3) increasing

market share in HK bottle LPG to 30%+, from zero today (c.20% contribution to group net

income); 4) increasing bunker fuel volumes via further market share gains in HK and

first sales to the Zhuhai market; 5) oil products margin expansion following the

completion of its storage facilities; and 6) lower interest expenses as company has

replaced a majority of its PRC-based borrowings with loans from HK banks.

A justified re-rating. Given NewOcean’s robust earnings growth outlook, defensive utility-

like cash flow profile, and rising FCF yield, we think that over time NOE would re-rate

towards a gas sector like multiple of 18x. Our HK$8.0/sh price target implies 10x 2015 PE.

Our price target is supported by DCF of HK$8.0/sh, using a 10% WACC and 6.3x terminal

EV/NOPLAT. NOE remains one of our key Emerging Leaders stock picks, with c.150%

upside to our HK$15.2 bull case fair value

11.1

20.024.8

1.22.4

4.4

3.1

7.1

1.8

3.6

1.2

0.0

5.0

10.0

15.0

20.0

25.0

E&P (4x) Gas Distribution

(15x)

LNG (15x) Gas Pipelines Sold

Bear Fair Value (8x

2015e PE)

Gas Pipelines - Base (17x)

LNG, Others -Base (20x)

Price Target (15x 2015e

PE)

Gas Pipelines - Bull (21x)

LNG - Bull (25x)

Bull Fair Value (18x 2015e

PE)

HK$/sh

Current Share Price

Pipeline sold at 2010 acq

cost of

US$3bn <5% probability

20% probability


https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7216328&file_name=KunlunEnergy281013e163065.pdf&uid=MTMyNTM2&


8 January 2014 22

Two to Avoid: COSL and Honghua COSL – Downgrading to Underperform (PT HK$18) on valuation and an expected growth slowdown

COSL has had a strong share price run since early July 2013 (+65% vs. an average rise of

11% at its large cap peers), justified in part by the 1H results in which the company beat

consensus EPS by 30%, helped by one-off refurbishment consulting fees, two rigs joining the

fleet (the Kantan2 and NH7) and an unusually low reported tax rate of 10%.

We see the COSL investment case for 2014 as:

i) Relative to global peers it is over-valued: COSL currently trades on 2014 PE,

EV/EBITDA and P/B of 12.1x, 8.5x and 1.9x versus the US offshore drillers average

of 9.2x, 6.5x and 1.0x respectively. PetroVietnam Drilling, the only other credible

Asian comp, trades on a 7.8x, 4.9x and 1.2x on the same respective metrics.

ii) We agree there’s little threat to COSL’s 2014 day rates… 51% of the 2014 new-

build additions to the world’s offshore drill fleet are already contracted (figure 45) so

there’s potentially some risks around 2H 14 global day rates but we note that recent

cautious talk from both Seadrill and Transocean relate mainly to ultra-deepwater

vessels, to which COSL has near zero exposure. We’re conformable with our (and

consensus) EPS forecasts, but we think there it is likely these forecasts will still

eventually prove disappointing to implicit buy-side expectations, because…

iii) …but what really matters is its EPS growth rate is set to dramatically slow in

2014: Given c.44% EPS growth in 2013e the valuation premium to global peers

might be understandable, but only if high growth was to persist. On the contrary,

even after modelling full 2014 utilisations of 2013 fleet additions (Gift, Hunter, NH7

and NH9), we only forecast 6% EPS growth in 2014 – significantly lower than the

66% EPS growth implied by consensus for the 24% cheaper US peer group.

iv) Low transparency – heads (2013) you win, tails (2014?) you lose: COSL gained

from its lack of disclosure in 2013; it was able to post a 30% ‘beat’ for 1H mainly

because the market was not aware of material consulting fees, new rig additions or

that reported tax would be so low. Rig rates and contract start/end dates remain

undisclosed - in stark contrast to the global peers Ensco, Diamond, Noble, Seadrill

and Transocean. It is a matter of time before this opaqueness drives a negative

surprise, in our opinion. This (unnecessary) extra risk that investors have to take on

argues for a discount rating.

v) Placement – opportunistic, and ultimately mainly for maintenance capex, in our

view. The US$759m H share placement announced 7th Jan will increase the share

count by 6.15% so is not especially material, but for us it is a sign that management

rightly sees the current share price as an opportunity to raise ‘cheap’ funds. With a

ND/NDE of 36% COSL’s gearing is not stretched, and on top of that we forecast

Rmb4.2bn of FCF in 2014. Bulls will take the view that the funds will be used to

expand the fleet further, however given the fact that ten of COSL’s 42 rigs (as of

2014) are over 30 years old (and unusable in most of the world’s offshore

hydrocarbon regimes) we are already looking for any further fleet spend to actually

be replacement or maintenance capex, rather than growth capex.

A PE de-rating ahead

We conclude that COSL is fundamentally over-valued and we think as it becomes clear that

the 2013 EPS growth was a welcome but short-lived spurt to be followed by low single digit

growth in 2014 and again in 2015, so the company’s market PE will contract closer to US and

PVD levels. We understand that in some investors’ eyes COSL merits a premium for Asia

‘scarcity value’, but we counter that this is offset by the poor transparency management

chooses to embrace.

We are cutting our price target to HK$18/sh (from HK$19.5), and so implicitly target a 2014

PE of 9.3x, in-line with the US sector average, in line with COSL’s own post GFC average fwd

PE and essentially in-line with our DCF valuation of 18.6/sh. We thus see 22% downside to

our PT (-20% TSR) and downgrade our COSL rating to Underperform.



8 January 2014 23

Fig 43 COSL is trading at a premium to US peers and Asia’s PetroVietnam Drilling

Fig 44 US drillers and Asian peer PVD are 25-50% less expensive than COSL

Source: Macquarie Research, January 2014 Source: Macquarie Research, January 2014

Fig 45 A record global offshore rig newbuild program, but we think COSL day rates are safe for 2014…

Fig 46 … Nevertheless, COSL EPS momentum is set to slow sharply after an unexpectedly strong 2013

Source: Macquarie Research, January 2014 Source: Company data, Macquarie Research, January 2014

Honghua – Rising execution and funding risks

As we detail in Murky outlook trumps potential upside (4-Sept) and The Big Short (6-Dec) we

continue to see rising execution risks for Honghua and we reiterate our Underperform rating.

Honghua is a Macquarie Marquee Sell Idea

1) FY13 results will likely materially undershoot expectations. We expect group

revenues to be 24% below Honghua’s targets (MQe Rmb7.6bn, cons Rmb8.7bn, co. target

Rmb10bn) due to slower than expected revenue recognition on its big-ticket Rmb2bn order

from NDC (Middle East). Indeed, the company confirmed this on 31-Dec, stating that it

would not meet its Rmb10bn revenue target for 2013.

2) Ex-growth in 2014/15. Even if we assume Honghua fully executes its existing

c.Rmb10bn order book and wins Rmb5bn worth new orders, and consequently delivers

record high land rig sales in 2014/15, we forecast near zero group EPS growth. We expect

EBIT losses for the newly started offshore rig business; higher interest expenses to fund

rising working capital needs; and more normal sales volumes for its rig parts and trading

business (2013 boosted by a US$181mn order from PDVSA).

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

2014e PE 2014e EV/EBITDA 2014e P/B

COSL, US, PVD 2014e valn comps

COSL US avg PVD

-60%

-50%

-40%

-30%

-20%

-10%

0%

US avg PVD

US drillers and PVD discount to COSL valuation

2014e PE 2014e EV/EBITDA 2014e P/B

500

550

600

650

700

750

800

850

900

950

1000

2013E 2014E 2015E 2016E + TOTAL

No of rigs A growing globaloffshore rig fleet

Total fleet Under construction

-20%

0%

20%

40%

60%

80%

100%COSL EPS growth y/y

A great 2013, followed byalost ex-growth in

2014/15





8 January 2014 24

3) Risk of capital raising to fund working capital needs. As things stand we forecast

Honghua’s ND/E to rise to nearly 100% by end-2014 (from 65% in 1H13). If Honghua

chases the market to win jack-up rig orders by offering Chinese funding terms (typically

<10% payment upfront and the remaining on-delivery), the chances of a funding event

further increases.

4) Shale gas won’t move the needle near-term for Honghua. Even if Honghua

(alongside partner Baker Hughes) wins 5 lump sum shale gas contracts (base case zero)

at c.Rmb 50mn/well and 20% gross margins, and in addition Honghua sells 25 sets of

fracturing trucks in 2014 (base case 5 sets), our EPS estimates would increase by a

mere 5%.

Fig 47 Honghua to be ex EPS growth for the next two years…

Fig 48 … gearing set to increase to fund higher working capital needs


Fig 49 … returns falling Fig 50 … expect a material de-rating

Source: Company data, Macquarie Research, January 2014 Source: Bloomberg, Macquarie Research, January 2014

0.20 0.20 0.19

0.14

0.02-0.05

-0.04

-0.02

0.10

0.15

0.20

0.25

0.30

0.35

0.40

Rmb/sh Path to 2014 EPS

-40%

-20%

0%

20%

40%

60%

80%

100%

1H12A 2H12A 1H13A 2H13E 1H14E 2H14E 1H15E 2H15E

Honghua Gearing (ND/E)

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

2009A 2010A 2011A 2012A 2013E 2014E 2015E

Returns Outlook

ROA ROE ROACE

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

10.0x

11.0x

12.0x

Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13

Honghua 2014 PE

Bberg Cons MacQ Average

+1 s.d. -1 s.d.

MacQ target PE



8 January 2014 25

Valuation – Considering risk As we have outlined in the rest of this report, we use a combination of PE, DCF and SOTP in

setting our one-year price targets. For the time being we use 2014 target multiples for the

large caps (where EPS growth is low but visibility is higher) and 2015 target multiples for the

much higher growth (albeit with lower EPS visibility) smaller names.

Fig 51 China Oil & Gas valuation summary

Source: Datastream, Bloomberg, Macquarie Research, January 2014. Share prices as on 6-Jan

Some expected returns are more risky than others. We feel there needs to be some

recognition that not all potential returns carry the same level of investor risk. If for example,

we take the traditional approach of using historic daily share price volatility as a measure of

risk, then the c.40% total shareholder return we see on offer over the next year at both

CNOOC and SPT in fig 52 are clearly not directly comparable – the risk associated with the

SPT potential returns is higher than that taken on with the CNOOC investment.

Fig 52 One year implied total shareholder returns versus ‘risk’ (standard deviation)

Source: Macquarie Research, January 2014

Sharpe Ratio analysis – helps drive our top picks. Clearly there’s some level of

incremental risk that becomes justified in taking, given higher expected returns – there’s

several ways of trying to quantify this and we consider the ‘Sharpe ratio’ and ‘Sortino ratio’

approaches below. The Sharpe ratio is an intuitively obvious formula:


(US$, bn)Rating

Current

Price (HK$)

OLD Target

Price (HK$)

NEW

Target

Price (HK$)

TSR Upside

%

Risk-

adjusted

returns -

Sharpe

Ratio

2014E PE 2015E PE

MQ 2014E

EPS vs.

Cons

MQ 2015E

EPS vs.

Cons

Most Preferred Kunlun 135 HK 13.7 OP 13.4 17.0 20.0 52% 24.1 11.3 9.7 12% 12%

Petro-king 2178 HK 0.6 OP 4.1 7.2 7.2 76% 23.7 14.4 12.1 4% 6%

CNOOC 883 HK 79.6 OP 13.8 19.0 19.0 41% 19.1 6.4 6.0 10% 15%

Sinopec 386 HK 90.7 OP 6.0 7.0 7.8 34% 18.3 6.4 6.1 14% 15%

Anton 3337 HK 1.4 OP 5.1 7.5 7.5 49% 14.0 15.3 13.4 5% 5%

SPT Energy 1251 HK 0.9 OP 4.6 5.4 6.5 43% 12.8 14.1 11.5 -13% -14%

NewOcean 342 HK 1.2 OP 6.2 6.7 8.0 30% 12.3 9.7 8.2 2% 6%

PetroChina 857 HK 193.5 OP 8.1 10.0 9.0 18% 8.5 7.5 6.2 7% 22%

Hilong 1623 HK 1.4 OP 6.4 6.0 7.2 16% 3.6 15.4 12.6 -3% 0%

MIE 1555 HK 0.6 OP 1.6 2.6 1.8 16% 3.4 6.0 5.8 -23% -13%

Green Dragon GDG LN 0.6 OP 272.5 £6.5 £6.5 132% 38.4 44.1 17.3 nmf nmf

Honghua 196 HK 0.9 UP 2.3 1.8 1.8 -17% -6.7 8.6 8.9 -22% -34%

Least Preferred COSL 2883 HK 13.5 UP 23.1 19.5 18.0 -20% -9.7 12.1 11.9 -1% -8%

PetroChina

SinopecCNOOC

COSL

Kunlun

MIE

NewOcean

Anton

Honghua

SPT Energy

Petro-king

Hilong

-40%

-20%

0%

20%

40%

60%

80%

1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0%

TS

R U

psid

e/D

'sid

e

'Risk' (standard deviation of historic daily returns) Lower Risk HigherRisk

Avg riskadj

returns

MOST PREFERRED

LEAST PREFERRED

𝑆ℎ𝑎𝑟𝑝𝑒 𝑅𝑎𝑡𝑖𝑜 =𝐸 𝑎 − 𝑅𝑓

𝜎𝑎



8 January 2014 26

Where E(a) is the expected total shareholder returns of the asset, Rf is the risk free rate and

𝜎𝑎 is the ‘risk’, or standard deviation of historical daily returns of the asset. The higher the

Sharpe ratio the more the expected return per unit risk, and hence the better the investment,

in theory at least.

We rank the Sharpe ratio for each of the oils stocks under coverage in figure 53, where we

see that our five top picks are, not un-coincidently, the five highest on the Sharpe ratio

measure.

Fig 53 Risk adjusted returns (TSR-Rf)/StdDev – the Sharpe Ratio

Source: Datastream, Macquarie Research January 2014

Our five top picks have the five highest Sharpe ratios. SPT and NewOcean’s high

expected returns of 43% and 30% respectively are put into a slightly less attractive light

once the risk associated is taken into account, especially when you can get similar returns

from Kunlun, CNOOC and Sinopec for materially lower risk.

Our two least preferred names fare poorly on this measure by default since we expect

negative shareholder returns – by definition it’s better to hold the risk free asset than either

of these stocks, in our view (i.e. there is no level of risk in which it makes sense to hold

them – hence the Underperform rating!).

The Sortino Ratio. For completeness, a similar but potentially better way of looking at risk

adjusted expected returns is to use the Sortino ratio. It’s similar to the Sharpe ratio but only

takes into account downside risk to daily returns when calculating the denominator measure

of ‘risk’. We show the ranked Sortino ratio for our coverage in figure 54. The order changes a

bit versus the Sharpe ratio – with CNOOC/Sinopec and Anton/SPT swapping places.

Fig 54 Risk adjusted returns (TSR-Rf)/Downside StdDev – the Sortino Ratio

Source: Datastream, Macquarie Research January 2014

-10

-5

0

5

10

15

20

25

30

Sharpe Ratio Risk-Adjusted Returns - Sharpe Ratio


5 to own...

...2 to avoid

-20

-10

0

10

20

30

40

50Sortino Ratio Risk-Adjusted Returns - Sortino Ratio


5 to own...

...2 to avoid



8 January 2014 27

Appendices

Fig 55 CNOOC Financial Summary

Source: Company data, Macquarie Research, January 2014

CNOOC (883 HK) Price target: HK$19.0

Outperform

Profit & Loss (Rmb mn) 2011A 2012A 2013E 2014E 2015E Assumptions 2011A 2012A 2013E 2014E 2015E

Net Revenues 240,944 247,627 285,035 322,474 357,213 Rmb/US$ 6.5 6.3 6.2 6.1 6.1

less COGS 50,307 50,532 54,666 64,195 71,143 HK$/US$ 7.8 7.8 7.8 7.8 7.8

less SG&A 2,854 3,377 4,776 3,000 3,000 Brent ($/bbl) 111.1 112.3 109.0 112.0 115.8

less Other operating costs 61,435 64,631 72,534 86,703 96,477

EBITDAX 126,348 129,087 153,060 168,576 186,593 Group Realisations 2011A 2012A 2013E 2014E 2015E

less Exploration expense 5,220 9,043 6,682 5,377 5,871 Oil ($/bbl) 109.8 110.5 105.4 106.9 110.5

EBITDA 121,128 120,044 146,378 163,199 180,722 Gas ($/mscf) 5.2 5.8 5.0 5.7 6.3

less DD&A 30,521 32,903 52,708 57,755 61,949

EBIT 90,607 87,141 93,670 105,444 118,773 Production 2011A 2012A 2013E 2014E 2015E

less Total finance costs 511 601 2,823 3,567 3,198 Oil (kb/d) 708 743 906 997 1,054

Other income/(expense) 2,469 3,632 3,836 1,600 1,600 Gas (kboe/d) 202 191 212 267 318

Pretax Profit 92,565 90,172 94,683 103,477 117,175 Group Production (kboe/d) 909 936 1,118 1,264 1,372

less Tax Expense 22,310 26,481 27,175 30,738 38,495 Production Growth Y/Y % 1% 3% 19% 13% 9%

Basic Net Income 70,255 63,691 67,508 72,739 78,681

Clean Net Income 70,255 63,691 67,508 72,739 78,681

Basic EPS (Rmb/sh) 1.57 1.43 1.51 1.63 1.76

Diluted EPS (Rmb/sh) 1.57 1.42 1.51 1.62 1.76

DPS (Rmb/sh) 0.41 0.35 0.38 0.41 0.44

Cashflows (Rmb mn) 2011A 2012A 2013E 2014E 2015E Reserves 2011A 2012A 2013E 2014E 2015E

EBITDA 121,128 120,044 146,378 163,199 180,722 1P Reserves (mboe) 2,744 2,780 2,876 3,427 3,876

less Tax Paid 24,638 25,162 27,175 30,738 38,495 1P Reserve Life (yrs) 8.3 8.4 8.4 8.4 8.4

less Chgs in Working Cap 0 0 0 0 0 EV / 1P reserves ($/boe) 31.8 31.9 33.0 27.3 23.4

less Net Interest Paid 486 577 2,823 3,567 3,198

add Other 20,167 -1,731 4,811 4,567 4,198 Per Barrel Statistics ($/boe) 2011A 2012A 2013E 2014E 2015E

Operating Cashflow 116,171 92,574 121,191 133,462 143,228 Realizations 88.1 90.1 89.8 90.6 92.5

Acquisitions -16,351 -8,895 -93,167 0 0 Opex -8.5 -9.9 -13.7 -14.8 -15.3

Capex -36,422 -54,145 -101,805 -104,000 -104,000 Production Tax -4.8 -7.2 -6.3 -6.1 -6.2

Asset Sales 92 123 0 0 0 Exploration Expense -2.4 -4.2 -1.8 -1.9 -1.9

Other -46,355 -880 1,950 1,536 1,905 DD&A -14.2 -15.2 -20.0 -20.4 -20.1

Investing Cashflow -99,036 -63,797 -193,022 -102,464 -102,095 Accretion expense -0.6 -0.6 -0.9 -1.0 -0.9

Dividends Paid -20,877 -15,635 -18,772 -16,950 -19,075 Special oil gain levy -14.9 -12.2 -10.1 -9.7 -9.9

Debt Raised 18,132 34,030 58,029 0 0 EBIT 42.7 40.7 37.0 36.7 38.2

Other -17,501 -15,811 -3,713 -4,503 -4,503 Income Tax -10.4 -12.2 -10.8 -10.8 -12.5

Financial Cashflow -20,246 2,584 35,544 -21,453 -23,578 Net Income 32.3 28.5 26.2 25.9 25.6

Net exchange difference -498 -15 0 0 0

Net Change in Cash -3,111 31,361 -36,286 9,545 17,555 Valuation Multiples 2011A 2012A 2013E 2014E 2015E

EV/EBITDA 5.9 5.8 5.8 5.2 4.5

EV/DACF 5.9 5.7 4.9 4.3 3.9

Balance Sheet (Rmb mn) 2011A 2012A 2013E 2014E 2015E P/E 8.2 9.0 7.3 6.7 6.2

Cash & Cash eqv. 23,678 55,024 28,868 38,413 55,968 P/CEPS 6.0 5.8 4.1 3.7 3.4

Current assets 131,923 170,894 161,612 171,157 188,712 P/B 2.2 1.9 1.4 1.2 1.0

Fixed assets 252,341 285,176 497,491 543,735 585,786 FCF yield 11% 5% -16% 5% 7%

Total assets 384,264 456,070 659,103 714,893 774,498 Dividend yield 3.2% 2.7% 3.4% 3.7% 4.0%

Current liabilities 70,216 82,437 126,328 126,328 126,328

Total liabilities 121,408 146,290 304,643 305,879 306,474 DCF (Rmb mn) 2013E 2014E 2015E 2016E 2017E

Shareholder equity 262,856 309,780 354,459 409,014 468,024 EBIT 93,670 105,444 118,773 130,545 129,283

NOPLAT 66,506 74,865 84,329 92,687 91,791

DD&A 59,390 63,132 67,820 70,882 68,818

Ratio Analysis 2011A 2012A 2013E 2014E 2015E CFI -193,022 -102,464 -102,095 -101,469 -100,665

Gearing (ND/ND&E) -4% -5% 21% 17% 13% FCF to enterprise -67,126 35,534 50,054 62,100 59,943

Interest cover 71 75 39 36 40 PV explicit period 167,948

Effective tax rate 24% 29% 29% 30% 33% PV terminal EV 624,049 based on EV/NOPLAT of: 9.1x

ROA 20% 15% 13% 11% 11% Net (debt)/cash -94,624

ROE 27% 21% 19% 18% 17% Equity value 697,374

EBITDA margin 50% 48% 51% 51% 51% Shares o/s (mn) 44,669

EBIT margin 38% 35% 33% 33% 33% Value per share (HK$) 18.8

0%

5%

10%

15%

20%

25%

0

225

450

675

900

1,125

1,350

1,575

2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E

kboe/d CNOOC Production Mix

Gas Oil % Gas (RHS)



8 January 2014 28

Fig 56 Sinopec Financial Summary


Sinopec (386 HK) Target Price HK$7.8

Outperform

Profit & Loss (Rmb mn) 2011A 2012A 2013E 2014F 2015F Price Assumption 2011A 2012A 2013E 2014F 2015F

Net Revenues 2,505,683 2,786,045 2,739,268 2,505,672 2,655,849 Rmb/US$ 6.5 6.3 6.2 6.1 6.1

less COGS 2,031,545 2,301,199 2,261,763 2,033,885 2,155,152 HK$/US$ 7.8 7.8 7.8 7.8 7.8

less SG&A 58,960 61,174 64,342 57,859 61,309 Brent ($/bbl) 111 112 109 112 116

less Other operating costs 232,221 239,021 226,801 186,777 194,833 GRM ($/bbl) 1.6 1.7 3.8 6.2 6.6

EBITDAX 182,957 184,651 186,362 227,151 244,556 Group Realisations 2011A 2012A 2013E 2014F 2015F


EBITDA 169,616 169,118 175,571 217,447 234,273 Gas ($/mscf) 5.6 5.8 6.3 7.6 8.0

less DD&A 63,816 70,456 78,190 84,787 92,923

EBIT 105,800 98,662 97,382 132,660 141,351 Production 2011A 2012A 2013E 2014F 2015F

E&P 71,631 70,054 65,068 65,447 69,108 Oil (kb/d) 881 897 923 922 920

Refining -35,780 -11,444 -697 12,346 16,729 Gas (kboe/d) 236 272 298 338 388

Marketing and distribution 44,696 42,652 37,498 45,948 42,685 Group Production (kboe/d) 1117 1169 1221 1260 1309

Chemicals 26,732 1,178 1,599 12,920 16,828 Production Growth Y/Y % 6% 5% 4% 3% 4%

Corporate and other -1,749 -3,778 -3,087 -4,000 -4,000 Refining throughput (mb/d) 4.2 4.3 4.5 4.8 5.1

less Total finance costs -5,285 -9,881 -7,038 -13,199 -13,921

less Income from equity affiliates 4,320 1,861 2,738 4,800 4,800

Pretax Profit 104,565 90,642 96,081 124,262 132,230

less Tax Expense 26,120 23,846 25,249 31,065 33,057

Income before Minorities 78,445 66,796 70,832 93,196 99,172

less Minority interests 5,220 2,917 4,543 7,456 7,934

Reported Net Income 73,225 63,879 66,289 85,741 91,239

Clean Net Income 72,938 64,482 65,789 86,341 91,839

Basic EPS (Rmb/sh) 0.65 0.57 0.58 0.74 0.79


DPS declared (Rmb/sh) 0.30 0.30 0.20 0.26 0.28

Cashflow Analysis (Rmb m) 2011A 2012A 2013E 2014F 2015F Reserves 2011A 2012A 2013E 2014F 2015F

EBITDA 169,616 169,118 175,571 217,447 234,273 1P Reserves (mboe) 3,860 3,906 4,065 4,234 4,369

less Tax Paid 29,798 22,678 26,458 31,065 33,057 1P Reserve Life (yrs) 9.5 9.5 9.5 9.5 9.5

less Chgs in Working Cap -3,606 13,000 20,815 20,000 10,000 EV / 1P reserves ($/boe) 40.9 41.4 40.3 42.1 42.4

add Other 7,198 8,940 8,770 5,000 5,000

Operating Cashflow 150,622 142,380 137,068 171,382 196,216 Per Barrel Statistics ($/boe) 2011A 2012A 2013E 2014F 2015F

Acquisitions -7,488 -10,246 -28,127 0 0 Realizations 83.2 84.3 81.2 83.3 84.9

Capex -131,737 -145,663 -187,302 -185,000 -185,000 Opex -16.1 -17.6 -18.5 -18.9 -19.4

Asset Sales 7,934 4,198 1,254 0 0 Production Tax -1.0 -0.7 -1.0 -1.0 -1.0

Other -9,158 -10,486 -4,019 -3,191 -3,162 Resource Tax -0.7 -4.2 -4.1 -4.2 -3.2

Investing Cashflow -140,449 -162,197 -218,194 -188,191 -188,162 Windfal Tax -15.6 -15.7 -14.2 -14.3 -14.7

Divdends Paid -19,469 -25,486 -39,631 -19,926 -30,381 DD&A -14.2 -14.9 -15.7 -15.7 -15.7

Debt Movements 25,583 41,750 147,462 100,000 0 Others -8.5 -5.1 -4.2 -6.0 -7.4

Other -8,630 -10,636 21,281 -15,008 -15,758 EBIT 27.1 26.0 23.6 23.2 23.6

Financial Cashflow -2,516 5,628 129,112 65,066 -46,139 Income Tax -8.4 -8.5 -5.9 -5.8 -5.9

Net Income 18.7 17.5 17.7 17.4 17.7

Net exchange difference -18 -2 419 0 0

CFO-CFI 10,173 -19,817 -81,125 -16,809 8,054 Valuation Multiples 2011A 2012A 2013E 2014F 2015F

CFO-CFI-dividend -9,296 -45,303 -120,756 -36,735 -22,328 EV/EBITDA 5.6 5.5 5.4 4.8 4.7

EV/DACF 7.1 6.7 6.6 5.9 5.7

Balance Sheet (Rmb m) 2011A 2012A 2013E 2014F 2015F P/E 10.4 11.3 9.1 7.0 6.6

Cash & cash eqv. 24,647 10,456 58,862 107,119 69,034 P/B 1.8 1.5 1.2 1.1 1.0

Current assets 342,755 365,015 403,548 471,805 443,720 FCF yield 0% -3% -11% -5% -1%

Non-Current assets 801,773 892,929 1,019,396 1,124,409 1,221,286 Dividend yield 4% 5% 3.8% 5% 5%

Total assets 1,144,528 1,257,944 1,422,944 1,596,214 1,665,006

Current liabilities 444,240 513,373 542,143 552,226 553,779 DCF 2013E 2014E 2015E 2016E 2017E

Total liabilities 637,184 709,908 822,109 932,192 933,745 EBIT 100,382 132,660 141,351 142,264 147,665

Shareholder equity 507,344 548,036 600,835 664,022 731,261 NOPLAT 75,286 99,495 106,013 106,698 110,749

DDA & exploration expense 83,666 89,787 97,923 105,306 111,902

CFI -187,302 -185,000 -185,000 -184,000 -180,000

Ratio Analysis 2011A 2012A 2013E 2014F 2015F FCF to enterprise -28,350 4,282 18,936 28,004 42,651

Gearing (ND/ND+e) 29% 33% 38% 39% 38% PV explicit period 45,443

Interest cover 14.1 10.3 15.2 10.2 9.9 PV terminal EV 936,149 based on EV/NOPLAT of 11.1x

Dividend payout ratio 46% 53% 35% 35% 35% Net (debt)/cash -366,408

Effective tax rate 25% 26% 26% 25% 25% Minorities buy out -45,433

ROA 8% 6% 6% 7% 7% Equity value 569,751

ROE 16% 13% 12% 14% 14% Shares o/s (mn) 114940

EBITDA margin 7% 6% 7% 9% 9% Value per share (Rmb) 5.0


0%

7%

14%

21%

28%

35%

0

350

700

1050

1400

2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

kboe/d Sinopec Production Mix

Gas Oil % Gas (RHS)



8 January 2014 29

Fig 57 PetroChina Financial Summary


PetroChina (857 HK) HK$9.0

Outperform

Profit & Loss (Rmb mn) 2011A 2012A 2013E 2014E 2015E Assumption 2011A 2012A 2013E 2014E 2015E

Net Revenues 2,003,843 2,195,296 2,182,348 2,076,070 2,164,927 Rmb/US$ 6.5 6.3 6.2 6.1 6.1

less COGS 1,324,695 1,517,225 1,533,292 1,431,391 1,462,858 HK$/US$ 7.8 7.8 7.8 7.8 7.8

less SG&A 69,969 74,692 75,460 70,445 71,993 Dubai ($/bbl) 106.0 109.7 106.5 109.0 112.8

less Other operating costs 264,737 252,913 184,225 126,571 120,016

EBITDAX 344,442 350,466 389,371 447,663 510,060 Group Realisations 2011A 2012A 2013E 2014E 2015E


EBITDA 320,534 326,494 360,141 417,651 479,014 Gas ($/mscf) 4.7 5.0 5.6 6.6 7.7

less DD&A 138,073 151,975 176,742 205,333 218,810

EBIT 182,461 174,519 183,399 212,318 260,204 Production 2011A 2012A 2013E 2014E 2015E

E&P 219,539 214,955 199,489 210,224 229,380 Oil (kb/d) 2,426 2,504 2,556 2,574 2,583

Ref & Chems -61,866 -43,511 -28,818 -13,042 -11,436 Gas (kboe/d) 1,094 1,165 1,258 1,341 1,467

Marketing 20,653 16,391 8,849 11,574 12,546 Group Production (kboe/d) 3,521 3,669 3,814 3,916 4,050

Natural gas and pipelines 15,530 -2,110 22,737 15,561 41,713 Production Growth Y/Y % 5% 4% 4% 3% 3%

Other -11,395 -11,206 -16,341 -12,000 -12,000

less Total finance costs 9,148 15,970 19,536 10,414 12,556

Other income/(expense) 10,902 8,262 8,710 6,800 6,800

Pretax Profit 184,215 166,811 175,089 208,704 254,448

less Tax Expense 38,256 36,191 38,029 45,915 55,979

Income before Minorities 145,959 130,620 137,061 162,789 198,469

less Minority interests 12,998 15,294 13,732 17,907 21,832

Reported Net Income 132,961 115,326 123,329 144,882 176,638

Clean Net Income 127,555 115,284 107,310 144,882 176,638

Basic EPS (Rmb/sh) 0.73 0.63 0.67 0.79 0.97


DPS declared (Rmb/sh) 0.32 0.28 0.30 0.36 0.43 Reserves 2011A 2012A 2013E 2014E 2015E

1P Reserves (mboe) 23,215 24,246 25,118 25,772 26,644

1P Reserve Life (yrs) 18.1 18.1 18.0 18.0 18.0

Cashflow Analysis (Rmb m) 2011A 2012A 2013E 2014E 2015E EV / 1P reserves ($/boe) 13.2 13.6 11.1 11.5 11.5

EBITDA 320,534 326,494 360,141 417,651 479,014

less Tax Paid 46,379 41,847 59,745 45,915 55,979 Per Barrel Statistics ($/boe) 2011A 2012A 2013E 2014E 2015E

less Chgs in Working Cap -2,296 -64,926 4,281 -30,000 -30,000 Realizations 76.6 72.8 78.2 83.3 86.8

add Other 13,704 -110,285 4,435 -45,997 -45,515 Opex -11.5 -12.1 -12.9 -13.7 -14.4

Operating Cashflow 290,155 239,288 300,550 355,739 407,521 Production Tax -4.7 1.6 -3.9 -4.2 -4.3

Acquisitions -15,284 -14,880 -6,509 0 0 Resource Tax 0.0 -3.5 -3.6 -3.7 -3.9

Capex -267,975 -311,744 -355,000 -346,860 -346,860 Windfall Tax -12.3 -13.8 -12.8 -13.8 -14.3

Asset Sales 1,259 629 38,963 0 0 DD&A -9.7 -11.1 -12.5 -13.9 -15.3

Other -1,638 -6,231 86,589 11,343 9,607 Others -4.3 -3.3 -3.7 -3.7 -3.7

Investing Cashflow -283,638 -332,226 -235,957 -335,517 -337,253 EBIT 34.1 30.5 28.7 30.3 31.0

Dividends Paid -66,933 -65,540 -59,490 -63,154 -75,056 Income Tax -7.2 -6.1 -5.6 -5.7 -6.1

Equity Raised 0 0 0 0 0 Net Income 26.9 24.4 23.1 24.6 24.9

Debt Movements 74,738 107,361 91,275 -14,957 4,638

Other 1,454 33,535 13,129 0 0 Valuation Multiples 2011A 2012A 2013E 2014E 2015E

Financial Cashflow 9,259 75,356 44,913 -78,111 -70,419 EV/EBITDA 5.8 6.0 4.4 4.1 3.7

EV/DACF 6.9 7.0 6.0 4.8 4.3

Net exchange difference -313 -195 -1,431 0 0 P/E 12.0 13.3 9.6 8.1 6.6

Net Chg in Cash/Debt 15,463 -17,777 108,076 -57,889 -151 P/CEPS 5.6 5.3 4.3 3.1 2.8

Free cash flow (OpCF-capex) 6,896 -87,336 -60,959 8,879 60,661 P/B 1.6 1.4 1.1 1.0 0.9

FCF yield 0.5% -4.4% -4.3% -0.3% 2.4%

Balance Sheet (Rmb mn) 2011A 2012A 2013E 2014E 2015E Dividend yield 3.6% 3.4% 4.7% 5.6% 6.8%

Cash & Cash eqv. 61,172 43,395 151,439 93,550 93,399

Current assets 382,711 414,332 590,493 562,604 592,453 DCF 2013E 2014E 2015E 2016F 2017F

Fixed assets 1,534,875 1,754,564 1,789,248 1,916,772 2,030,337 EBIT 185,915 212,318 260,204 262,608 271,515

Total assets 1,917,586 2,168,896 2,379,741 2,479,376 2,622,789 NOPLAT 145,014 165,608 202,959 204,834 211,782

Current liabilities 560,038 574,748 666,211 671,254 678,685 DDA & exploration expense 205,972 235,345 249,856 262,877 274,737

Total liabilities 835,040 988,148 1,139,671 1,144,714 1,172,145 CFI -235,957 -335,517 -337,253 -330,258 -287,934

Shareholder equity 1,082,546 1,180,748 1,240,070 1,334,662 1,450,644 FCF to enterprise 115,029 65,436 115,562 137,453 198,585

Net Debt 257,201 401,626 402,536 460,425 480,576

PV explicit period 420,215 WACC: 7.5%

Ratio Analysis 2011A 2012A 2013E 2014E 2015E PV terminal EV 1,361,164 8.3x

Gearing (ND/ND&E) 19% 25% 25% 26% 25% Net (debt)/cash -402,536

Interest cover 29.4 18.0 16.9 27.9 31.2 Minorities buy out -20,070

Dividend payout ratio 4% 3% 5% 6% 7% Equity value 1,358,772

Effective tax rate 21% 22% 22% 22% 22%

ROA 7% 6% 6% 6% 7% Shares o/s (mn) 183,021

ROE 13% 11% 11% 12% 13% Value per share (Rmb) 7.4

EBITDA margin 16% 15% 17% 20% 22% Value per share (HK$) 8.9

EBIT margin 9% 8% 9% 10% 12%

based on EV/NOPLAT of

Target Price

0%

7%

14%

21%

28%

35%

42%

0

700

1400

2100

2800

3500

4200

4900

2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

kboe/d PetroChina Production Mix

Oil Gas % Gas (RHS)



8 January 2014 30

Fig 58 Kunlun Financial Summary


Kunlun Energy (135 HK)

Outperform

Profit & Loss (HK$ mn) 2011A 2012A 2013E 2014E 2015E Assumptions 2011A 2012A 2013E 2014E 2015E

Net Revenues 25,915 32,953 46,824 70,271 85,041 Upstream

less COGS 13,688 17,365 28,686 48,295 59,485 Brent - MacQ Est. ($/bbl) 109 111 107 116 118

EBITDA 12,227 15,588 18,138 21,975 25,556 Oil Price Realization ($/boe) 105 104 102 110 112

less D&A 4,090 4,434 4,408 4,915 5,190 Oil & Gas Production (kboe/d) 46.7 48.0 48.2 47.4 46.6

E&P 2,065 2,185 1,932 1,940 1,698 Mid/Downstream gas

Gas Transmission 4,335 6,088 7,802 9,408 10,967 Volumes (bcm)

Gas Distribution (incl LNG & CNG) 1,182 1,731 2,381 4,269 5,181 City Gas Distribution 3.6 4.2 5.6 7.3 8.8

Regas Terminal & Plants 258 565 1,410 1,444 2,520 LNG for transport 0.1 0.4 1.6 2.6 3.1

EBIT 7,910 10,665 13,525 17,060 20,366 Gas Distribution (bcm) 3.7 4.6 7.2 9.9 11.9

less Total finance costs 227 489 463 613 665 Y/Y growth 68% 23% 56% 38% 20%

Share of Associate Profit, Others 2,577 2,641 2,175 2,000 2,000

Pretax Profit 10,487 13,306 15,700 19,060 22,366 Gas Transmission (bcm) 20.8 23.8 25.0 30.0 34.5

less Tax Expense 2,291 3,392 4,042 4,765 5,592 Y/Y growth 18% 15% 5% 20% 15%

Profit after tax 8,196 9,914 11,658 14,295 16,775

Minorities -2,575 -3,396 -4,089 -4,901 -5,890 LNG Regas (bcm) 1.6 5.1 7.4 8.1 11.4

Basic Net Income 5,621 6,518 7,569 9,394 10,885 Y/Y growth - 240% 46% 10% 40%

Basic EPS (HK Cents/sh) 78.6 83.5 94.0 116.6 135.1 EBITDA Margins (Rmb/cu.m)

Diluted EPS (HK Cents/sh) 77.7 83.1 93.3 115.4 133.7 City Gas distribution 0.35 0.40 0.30 0.35 0.35

DPS (HK Cents/sh) 22.0 23.0 25.9 32.1 37.2 LNG for transport 0.81 0.64 0.51 0.60 0.60

LNG Regas 0.24 0.21 0.24 0.24 0.24

Cashflows (HK$ mn) 2011A 2012A 2013E 2014E 2015E Gas transmission 0.27 0.28 0.31 0.31 0.31

Net Income 5,621 6,518 7,569 9,394 10,885

DD&A 4,090 4,434 4,408 4,915 5,190

Changes in working capital -1,539 -3,265 -2,005 4,121 2,825

Other 1,426 2,376 5,147 3,514 4,555

Operating Cashflow 9,598 10,063 15,119 21,944 23,454

Acquisitions -3,090 -579 0 0 0

Capex -13,507 -15,391 -19,941 -14,823 -15,085

Other 2,312 3,099 2,377 1,958 1,800

Investing Cashflow -14,285 -12,871 -17,564 -12,865 -13,285

Dividends Paid -1,933 -5,845 -6,173 -7,487 -8,887

Debt Raised 17,580 8,346 0 0 0

Other -7,731 7,924 -508 -1,638 -1,638

Financial Cashflow 7,916 10,425 -6,681 -9,126 -10,525

Net exchange difference 321 257 147 0 0 Valuation Multiples 2011A 2012A 2013E 2014E 2015E

Net Change in Cash 3,550 7,874 -8,979 -46 -355 EV/EBITDA 8.3 7.3 7.0 5.8 4.9

P/E 15.7 16.2 14.3 11.5 9.9

Balance Sheet (HK$ mn) 2011A 2012A 2013E 2014E 2015E P/B 2.9 2.4 2.1 1.8 1.5

Cash & Cash eqv. 11,718 19,592 10,613 10,566 10,211 FCF yield -2% -2% -2% 2% 4%

Current assets 16,611 27,251 20,249 21,128 21,617 Dividend yield 2% 2% 2% 2% 3%

Fixed assets 56,677 69,225 84,139 94,046 103,941

Total assets 84,207 108,542 116,983 127,770 138,154 DCF (HK$ mn) 2014E 2015E 2016E 2017E 2018E

Current liabilities 12,572 18,363 29,048 34,094 37,763 EBIT 17,060 20,366 22,684 25,613 29,443

Non-Current liabilities 25,977 28,001 20,069 20,069 20,069 NOPLAT 12,454 14,867 16,559 18,697 21,493

Shareholder equity 30,383 44,422 50,578 59,972 70,856 DD&A 4,915 5,190 5,614 5,487 5,775

CFI -14,823 -15,085 -15,450 -15,560 -15,954

Ratio Analysis 2011A 2012A 2013E 2014E 2015E FCF to enterprise -355 1,082 2,028 3,042 4,686

Gearing (ND/ND&E) 34% 21% 32% 28% 25%

Interest cover 54 32 39 36 38 PV explicit period 18,881 Cost of Debt 5%

Dividend payout ratio 28% 28% 28% 28% 28% PV terminal EV 157,484 Cost of Equity 10%

Effective tax rate 22% 25% 26% 25% 25% Net (debt)/cash -23,324 Target Gearing 30%

ROACE 10% 10% 9% 10% 11% Equity value 153,040 WACC 8%

ROE 19% 15% 15% 16% 15%

EBITDA margin 47% 47% 39% 31% 30% Shares o/s (mn) 8,056


Target Price HK$20.0

0

5,000

10,000

15,000

20,000

25,000

30,000

2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

HK$, mn EBIT (incl associates, ex minorities)

E&P Gas Transmission Gas Distribution LNG for transport LNG regas/micro-LNG



8 January 2014 31

Fig 59 COSL Financial Summary


COSL (2883 HK)

Underperform

Profit & Loss (Rmb mn) 2011A 2012A 2013E 2014E 2015E Assumptions 2011A 2012A 2013E 2014E 2015E

Net Revenues 18,539 22,284 26,411 28,655 29,557 Rmb/US$ 6.5 6.4 6.2 6.2 6.2

less COGS 10,486 13,487 15,493 16,960 17,606 HK$/US$ 7.8 7.8 7.8 7.8 7.8

EBITDA 8,052 8,797 10,918 11,695 11,951 Brent $/bbl 109 113 106 112 116

less D&A 3,070 3,173 3,261 3,328 3,375 Global Day Rate

EBIT 4,983 5,624 7,657 8,367 8,575 Jack-up avg (<300ft) 89 90 87 87 87

less Total finance costs 345 427 358 262 180 Jack-up avg (>300ft) 113 124 133 137 137

Other income/(expense) 174 243 205 160 160 Semi-subs avg (<3000ft) 234 276 296 296 296

Pretax Profit 4,812 5,440 7,504 8,265 8,555 Semi-subs avg (5000-7500ft) 346 422 471 478 478

less Tax Expense 772 867 1,003 1,405 1,540 Semi-subs avg (>7500ft) 401 558 615 630 630

Basic Net Income 4,040 4,573 6,501 6,860 7,015 COSL Day Rate

Clean Net Income 4,040 4,559 6,491 6,860 7,015 Jack-up Rigs 107 108 119 123 123

Semi-submersibles 261 298 320 314 315

Basic EPS (Rmb/sh) 0.90 1.00 1.44 1.53 1.56 COSL Utilization

Diluted EPS (Rmb/sh) 0.90 1.00 1.44 1.53 1.56 Jack-up Utilization 88% 94% 95% 95% 95%

DPS (Rmb/sh) 0.18 0.31 0.29 0.31 0.31 Semi-subs Utilization 92% 85% 90% 88% 84%

Cashflows (Rmb mn) 2011A 2012A 2013E 2014E 2015E

EBITDA 8,052 8,797 10,918 11,695 11,951

less Tax Paid 772 867 1,003 1,405 1,540

less Chgs in Working Cap 1,079 -613 2,462 0 0

less Net Interest Paid 393 378 369 262 180

add Other 540 574 369 262 180

Operating Cashflow 6,349 8,739 7,453 10,290 10,411

Acquisitions 0 0 0 0 0

Capex -4,596 -3,643 -5,800 -4,610 -4,610

Asset Sales 0 0 0 0 0

Other -58 -4,773 2,527 386 468

Investing Cashflow -4,654 -8,415 -3,273 -4,224 -4,142

Dividends Paid -805 -811 -1,394 -1,298 -1,372

Debt Raised 2,558 751 0 0 0 Valuation Multiples 2011A 2012A 2013E 2014E 2015E

Other -3,490 3,993 -687 -488 -488 EV/EBITDA 9.3 8.3 6.7 6.3 6.1

Financial Cashflow -1,737 3,933 -2,080 -1,786 -1,860 EV/DACF 11.6 10.3 11.6 10.5 9.9

Net exchange difference -159 -88 11 0 0 P/E 13.0 10.9 12.6 11.9 11.7

Net Change in Cash -201 4,169 2,111 4,280 4,408 P/CF 7.6 6.6 8.8 8.4 8.3

P/B 1.9 1.5 2.2 1.9 1.7

Balance Sheet (Rmb mn) 2011A 2012A 2013E 2014E 2015E FCF yield 4% 6% 4% 6% 6%

Cash & Cash eqv. 5,646 9,815 11,203 15,483 19,891 Dividend yield 2% 3% 2% 2% 2%

Current assets 13,451 22,223 24,273 28,553 32,962

Fixed assets 46,285 47,076 48,331 49,613 50,848 DCF (Rmb mn) 2012A 2013E 2014E 2015E 2016E

Total assets 64,851 74,649 78,092 83,653 89,297 EBIT 5,624 7,657 8,367 8,575 9,489

Current liabilities 7,105 7,923 9,086 9,086 9,086 NOPLAT 4,499 6,126 6,693 6,860 7,591

Total liabilities 36,392 42,444 40,906 40,906 40,906 DD&A 3,173 3,261 3,328 3,375 3,365

Shareholder equity 28,459 32,205 37,185 42,747 48,390 CFI -3,643 -5,800 -4,610 -4,610 -2,300

FCF to enterprise 4,029 3,587 5,411 5,626 8,656

Ratio Analysis 2011A 2012A 2013E 2014E 2015E

Gearing (ND/ND&E) 44% 42% 36% 28% 20% PV explicit period 30,918 WACC: 8.0%

Interest cover 16 16 19 24 24 PV terminal EV 59,065

Dividend payout ratio 20% 31% 20% 20% 20% Net (debt)/cash 20,818

Effective tax rate 16% 16% 13% 17% 18% Equity value 69,165

ROACE 9% 9% 12% 12% 12%

ROE 15% 15% 19% 17% 15% Shares o/s (mn) 4,495

EBITDA margin 43% 39% 41% 41% 40% Value per share (Rmb) 15.4


Target Price HK$18.0

0

2,000

4,000

6,000

8,000

10,000

12,000

2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012e 2013e 2014e

(Rmb m)EBITDA by segment

Drilling Well Services Marine S&T Geophyscial Services



8 January 2014 32

Fig 60 Anton Financial Summary


Antonoil (3337.HK) HK$7.5

Outperform

Profit & Loss (Rmb mn) 2011A 2012A 2013E 2014E 2015E Segment Detail (Rmb m) 2011A 2012A 2013E 2014E 2015E

Total Revenue 1,261 2,015 2,542 3,275 4,165 Downhole Operations

EBIT 175 398 547 665 844 Multistage fracking jobs 79 139 190 247 321

Well Completion 110 146 158 189 217 Multistage fracking revenue 272 413 475 593 803

Down-hole Operations 259 471 606 736 945 y/y 23% 52% 15% 25% 35%

Drilling Technology 45 108 150 207 288 Coiled tubing revenues 193 240 309 458 606

Tubular Services 40 105 156 155 178 y/y 216% 24% 29% 48% 32%

Other (i.e. corporate) -220 -339 -409 -491 -625 Helium Testing revenues 50 105 131 144 159

Total EBITDA 234 491 660 795 1,003 Pressure Pumping revenues 0 27 145 174 209

Finance costs, net -16 -31 -43 -43 -44 Oil production Service revenues 55 72 86 103 113

Profit before income tax 113 367 498 621 800 Total segment revenues 570 857 1,127 1,472 1,890

Tax -21 -50 -90 -99 -128 y/y 66% 50% 32% 31% 28%

Reported tax rate (%) 13% 14% 18% 16% 16% Downhole ops EBITDA margin 45% 55% 54% 50% 50%

Profit for the year 92 318 408 522 672 Well Completion

Attr to Minorities 14 15 13 16 16 Well Completion revenues 320 458 492 590 678

Reported Net Income 77 303 395 506 656 y/y -2% 43% 7% 20% 15%

Clean Net Income 109 339 395 506 656 Well Completion EBITDA margin 34% 32% 32% 32% 32%

Drilling Technology

Basic EPS (Rmb) 0.036 0.140 0.178 0.228 0.296 Drilling Technology revenues 198 433 574 827 1,152

Clean, diluted EPS 0.052 0.157 0.178 0.228 0.296 y/y 103% 119% 33% 44% 39%

DPS (Rmb/sh) 0.017 0.046 0.064 0.083 0.107 Drilling Technology EBITDA margin 23% 25% 26% 25% 25%

payout 46% 32% 35% 35% 35% Tubulars

Tubulars revenues 171 257 336 387 445

Cashflows (Rmb mn) 2011A 2012A 2013E 2014E 2015E y/y -7% 50% 31% 15% 15%

Profit for the year (pre-minorities) 92 318 408 522 672 Tubulars EBITDA margin 24% 41% 46% 40% 40%

Depreciation of PPE 49 73 103 130 159

Operating profit before changes in working capital255 550 667 795 1,003

Inventories -7 -190 -44 -108 -120

Trade and notes receivables -11 -216 -135 -295 -357

Prepayments and other receivables -19 -20 -71 0 0

Trade payables 27 291 289 189 229

Accruals and other payables 18 2 33 0 0

Changes in working capital 7 -133 71 -213 -249

Other -42 -68 -135 -143 -172

Net cash generated from operating activities 220 350 603 439 582

Purchase of PPE -160 -232 -492 -470 -410

Purchase of intangible assets -28 -22 -10 0 0

Net cash from investing activities -198 -273 -464 -470 -410

Net cashflow from financing activities 258 -11 70 -138 -177

Net increase / (decrease) in cash and cash equivalents281 65 209 -169 -5 Valuation Multiples 2011A 2012A 2013E 2014E 2015E

P/E 13.8 18.5 23.1 18.0 13.9

FCFF (CFO-CFI) 23 76 139 -31 172 EV/EBITDA 6.6 12.9 13.6 11.6 9.2

FCFF ex changes in WC 16 209 68 182 421 P/B 0.9 3.1 3.9 3.3 2.8

Balance Sheet (Rmb mn) 2011A 2012A 2013E 2014E 2015E Enterprise FCF Yield (pre WC) 1.1% 3.3% 0.3% 2.0% 4.6%

Cash and cash equivalents (active) 462 523 722 552 548 Enterprise FCF Yield (post WC) 1.6% 1.2% 1.1% -0.3% 1.9%

Total current assets 1,541 2,214 2,462 2,695 3,169 Dividend yield 2.4% 1.6% 1.6% 2.0% 2.6%

Property, plant and equipment (active) 539 955 1,360 1,700 1,951

Non-current assets 957 1,379 1,783 2,123 2,374 DCF (Rmb m) 2012A 2013E 2014E 2015E 2016E

Total current liabilities 742 1,209 1,566 1,755 1,985 EBIT 398 547 665 844 948

Total non-current liabilities 16 303 300 300 300 NOPLAT 334 460 558 709 796

Total equity 1,740 2,081 2,380 2,763 3,259 DD&A 93 113 130 159 181

CFI -365 -421 -683 -659 -593

Ratio Analysis 2011A 2012A 2013E 2014E 2015E FCF to enterprise 63 152 5 209 384

Gearing (ND/ND&E) -5% 2% 1% 7% 6% PV explicit period 2,448

EBITDA Interest cover 13 15 15 17 22 PV terminal EV 15,630 Terminal EV/NOPLAT of: 21.4

Effective tax rate 13% 14% 18% 16% 16% Net (debt)/cash 40

ROA 5% 12% 11% 12% 13% Minorities (buy out valn) 151 Rf: 4.1%

ROE 7% 19% 19% 21% 23% Equity value 17,887 Kd: 6.6%

ROACE 8% 20% 20% 21% 22% Shares o/s (mn) 2,158 Rm: 5.5%

EBITDA margin 19% 24% 26% 24% 24% Value per share (Rmb) 8.3 Ke: 9.6%

EBIT margin 14% 20% 22% 20% 20% Value per share (HK$) 10.3 WACC: 8.0%

Target Price:

-1,000

-500

-

500

1,000

1,500

2,000

2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E

Rmb mSegment EBITDA split

Other (i.e. corporate) Well Completion Down-hole Operations

Drilling Technology Tubular Services Total EBITDA



8 January 2014 33

Fig 61 Petro-king Financial Summary


Petro-king (2178.HK)

Outperform

P&L summary (HK$ m) 2011A 2012A 2013E 2014E 2015E Segment data (HK$m) 2011A 2012A 2013E 2014E 2015E

Total Revenue 568 1,063 1,395 1,851 2,360 Oilfield Project Services

Oilfield Project Services 179 330 509 639 778 Drilling revenues 62 131 99 139 180

Consultancy Services 24 27 23 33 38 Well Completion revenues 6 266 454 636 826

Tools & Equipment 12 29 47 71 92 Production Enhancement revenues 46 525 551 645 803

Other (i.e. corporate) -85 -187 -234 -278 -354 # frack jobs 0 147 190 247 321

Total EBITDA 131 199 344 465 554 Total segment revenue 471 922 1104 1419 1809

EBITDA margin 23% 19% 25% 25% 23% Segment revenue growth -6% 96% 20% 29% 27%

Total EBIT (continuing ops) 116 180 325 446 534 Segment EBITDA margin 38% 36% 46% 45% 43%

Finance costs, net -3 -7 -8 -10 -10

Gain on disposal of jointly controlled entity 0 48 0 0 0 Consultancy services

Profit before income tax 112 220 317 436 524 Revenue 54 50 48 68 79

Tax expense -20 -46 -80 -109 -131 Revenue growth 2% -8% -2% 41% 15%

Reported tax rate (%) 18% 21% 25% 25% 25% EBITDA margin 44% 54% 47% 48% 48%

Profit for the period 92 174 237 327 393

Due to minorities 5 6 17 16 20 Tools & Equipment

Profit due to owners of co. (continuing)87 169 220 311 373 Revenue 35 86 236 354 460

Clean Net Income 87 146 220 311 373 Revenue growth 490% 147% 174% 50% 30%

Basic EPS (HK$) 0.12 0.23 0.22 0.31 0.37 EBITDA margin 39% 34% 20% 20% 20%

Clean, diluted EPS 0.11 0.19 0.22 0.30 0.36

Cashflow summary (HK$m) 2011A 2012A 2013E 2014E 2015E

Profit before income tax 112 220 317 436 524

Depreciation 4 7 9 9 10

Amortisation 11 12 10 10 10

Gain on disposals 0 -48 0 0 0

CFO pre WC changes 130 240 344 465 554

(Increase) inventories -34 -71 22 -47 -52

(Increase) receivables 111 -284 -47 -262 -293

Increase payables -159 288 29 108 120

Cash from operations 7 131 260 145 188

Cash from investing -64 -159 -652 -200 -210

Share issue proceeds 0 0 943 0 0

Cash from financing 24 92 823 0 0 Valuation Multiples 2011A 2012A 2013E 2014E 2015E

EV/EBITDA 12.6 9.8 8.6

Balance Sheet (HK$m) 2011A 2012A 2013E 2014E 2015E P/E 18.6 13.2 11.0

Cash & Cash eqv. 73 137 580 525 504 P/B 1.9 1.7 1.4

Current assets 685 1,091 1,710 1,964 2,287 Enterprise FCF yield -9.0% -1.2% -0.5%

Non-current assets 549 742 1,214 1,395 1,584 Enterprise FCF yield (ex WC changes) -7.0% 1.4% 2.5%

Total assets 1,235 1,832 2,924 3,359 3,871 Dividend yield 0% 0% 0%

Current liabilities 219 730 677 785 904

Total liabilities 232 741 689 797 916 DCF (HK$m) 2013E 2014E 2015E 2016E 2017E

Shareholder equity 1,003 1,091 2,235 2,562 2,955 EBIT 325 446 534 587 671

NOPLAT 260 356 427 469 537

Key metrics 2011A 2012A 2013E 2014E 2015E DD&A 19 19 20 21 23

Gearing (ND/ND&E) 3% 5% -17% -11% -9% CFI (incl WC changes) -648 -401 -435 -436 -386

EBITDA Interest cover 40 27 41 48 57 FCF to enterprise -369 -25 12 54 174

ROA 7% 10% 10% 10% 11% PV explicit period 859

ROE 9% 14% 14% 13% 14% PV terminal EV 6,309 Terminal EV/NOPLAT: 16.1

ROACE 10% 14% 15% 16% 16% Net (debt)/cash -317 WACC 8.0%

EBITDA margin 23% 19% 25% 25% 23% Equity value 7,318

EBIT margin 20% 17% 23% 24% 23% Shares o/s (mn) 1,038

Value per share (HK$) 7.1

Target Price HK$7.2

-600

-400

-200

0

200

400

600

800

1,000

2009A 2010A 2011A 2012A 2013E 2014E 2015E

HK$mSegment EBITDA split

Oilfield Project Services Consultancy Services

Tools & Equipment Other (i.e. corporate)

Total EBITDA



8 January 2014 34

Fig 62 SPT Energy Financial Summary


SPT (1251.HK) HK$6.5

Outperform

Profit & Loss (Rmb mn) 2011A 2012A 2013E 2014E 2015E Segment Detail (Rmb m) 2011A 2012A 2013E 2014E 2015E

Total Revenue 1,321 1,822 2,360 2,895 3,581 Drilling Services

Material costs -363 -460 -590 -724 -895 Revenue 451 659 975 1268 1648

materials as % revenues 28% 25% 25% 25% 25% Revenue growth 31% 46% 48% 30% 30%

Depreciation & amortisation -44 -57 -70 -92 -118 EBITDA margin 25% 29% 27% 27% 27%

Operating Costs (info only) -1,038 -1,448 -1,942 -2,391 -2,968

Operating profit (EBIT) 276 362 419 504 613 Well Completion

Drilling Services 111 191 267 347 452 Revenue 355 532 691 898 1168

Well Completion Services 101 144 191 245 319 Revenue growth 10% 50% 30% 30% 30%

Reservoir Services 187 215 224 235 247 EBITDA margin 29% 27% 28% 27% 27%

Implied corporate -81 -131 -194 -232 -286

Total EBITDA 319 419 488 596 731 Reservoir Services

Finance cost, net -14 -23 -27 -25 -25 Revenue 516 631 694 729 766

Income tax expense -75 -84 -80 -96 -118 Revenue growth 35% 22% 10% 5% 5%

Profit for the period 187 255 317 384 471 EBITDA margin 36% 34% 32% 32% 32%

Attributable to minorities 5 7 2 4 4

Equity holders of the company 182 248 314 380 467

EPS basic (Rmb) 0.180 0.184 0.206 0.249 0.306

EPS fully diluted (Rmb) 0.180 0.183 0.199 0.240 0.294

DPS declared (Rmb/sh) 0.013 0.045 0.041 0.050 0.061

Payout 7% 25% 20% 20% 20%


Profit before income tax 262 339 397 480 589

Depreciation PPE 43 57 70 92 118

Inventories (incr)/decr -34 -69 -40 -81 -103

Trade receivables (incr)/decr -141 -465 -203 -203 -246

Prepayments & other receivables (incr)/decr 15 -18 0 0 0

Trade payables incr/(decr) -56 120 179 114 147

Other 62 90 -36 24 24

Net cash inflows from operations 151 54 366 427 529

Interest paid -10 -18 -21 -25 -25

Interest received 0 3 4 1 1 Valuation Multiples 2011A 2012A 2013E 2014E 2015E

Income tax paid -110 -98 -89 -96 -118 EV/EBITDA 11.0 9.0 7.2

Net cash generated from operating activities 31 -58 260 307 387 P/E 18.0 14.9 12.1

Purchases PP&E -83 -118 -193 -210 -180 P/B 3.2 2.7 2.3

Net cash used in investing activities -85 -144 -202 -210 -180 Enterprise FCF Yield 2% 5% 8%

Net cash generated from financing activities 191 559 -126 -63 -76 Enterprise FCF Yield (incl WC changes) -4% 1% 2%

Dividend yield 1% 1% 2%

Net increase in cash and cash equivalents 138 358 -68 34 131

FCF (post WC) CFO-WC-capex/acqs -53 -201 59 97 207

FCF (pre WC) 150 187 89 266 409 DCF (Rmb mn) 2013E 2014E 2015E 2016E 2017E

Balance Sheet (Rmb mn) 2011A 2012A 2013E 2014E 2015E EBIT 419 504 613 713 805

PP&E 215 277 420 538 599 NOPLAT 293 353 429 499 564

Non-current assets 284 389 556 674 735 DD&A 70 92 118 132 142

Cash & equivalents 301 659 589 624 754 CFI -223 -379 -382 -299 -379

Current assets 1,184 2,106 2,277 2,594 3,074 FCF to enterprise 140 66 165 332 327

Non-current Liabilities 17 151 157 157 157 PV explicit period 1,673

Current liabilities 565 867 1,025 1,140 1,286 PV terminal EV 7,924 Terminal EV/NOPLAT: 18.0

Total Equity 904 1,628 1,807 2,128 2,523 Net (debt)/cash -308 Rf: 4.1%

Minorities (buy out valn) -24 Kd: 8.0%

Ratio Analysis 2011A 2012A 2013E 2014E 2015E Equity value (Rmb m) 9,929 Rm: 5.0%

Gearing (ND/ND&E) -9% -25% -21% -20% -24% Shares o/s (mn) 1,526 Ke: 9.6%

EBITDA Interest cover 23 18 18 24 30 Value per share (Rmb) 6.5 WACC: 8.0%

Effective tax rate 29% 25% 20% 20% 20% Value per share (HK$) 8.1

ROA 15% 13% 13% 13% 14%

ROE 25% 20% 19% 20% 21%

ROACE 28% 26% 25% 25% 26%

EBITDA margin 24% 23% 21% 21% 20%

EBIT margin 21% 20% 18% 17% 17%

Target price:

(200)

0

200

400

600

800

1000

2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E

Rmb m Segment EBITDA 2008-15e

Implied corporate Drilling ServicesWell Completion Services Reservoir ServicesTotal EBITDA



8 January 2014 35

Fig 63 Hilong Financial Summary


Hilong Holdings (1623 HK)

Outperform

Profit & Loss (Rmb, mn) 2011A 2012A 2013E 2014E 2015E Operationals 2011A 2012A 2013E 2014E 2015E

Net Revenues 1,821 2,264 2,613 3,174 3,628 Drill Pipes

less COGS -1,075 -1,369 -1,541 -1,854 -2,090 Total Volumes ('000 tonnes) 27.6 37.4 40.0 42.8 45.9

Gross Profit 747 895 1,072 1,320 1,538 Y-o-Y volume growth % 10% 35% 7% 7% 7%

Selling & distribution expense -109 -117 -128 -155 -177 Capacity Utilization (%) 68% 74% 66% 61% 57%

Administrative expenses -241 -286 -305 -370 -423 Avg. Drill Pipes gross margin (%) 42% 38% 39% 40% 41%

Others 25 -15 -128 -64 -68

Coating

Drill Pipes 211 160 178 220 253 Line pipe revenue growth y/y 46% 13% -1% 15% 10%

Coating 124 163 175 214 262 OCTG revenue growth y/y 16% 57% 37% 20% 20%

Oilfield Services 87 155 232 296 356 Line pipe gross margin % 26% 21% 21% 22% 23%

EBIT 421 478 512 730 870 OCTG gross margin % 75% 75% 75% 75% 75%

Finance income 1 2 6 7 10 Avg. Coating gross margin (%) 41% 41% 45% 46% 48%

Finance costs -47 -73 -71 -69 -70

Share of results of Associates -4 2 2 2 2 Oilfield Services

Share of results of JCE's -7 -1 -1 -1 -1 OFS revenue growth y/y 37% 50% 17% 30% 30%

Profit before tax 365 407 447 668 810 OFS gross margins (%) 36% 39% 40% 40% 40%

less Tax Expense -45 -45 -85 -100 -122

Effective Tax Rate 12% 11% 21% 15% 15%

Profit after tax 320 361 356 568 689

Minorities -18 -16 -25 -25 -25

Reported Net Income 302 345 331 543 664

Clean Net Income 302 345 405 543 664

Shares outstanding (mn) 1,462 1,591 1,660 1,689 1,689

Reported EPS (Rmb/sh) 0.21 0.22 0.20 0.32 0.39

Clean EPS (Rmb/sh) 0.21 0.22 0.24 0.32 0.39

y/y growth% 32% 5% 13% 32% 22%

DPS (Rmb/sh) 0.06 0.06 0.06 0.10 0.12

Dividend Payout 30% 29% 30% 30% 30%

Cashflows (Rmb, mn) 2011A 2012A 2013E 2014E 2015E 2011A 2012A 2013E 2014E 2015E

EBIT 421 478 512 730 870 Gearing (ND/ND&E) 19% 20% 14% 10% 4%

DD&A 82 105 126 145 150 Interest Cover (EBITDA/Interest) 10.8 8.0 8.9 12.6 14.6

Changes in Working Capital -606 -191 -186 -251 -162 Gross margin 41% 40% 41% 42% 42%

Net Interest Paid -36 -45 -67 -69 -70 EBIT margin 23% 21% 20% 23% 24%

Tax Paid -40 -39 -106 -100 -122 ROE 16% 16% 15% 17% 17%

Other 240 46 0 0 0 ROA 8% 9% 8% 9% 10%

Operating Cashflow 59 353 278 455 666 ROACE 15% 12% 12% 15% 16%

Capex -281 -377 -296 -300 -300

Acquisitions/Investments -16 -18 -18 0 0 2011A 2012A 2013E 2014E 2015E

Other -181 99 -2 0 0 P/E 8.7 6.7 21.5 16.3 13.4

Investing Cashflow -478 -296 -316 -300 -300 EV/EBITDA 6.4 5.2 14.7 10.8 9.1

Increase in borrowings 557 800 1,714 0 0 P/B 1.4 1.1 3.3 2.8 2.3

Debt repayment -764 -650 -1,049 0 0 FCF yield -7% -1% 0% 2% 4%

Dividends Paid -61 -98 -99 -99 -163 Dividend yield 3% 4% 1% 2% 2%

Other 764 -30 -7 0 0

Financial Cashflow 495 21 559 -99 -163 DCF (Rmb, mn) 2013E 2014E 2015E 2016E 2017E

NOPLAT 405 578 688 795 922

Net Change in Cash 76 78 522 55 204 DD&A 126 145 150 155 160

FCF (CFO - Capex - Dividends) -222 -24 -18 155 366 Changes in Working Capital -186 -251 -162 -242 -299

Cash flow from investing -316 -300 -300 -300 -300

Balance Sheet (Rmb, mn) 2011A 2012A 2013E 2014E 2015E Enterprise FCF 29 172 376 408 483

Cash & Cash eqv. 326 404 979 1,034 1,238

Other Current Assets 1,879 2,055 2,307 2,686 2,686 PV FCF explicit period 2,598 Post tax cost of debt 6.3%

PP&E 1,096 1,254 1,428 1,583 1,733 PV terminal EV 8,824 Rf 4.1%

Non-Current Assets 276 328 337 418 826 Net (debt)/cash -417 Rm 6.0%

Total assets 3,577 4,040 5,051 5,722 6,483 Equity value (Rmb, mn) 11,006 WACC 8.0%

Current liabilities 1,240 1,291 726 855 952

Non-Current liabilities 1,539 1,735 2,194 2,322 2,419 Shares o/s (mn) 1,660

Shareholder equity 2,039 2,305 2,857 3,400 4,064 Value per share (HK$/sh) 8.1

Target Price HK$7.2

0%

10%

20%

30%

40%

0

200

400

600

800

1,000

2008A 2009A 2010A 2011A 2012E 2013E 2014E 2015E

(Rmb, mn) EBIT Outlook

Drill Pipes Coating Oilfield Services Average EBIT Margin (RHS)



8 January 2014 36

Fig 64 Honghua Financial Summary


Honghua (196 HK)

Underperform

Profit & Loss (Rmb, mn) 2011A 2012A 2013E 2014E 2015E Operationals 2011A 2012A 2013E 2014E 2015E

Net Revenues 3,485 5,068 7,572 9,883 9,905 Land Drilling Rigs

less COGS -2,515 -3,321 -5,528 -7,300 -7,114 Digitially-controlled rigs (# sold) 43 43 59 67 100

Gross Profit 970 1,747 2,044 2,583 2,791 Conventional rigs (# sold) 5 13 0 0 0

Selling & distribution expense -386 -554 -806 -1,087 -1,090 Digitially-controlled rigs ASP (RMB mn/rig) 56 75 84 107 50

Administrative expenses -409 -527 -738 -988 -990 Conventional rigs ASP (RMB mn/rig) 26 39 50 50 50

Others 68 6 399 521 385

Offshore Drilling Rigs

Land rigs 393 780 758 1,195 745 Offshore rigs (# sold) 0 0 0 2 2

Offshore rigs -80 -35 -44 -249 42 Offshore rigs ASP (US$ mn/rig) 0 0 200 200 200

Parts, components, other 5 74 228 77 130

Oilfield services 0 14 5 55 229 Parts, Components, Others

EBIT 244 673 898 1,028 1,096 Mud Pumps (# sold) 168 108 80 80 80

Finance income 27 75 48 47 33 Mud Pumps ASP (RMB mn/unit) 1 1 1 1 1

Finance costs -78 -45 -148 -278 -353 Top Drives (# sold) 4 16 9 10 15

Share of results of Associates 0 0 0 0 0 Top Drives ASP (RMB mn/unit) 0 8 7 7 7

Share of results of JCE's 5 8 8 8 8

Profit before tax 199 710 807 806 784

less Tax Expense -28 -168 -133 -134 -130

Effective Tax Rate 14% 24% 17% 17% 17%

Profit after tax 171 542 665 672 654

Minorities -3 -12 -44 -45 -43

Reported Net Income 168 530 621 627 610

Shares outstanding (mn) 3,224 3,194 3,171 3,171 3,171


y/y growth% NM 218% 18% 1% -3%

DPS (Rmb/sh) 0.03 0.05 0.06 0.06 0.06


Cashflows (Rmb, mn) 2011A 2012A 2013E 2014E 2015E 2011A 2012A 2013E 2014E 2015E

EBIT 244 673 898 1,028 1,096 Gearing (ND/ND&E) 1% 18% 40% 49% 48%

DD&A 106 148 243 323 341 Interest Cover (EBITDA/Interest) 4.5 18.0 7.7 4.9 4.1

Changes in Working Capital -45 -1,222 -1,595 -2,155 -580 Gross margin 28% 34% 27% 26% 28%

Tax Paid -18 -104 -133 -134 -130 EBIT margin 7% 13% 12% 10% 11%

Other -73 -3 -91 -223 -312 ROE 4% 12% 13% 11% 10%

Operating Cashflow 214 -508 -678 -1,160 415 ROA 3% 5% 4% 4% 3%

Capex -105 -90 -1,090 -470 -270 ROACE 6% 12% 11% 9% 8%

Acquisitions/Investments -60 0 0 0 0

Other -429 -127 0 0 0 2011A 2012A 2013E 2014E 2015E

Investing Cashflow -594 -217 -1,090 -470 -270 P/E 14.5 7.8 9.2 9.1 9.3

Increase in borrowings 829 2,233 2,000 1,000 500 EV/EBITDA 7.4 6.4 8.0 8.3 8.1

Debt repayment -575 -1,129 0 0 0 P/B 0.6 0.9 1.2 1.0 0.9

Dividends Paid 0 -115 -155 -186 -188 FCF yield 4% -14% -21% -16% 0%

Other -9 -134 -148 -278 -353 Dividend yield 4% 4% 3% 3% 3%

Financial Cashflow 244 855 1,698 536 -41

DCF (Rmb, mn) 2013E 2014E 2015E 2016E 2017E

Net Change in Cash -135 130 -71 -1,095 104 NOPLAT 749 857 914 1,191 1,407

FCF (CFO - Capex - Dividends) 110 -713 -1,923 -1,817 -43 DD&A 243 323 341 342 343

Changes in Working Capital -1,595 -2,155 -580 -1,114 -999

Cash flow from investing -1,090 -470 -270 -270 -270

Balance Sheet (Rmb, mn) 2011A 2012A 2013E 2014E 2015E Enterprise FCF -1,693 -1,445 405 149 480

Cash & Cash eqv. 852 984 1,911 816 920

Other Current Assets 3,959 5,634 7,694 11,014 11,014 PV FCF explicit period -715 Target gearing 30.0%

PP&E 679 1,142 2,323 2,470 2,398 PV terminal EV 5,887

Non-Current Assets 1,204 2,086 1,987 2,407 3,362 Net (debt)/cash -999 Cost of debt 7.0%

Total assets 6,693 9,846 13,914 16,707 17,694 Equity value (Rmb, mn) 4,173 Rf 4.1%

Current liabilities 2,119 4,517 6,830 7,996 7,873 Rm 6.0%

Non-Current liabilities 2,518 5,257 8,902 11,068 11,445 Shares o/s (mn) 3,171 Cost of equity 10.1%

Shareholder equity 4,175 4,589 5,012 5,639 6,249 Value per share (HK$/sh) 1.6 WACC 9.0%

Target Price HK$1.8

-10%

-5%

0%

5%

10%

15%

20%

-500

0

500

1,000

1,500

2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E

(Rmb, mn) EBIT Outlook

Land Drilling Rigs Offshore Drilling Rigs Parts, Components, Others

Oilfield Services Average EBIT Margin



8 January 2014 37

Fig 65 NewOcean Financial Summary


NewOcean Energy (342 HK)

Outperform

Profit & Loss (HK$ mn) 2011A 2012A 2013E 2014E 2015E Volume Growth Assumptions 2011A 2012A 2013E 2014E 2015E

Net Revenues 10,117 12,456 14,708 19,938 23,874 LPG Volumes ('000 tons) 1,450 1,676 1,657 1,877 2,214

less COGS 9,690 11,399 13,369 18,275 21,790 Y/Y growth % 19% 16% -1% 13% 18%

Gross Profit 427 1,057 1,339 1,662 2,084 ..Wholesale 1,233 1,183 1,144 1,309 1,609

Selling & distribution expense -99 -227 -233 -319 -382 ..Retail 217 493 514 569 605

Administrative expenses -136 -202 -231 -319 -382

Others 161 0 0 0 0 Oil Product Volumes ('000 tons) 0 200 606 1,106 1,386

Y/Y growth % NM NM 203% 83% 25%

LPG (Wholesale + Retail) 300 529 889 1,009 1,234 ..Wholesale 0 200 606 1,106 1,386

Oil Products (Wholesale + Retail) 0 0 34 57 128 ..Retail 0 0 0 0 0

Electronics 66 88 8 8 8

Corporate/Others -45 -50 -44 -50 -50 Gross Margin Assumptions 2011A 2012A 2013E 2014E 2015E

EBIT 322 567 887 1,024 1,320 LPG (Wholesale + Retail) 4.0% 8.7% 10.2% 10.3% 10.6%

Interest Income 9 25 40 32 34 ..Wholesale 3.6% 4.6% 5.2% 5.8% 6.1%

Interest Expense -145 -195 -134 -113 -144 ..Retail 5.9% 19.6% 19.3% 18.4% 19.8%

Other non-recurring gains/(losses) 147 48 -8 6 14

Profit before tax 333 446 785 949 1,224 Oil Products (Wholesale + Retail) - 3.1% 3.5% 4.0% 5.0%

less Tax Expense -30 -18 -32 -76 -98 ..Wholesale - 3.1% 3.5% 4.0% 5.0%

Profit after tax 303 428 753 873 1,126 ..Retail - - - NM NM

Minorities -3 2 0 0 0

Reported Net Income 306 427 754 873 1,126

Clean Net Income 142 464 669 873 1,126

Reported EPS (HK cents/sh) 23.4 32.7 53.1 61.5 79.3

Clean EPS (HK cents/sh) 10.9 35.5 47.1 61.5 79.3

y/y growth% -5% 227% 44% 30% 29%

DPS (HK cents/sh) 2.3 3.8 7.1 8.2 10.6


Cashflows (HK$ mn) 2011A 2012A 2013E 2014E 2015E Ratio Analysis 2011A 2012A 2013E 2014E 2015E

Profit before tax 322 567 887 1,024 1,320 Gearing (ND/ND&E) 54% 25% 7% 20% 14%

DD&A 102 132 143 190 194 Interest Cover (EBITDA/Interest) 2.7x 3.3x 7.7x 10.7x 10.5x

Changes in Working Capital -723 1,560 -678 -1,519 -578 Dividend payout ratio 10% 12% 13% 13% 13%

Tax Paid -12 -12 -32 -76 -98 Effective tax rate 9% 4% 4% 8% 8%

Net Interest Paid -38 -38 -124 -81 -110 ROE 19% 19% 23% 20% 22%

Other -157 -242 98 0 0 ROACE 9% 12% 19% 17% 18%

Operating Cashflow -506 1,968 293 -462 728 EBITDA margin 4% 5% 7% 6% 6%

Capex -276 -231 -360 -310 -310 EBIT margin 3% 5% 6% 5% 6%

Acquisitions -48 -523 0 0 0

Other -2,057 655 917 0 0 Valuation Multiples 2011A 2012A 2013E 2014E 2015E

Investing Cashflow -2,381 -100 557 -310 -310 P/E 8.5x 13.9x 11.9x 10.2x 7.9x

Increase in borrowings 12,314 10,880 6,205 1,000 0 EV/EBITDA 12.5x 10.5x 9.0x 8.4x 6.5x

Debt repayment -8,796 -12,141 -7,191 0 0 P/B 1.4x 2.3x 2.2x 1.9x 1.6x

Dividends Paid -13 -30 -113 -118 -137 FCF yield -17% 18% -1% -8% 4%

Other -134 -252 632 0 0 Dividend yield 1% 1% 1% 1% 2%

Financial Cashflow 3,370 -1,542 -467 882 -137

DCF Summary 2012A 2013E 2014E 2015E 2016E

Net Change in Cash 483 325 383 110 281 NOPLAT 851 982 1,266 1,379 1,506

FCF (CFO - Capex - Dividends) -794 1,706 -179 -890 281 DD&A 143 190 194 199 193

Cash flow from investing -360 -310 -310 -10 -10

Balance Sheet (HK$ mn) 2011A 2012A 2013E 2014E 2015E Enterprise FCF -45 -657 573 1,112 1,158

Cash & Cash eqv. 878 1,196 1,590 1,700 1,981

Pledged Deposits 4,210 4,056 3,230 3,230 3,230 PV FCF explicit period 3,703 Cost of debt (post tax) 4.8%

Other Current Assets 3,345 4,604 4,007 5,736 6,748 PV terminal EV 6,748 Beta 0.7

Non-Current Assets 2,189 2,497 2,756 2,884 3,000 Net (debt)/cash -297 Cost of Equity 10.7%

Total assets 10,622 12,353 11,584 13,551 14,959 Equity value 10,154 WACC 10.0%

Current liabilities 8,308 9,436 7,142 7,353 7,786

Non-Current liabilities 466 332 434 1,434 1,434 Shares o/s (mn) 1,306

Shareholder equity 1,848 2,585 4,007 4,764 5,739 Value per share (HK$/sh) 7.8

Target Price HK$8.0

0

500

1,000

1,500

2,000

2,500

2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

HK$, mnNewOcean Energy EBIT Contribution

LPG Oil Products Electronics Others



8 January 2014 38

Fig 66 MIE Financial Summary


MIE Holdings (1555 HK)

Outperform

Profit & Loss (Rmb mn) 2011A 2012A 2013E 2014E 2015E Oil Price, Production & Reserves 2011A 2012A 2013E 2014E 2015E

Net Revenues 2,827 3,486 3,275 3,454 3,899 Brent ($/bbl) 108.6 111.0 106.3 115.3 117.3

less COGS -1,186 -1,499 -1,529 -1,674 -1,931 MIE Oil Price Realization ($/bbl) 94.9 99.2 91.7 96.2 97.5

EBITDA 1,641 1,986 1,746 1,780 1,969 FX - Rmb/US$ 6.5 6.4 6.4 6.4 6.4

less D&A -542 -861 -712 -706 -937

China 10,500 11,487 9,881 8,236 8,662

China 1,210 1,161 952 872 738 Kazakhstan 2,104 2,784 4,615 6,380 7,716

Kazakhstan -7 69 171 302 384 Total Oil Pdtn (boe/d) 12,604 14,271 15,679 15,754 17,474

Others -104 -105 -100 -100 -100 y/y% growth 30% 13% 10% 0% 11%

EBIT 1,099 1,125 1,034 1,073 1,032

less Finance Cost & Others 301 -288 -355 -378 -415 1P Reserves (mboe) 65.9 61.8 54.9 48.6 41.9

Pretax Profit 1,400 837 679 696 616 2P Reserves (mboe) 121.4 142.6 137.0 135.0 132.9

less Tax Expense -294 -296 -267 -244 -216 1P Reserve Life (yrs) 14.3 11.3 9.8 8.7 6.7

Profit after tax 1,106 541 412 452 401 2P Reserve Life (yrs) 26.4 26.0 24.6 24.0 21.3

Minorities 0 0 4 4 4

Basic Net Income 1,106 542 416 457 405

Clean Net Income 708 548 463 492 441


Clean EPS (Rmb/sh) 0.27 0.21 0.18 0.19 0.17


DPS (Rmb/sh) 0.03 0.04 0.06 0.01 0.01


EBITDA 1,641 1,986 1,746 1,780 1,969

less Tax Paid -264 -254 -267 -244 -216

less Net Interest Paid -148 -284 -308 -330 -367

add Other 17 1 -106 -194 -335

Operating Cashflow 1,246 1,449 1,066 1,013 1,050 Per Barrel Statistics 2011A 2012A 2013E 2014E 2015E

Acquisitions -1,005 -263 0 0 0 Revenues 94.9 104.3 89.4 93.9 95.5

Capex -1,242 -2,532 -2,157 -1,378 -1,095 Lifting Cost -7.7 -8.4 -8.0 -7.9 -7.1

Other -230 143 0 0 0 DD&A -18.2 -25.7 -19.8 -19.2 -17.3

Investing Cashflow -2,476 -2,651 -2,157 -1,378 -1,095 Production taxes & Others -28.6 -33.3 -29.8 -34.9 -42.4

Dividends Paid -77 -95 -156 -29 -26 EBIT 40.4 36.9 31.7 31.9 28.8

. -1,308 -50 -896 0 0 Income Tax -10.1 -9.7 -6.9 -6.9 -6.2

Other 2,479 918 1,780 500 0 Net Income 30.3 27.2 24.8 25.0 22.5

Financial Cashflow 1,094 773 728 471 -26 ..China NI/boe 37.0 32.1 35.1 34.8 28.1

..Kazakhstan NI/boe -11.8 6.5 9.9 16.7 18.2

Net Change in Cash -137 -429 -363 105 -71

FCF (CFO - Capex - Dividends) -73 -1,178 -1,247 -395 -71 Valuation Multiples 2011A 2012A 2013E 2014E 2015E

P/E 4.0 8.0 8.3 7.6 8.5

Balance Sheet (Rmb mn) 2011A 2012A 2013E 2014E 2015E P/B 1.5 1.3 0.9 0.8 0.7

Cash & Cash eqv. 533 467 165 270 199 EV/EBITDA 5.8 6.5 7.2 7.3 7.7

Other Current Assets 998 834 875 875 875 EV/1P 15.8 20.7 24.1 29.4 35.6

Non-Current Assets 5,267 6,633 7,904 8,576 8,733 FCF yield -16.9% -14.6% -10.9% 0.3% 6.5%

Total assets 7,426 8,912 9,868 10,644 10,731 Dividend yield 1.8% 2.2% 4.5% 0.9% 0.8%

Current liabilities 1,570 1,538 1,316 1,136 818

Total liabilities 4,464 5,448 6,097 6,417 6,099 SOTP Summary

Shareholder equity 2,963 3,464 3,770 4,227 4,632

Ratio Analysis 2011A 2012A 2013E 2014E 2015E $/boe $, mn HK$/sh Comments

Gearing (ND/ND&E) 39% 46% 52% 51% 49% China 13.1 731 2.0 MQ NAV, 12% WACC

Interest Cover (EBITDA/Interest) 7.0 7.0 5.5 5.3 5.3 Kazakhstan 8.3 802 2.1 MQ NAV, 12% WACC

Dividend payout ratio 7% 18% 38% 6% 7% Niobrara (US, shale oil) 20 0.1

Effective tax rate 21% 35% 39% 35% 35% Sino Gas & Energy (China, CBM) 283 0.8

ROE 37% 16% 11% 11% 9% MIE core upstream 1,835 5.0

ROACE 30% 10% 6% 6% 5% Net (debt)/cash -629 -1.9

EBITDA margin 58% 57% 53% 52% 50% Buy out of minorities 0 0.0

EBIT margin 39% 32% 32% 31% 26% MIE Core & Risked E&A 1,206 3.6

Risked NAV ($115/bbl LT)

Target Price HK$1.8

0

4

8

12

16

20

2007A 2010A 2013E 2016E 2019E 2022E 2025E 2028E 2031E 2034E

(kboe/d)MIE Organic Oil Production Outlook

Kazakhstan China



8 January 2014 39

Fig 67 Macquarie Oil Supply-Demand Summary

Source: IEA, EIA, JODI, Macquarie Research, January 2014

DEMAND 2008 2009 2010 2011 2012 2013 2014

OECD DEMAND

EUROPE 15,462 14,718 14,685 14,277 13,736 13,520 13,407

N. AMERICA 24,548 23,667 24,142 23,962 23,694 23,771 23,724

ASIA PACIFIC 8,400 8,005 8,188 8,234 8,591 8,391 8,290

OECD TOTAL 48,410 46,389 47,015 46,472 46,020 45,682 45,421

NON-OECD DEMAND

AFRICA 3,241 3,374 3,522 3,481 3,666 3,800 3,979

ASIA PACIFIC 9,717 10,144 10,730 11,023 11,307 11,591 11,910

EUROPE 723 696 664 663 685 688 701

S. & CENTRAL AM. 5,666 5,724 6,082 6,173 6,400 6,555 6,701

MIDDLE EAST 6,824 7,179 7,289 7,432 7,675 7,847 8,070

26,172 27,118 28,288 28,773 29,733 30,481 31,361

CHINA 7,516 7,924 8,927 9,306 9,766 10,139 10,519

FSU 4,219 4,030 4,129 4,387 4,491 4,601 4,716

11,736 11,955 13,056 13,694 14,257 14,740 15,235

NON OECD TOTAL 37,907 39,072 41,344 42,466 43,990 45,220 46,597

TOTAL CRUDE DEMAND 86,318 85,462 88,359 88,939 90,010 90,902 92,018

SUPPLY 2008 2009 2010 2011 2012 2013 2014

OECD SUPPLY

North America 13,370 13,604 14,065 14,596 15,844 17,059 17,987

Europe 4,761 4,513 4,139 3,757 3,449 3,239 3,172

Pacific 647 649 660 578 563 499 513

Total OECD 18,778 18,766 18,864 18,931 19,856 20,797 21,672

NON OECD SUPPLY

FSU 12,825 13,265 13,530 13,567 13,655 13,789 13,779

Europe 143 141 143 146 142 135 127

China 3,811 3,804 4,077 4,102 4,175 4,153 4,248

Other Asia 3,668 3,647 3,722 3,591 3,592 3,528 3,509

Latin America 3,690 3,898 4,123 4,239 4,191 4,238 4,482

Middle East 1,674 1,715 1,734 1,673 1,456 1,387 1,366

Africa 2,600 2,568 2,553 2,507 2,289 2,373 2,605

Total Non-OECD Supply 28411 29038 29882 29824 29501 29604 30114

Global Biofuels 1,410 1,582 1,827 1,857 1,856 1,950 2,095

Processing Gains 2,036 2,038 2,080 2,108 2,135 2,178 2,214

TOTAL NON-OPEC 50,633 51,425 52,654 52,719 53,348 54,530 56,096

OPEC CRUDE 31,073 28,585 28,646 29,308 30,759 30,251 30,336

OPEC NGLs 4,418 4,992 5,440 5,794 6,060 6,151 6,162

OPEC NON-CONVENTIONALS 106 108 117 122 218 235 238

OPEC TOTAL 35,597 33,686 34,203 35,224 37,037 36,637 36,736

TOTAL SUPPLY 86,230 85,110 86,857 87,943 90,385 91,167 92,832

SUPPLY - DEMAND -87 -351 -1,501 -996 374 264 815


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Fig 68 Macquarie China Gas Supply-Demand Summary

Source: CEIC, Wood Mackenzie, Macquarie Research, January 2014

Macquarie Research - China Gas Supply-Demand

(bcm) 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E2012-

15e

2012-

20eComments

Demand

Residential 8 10 14 17 18 23 26 31 35 41 47 53 59 65 73 80 15% 13% rising access to gas and urbanization

Industrial 30 34 40 45 44 49 61 73 77 85 93 102 112 123 134 146 8% 9% strong relationship w GDP (R2 98%)

Power Generation 3 4 8 8 13 19 22 23 26 32 43 53 61 69 77 85 24% 18% 60/110GW capacity 2015/20, 4% power mkt share

Transport (NGVs) 4 5 5 7 9 11 14 16 20 25 30 37 44 51 60 70 23% 20% 3.5mn NGVs by 2020; 1.8% new vehicle penetration

Other 2 3 4 4 5 6 5 4 5 5 6 7 7 8 8 9 15% 10%

China Gas Demand (bcm) 47 56 71 81 90 108 129 147 162 188 220 251 282 316 352 390 14% 13% Govt target 230/380bcm by 2015/20e…

y/y change 18% 20% 26% 15% 10% 20% 20% 14% 11% 16% 17% 14% 13% 12% 11% 11%

% of overall energy mix 3% 3% 3% 4% 4% 4% 5% 5% 6% 7% 7% 8% 9% 9% 10% 10% …and 7.5%/10% of overall energy mix

Supply

Changqing (Ordos) 7 7 9 11 15 16 22 23 25 29 33 37 42 46 50 54 Tight gas | P'China Sulige field (700bcm reserves)

Tarim 5 11 14 16 17 17 16 18 20 22 24 26 29 31 34 36 HP/HT gas | PChina’s Dabei, Dina, Kela (157bcm reserves)

Sichuan 11 13 14 14 14 14 13 13 13 14 16 18 19 21 22 24 Sour gas | P'China Longang field (similar size as Puguang)

Puguang (Sichuan) 0 0 0 0 0 4 6 7 9 10 12 12 12 13 14 15 Sour gas | S'pec Puguang, Yuanba, Others (250bcm reserves)

W S. China Sea 2 3 2 3 3 4 4 4 3 3 4 4 4 4 4 4 CNOOC offshore

Liwan 0 0 0 0 0 0 0 0 0 2 3 3 3 3 3 3 CNOOC new start-up

Coal-to-Gas (CTG) 0 0 0 0 0 0 0 1 4 10 13 15 15 15 15 15 160bcm proposed capacity; assume 50% of WMAC pdtn

Coal Bed Methane (CBM) 0 0 0 0 0 0 1 2 2 3 3 4 4 4 4 4 Govt target 16bcm in 2015, multiple challenges to overcome

Shale Gas 0 0 0 0 0 0 0 0 0 1 1 2 2 5 7 10 Unrealistic govt target of 6.5bcm in 2015, 60-100bcm in 2020

Other Conv. Legacy Fields 21 23 30 36 36 41 40 44 47 45 45 46 47 47 47 47 Assume flat over 2012

China Indigenous Production (bcm) 47 56 69 80 85 97 103 112 124 138 153 166 177 188 199 212 11% 8% Govt target 176bcm pdtn capacity by 2015

y/y change 18% 20% 23% 16% 6% 13% 7% 8% 11% 11% 11% 9% 7% 6% 6% 6%

Turkmenistan 0 0 0 0 0 3 9 15 25 30 35 40 45 50 55 60 Ramp-up to full capacity of 60bcm by 2020 (Galkynash 2016)

Myanmmar 0 0 0 0 0 0 0 0 3 12 12 12 12 12 12 12 First vols in 4Q13, ramping to full capacity in 2014

Russia (East Route) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Russia still in MoU stage, earliest startup 2018+

China Pipeline Imports (bcm) 0 0 0 0 0 3 9 15 28 42 47 52 57 62 67 72 46% 21%

y/y change 0% 0% 0% 0% 0% 0% 256% 71% 84% 50% 12% 11% 10% 9% 8% 7%

LNG Imports Reqd (bcm) 0 0 1 1 4 8 17 20 10 8 20 33 48 66 86 106 0% 23%

Contracted LNG 0 1 1 1 3 7 9 20 21 34 41 47 47 46 46 46 QCLNG, Gorgon, Qatargas

Implied Spot LNG (excess)/shortfall 0 -1 0 0 1 1 8 0 -11 -26 -21 -14 1 20 39 60 Adequately supplied medium term, but big shortfall in 2020

y/y change 0% 0% 0% 0% NM 96% 103% 18% -49% -21% 147% 64% 48% 36% 30% 24%

China Gas Supply, ex spot (bcm) 47 57 70 82 88 106 121 147 173 214 241 265 281 296 313 330 18% 11%

China Total Gas Supply (bcm) 47 56 71 81 90 108 129 147 162 188 220 251 282 316 352 390

Imports as % of overall supply 0% 0% 2% 1% 5% 10% 20% 24% 24% 27% 30% 34% 37% 40% 43% 46% Imports rises to 46% of mix in 2020, oil currently at c.65%


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Fig 69 Global oil & gas valuation


Company Local B'berg Mcap Reco. Price Price Target TSR Upside

Curr Ticker (US$ bn) (local) (local) (PT + DY) 2014E 2015E 2014E 2015E 2014E 2015E

Exxon USD XOM US 435.4 Not Rated 99.66 NM NM 5.7 x 5.6 x 12.8 x 12.5 x 2.3 x 2.1 x

RD Shell GBp RDSA LN 228.7 Not Rated 2,147.00 NM NM 4.3 x 4.2 x 9.1 x 9.0 x 1.1 x 1.1 x

BP GBp BP LN 149.3 Not Rated 488.95 NM NM 4.4 x 4.3 x 9.3 x 8.8 x 1.1 x 1.1 x

Chevron USD CVX US 238.5 Not Rated 124.02 NM NM 4.5 x 4.5 x 10.5 x 10.4 x 1.5 x 1.4 x

Total EUR FP FP 140.9 Not Rated 43.50 NM NM 3.7 x 3.5 x 8.7 x 8.4 x 1.2 x 1.1 x

Conoco USD COP US 86.1 Not Rated 70.26 NM NM 4.2 x 4.3 x 11.0 x 10.9 x 1.6 x 1.5 x

ENI EUR ENI IM 87.0 Not Rated 17.58 NM NM 3.2 x 3.0 x 11.0 x 9.6 x 1.0 x 1.0 x

Statoil NOK STL NO 75.6 Not Rated 146.40 NM NM 2.3 x 2.3 x 9.5 x 9.5 x 1.2 x 1.2 x

BG GBp BG US 72.7 Not Rated 1,300.50 NM NM 7.5 x 6.0 x 15.6 x 12.0 x 1.8 x 1.7 x

Occidental USD OXY US 75.6 Not Rated 93.80 NM NM 5.2 x 4.9 x 13.0 x 12.5 x 1.6 x 1.5 x

Repsol EUR REP SM 32.1 Not Rated 18.12 NM NM 4.9 x 4.6 x 12.1 x 11.1 x 0.8 x 0.8 x

Marathon Oil USD MRO US 24.0 Not Rated 34.43 NM NM 3.1 x 3.0 x 11.1 x 11.8 x 1.1 x 1.0 x

PetroChina HKD 857 HK 193.5 Outperform 8.14 10.00 +29% 3.6 x 3.1 x 7.5 x 6.2 x 1.0 x 0.9 x

Sinopec HKD 386 HK 90.7 Outperform 6.01 7.00 +22% 3.4 x 3.2 x 6.4 x 6.1 x 0.9 x 0.8 x

CNOOC HKD 883 HK 79.6 Outperform 13.84 19.00 +41% 3.5 x 3.2 x 6.4 x 6.0 x 1.2 x 1.0 x

RIL INR RIL IN 44.9 Outperform 854.95 1,100.00 +30% 7.4 x 6.4 x 10.8 x 9.8 x 1.3 x 1.1 x

ONGC INR ONGC IN 37.9 Outperform 280.95 355.00 +30% 4.1 x 3.2 x 8.9 x 6.8 x 1.7 x 1.4 x

Woodside AUD WPL AU 28.2 Neutral 37.70 40.00 +13% 5.7 x 5.5 x 11.9 x 11.9 x 1.8 x 1.7 x

Petrobras* BRL PETR4 BZ 88.2 Not Rated 16.62 NM NM 6.0 x 5.7 x 6.8 x 6.4 x 0.6 x 0.5 x

Rosneft* USD ROSN LI 77.4 Not Rated 7.30 NM NM 4.6 x 4.6 x 6.0 x 6.8 x 0.8 x 0.7 x

Big Four 1,051.9 4.7 x 4.6 x 10.4 x 10.2 x 1.5 x 1.4 x

Europe 815.3 4.9 x 4.5 x 12.1 x 10.8 x 1.2 x 1.1 x

US 859.5 4.5 x 4.4 x 11.7 x 11.6 x 1.6 x 1.5 x

APAC & EM 640.4 4.8 x 4.4 x 8.1 x 7.5 x 1.1 x 1.0 x

Global 2,315.2 4.6 x 4.2 x 9.9 x 9.3 x 1.3 x 1.2 x

EV/EBITDA Ratio P/E Ratio P/B Ratio


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Fig 70 Asia Oil & Gas Valuation Summary


Company Local B'berg Mcap Reco. Price Target TSR

Curr Ticker (US$ bn) (local) Price Upside 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E

HK/CHINA AVG 398.5 +33.9% 7.0 x 6.2 x 11.3 x 9.8 x 1.9 x 1.6 x 2.6% 3.0% 1.7% 4.6% 13.3% 13.7% 11.5% 8.4%PetroChina HKD 857 HK 193.5 Outperform 8.14 9.00 +17% 3.6 x 3.1 x 7.5 x 6.2 x 1.0 x 0.9 x 6.0% 7.2% 1.8% 6.2% 10.3% 11.5% 24.7% 23.6%

Sinopec HKD 386 HK 90.7 Outperform 6.01 8.00 +39% 3.4 x 3.2 x 6.4 x 6.1 x 0.9 x 0.8 x 5.5% 5.8% -2.5% 1.9% 10.7% 10.1% 31.8% 32.3%

CNOOC HKD 883 HK 79.6 Outperform 13.84 19.00 +41% 3.5 x 3.2 x 6.4 x 6.0 x 1.2 x 1.0 x 3.9% 4.1% 6.6% 9.2% 14.8% 14.3% 21.1% 15.6%

COSL HKD 2883 HK 13.5 Underperform 23.05 18.00 -20% 8.6 x 8.5 x 12.1 x 11.9 x 1.9 x 1.7 x 1.6% 1.7% 6.8% 6.9% 10.5% 9.9% 24.9% 17.0%

Kunlun HKD 135 HK 13.7 Outperform 13.40 20.00 +52% 5.0 x 4.4 x 11.3 x 9.7 x 1.8 x 1.5 x 2.4% 2.8% 5.9% 7.7% 14.4% 15.9% 24.8% 23.4%

NewOcean HKD 342 HK 1.2 Outperform 6.22 8.00 +30% 7.4 x 6.3 x 9.7 x 8.2 x 1.9 x 1.6 x 1.4% 1.6% -7.7% 1.4% 10.4% 10.9% 19.3% 16.7%

Anton HKD 3337 HK 1.4 Outperform 5.14 7.50 +48% 10.4 x 9.3 x 15.3 x 13.4 x 3.0 x 2.6 x 2.3% 2.6% 2.6% 3.9% 18.0% 17.9% -4.9% -9.0%

SPT Energy HKD 1251 HK 0.9 Outperform 4.59 6.50 +43% 8.4 x 6.9 x 14.1 x 11.5 x 2.6 x 2.2 x 1.4% 1.7% 1.8% 3.9% 18.4% 19.2% -21.2% -24.9%

Petro-king HKD 2178 HK 0.6 Outperform 4.08 7.20 +76% 9.7 x 8.3 x 14.4 x 12.1 x 1.7 x 1.5 x 0.0% 0.0% 0.4% 0.5% 11.9% 12.4% -15.2% -14.1%

Hilong HKD 1623 HK 1.4 Outperform 6.43 7.20 +14% 10.2 x 8.8 x 15.4 x 12.6 x 2.6 x 2.2 x 1.9% 2.4% 1.8% 4.4% 14.1% 14.8% 9.6% 3.7%

Honghua HKD 196 HK 0.9 Underperform 2.26 1.80 -17% 6.2 x 5.8 x 8.6 x 8.9 x 1.0 x 0.9 x 3.5% 3.4% -29.5% 2.6% 8.7% 8.2% 48.5% 47.8%

MIE HKD 1555 HK 0.6 Outperform 1.57 1.80 +16% 3.5 x 3.1 x 6.0 x 5.8 x 0.8 x 0.7 x 1.1% 1.2% -7.2% 2.1% 10.4% 10.1% 49.8% 46.5%

Green Dragon GBp GDG LN 0.6 Outperform 272.50 650.00 +139% nmf 11.7 x 44.1 x 17.3 x 0.8 x 0.7 x 0.0% 0.0% -15.6% -8.3% 2.4% 4.3% -5.4% -1.8%

INDIA AVG 114.3 +15% 6.6 x 5.6 x 9.3 x 7.6 x 1.2 x 1.0 x 3.1% 3.7% -21.3% 3.6% 11.5% 11.6% 40.4% 36.2%RIL INR RIL IN 44.9 Outperform 854.95 1,100.00 +30% 7.4 x 6.4 x 10.8 x 9.8 x 1.3 x 1.1 x 1.3% 1.4% -4.5% 0.3% 9.7% 10.1% 19.1% 15.8%

ONGC INR ONGC IN 37.9 Outperform 280.95 355.00 +30% 4.1 x 3.2 x 8.9 x 6.8 x 1.7 x 1.4 x 3.8% 4.0% 10.4% 9.1% 15.5% 18.7% 1.0% -6.9%

IOCL INR IOCL IN 7.9 Outperform 204.55 300.00 +53% 8.2 x 7.1 x 6.8 x 5.8 x 0.7 x 0.7 x 5.9% 6.8% -26.2% -12.8% 9.7% 9.5% 62.0% 62.4%

Cairn India INR CAIR IN 9.8 Outperform 319.55 382.00 +24% 4.0 x 3.9 x 5.5 x 5.5 x 1.1 x 0.9 x 4.0% 3.6% 11.3% 11.3% 20.4% 17.5% -20.5% -32.4%

GAIL INR GAIL IN 6.9 Outperform 336.20 386.00 +18% 7.1 x 6.2 x 10.4 x 9.3 x 1.4 x 1.2 x 3.2% 3.5% -3.8% 6.6% 10.1% 10.2% 25.6% 20.3%

BPCL INR BPCL IN 3.8 Outperform 329.80 421.00 +30% 8.7 x 7.0 x 15.4 x 11.3 x 1.4 x 1.3 x 1.9% 2.7% -32.2% -17.9% 9.5% 10.7% 65.7% 65.7%

HPCL INR HPCL IN 1.2 Outperform 225.55 255.00 +18% 4.7 x 4.3 x 8.7 x 5.1 x 0.5 x 0.5 x 4.6% 7.9% 51.2% 34.1% 6.4% 7.2% 75.0% 72.4%

Petronet LNG INR PLNG IN 1.5 Underperform 124.00 95.00 -21% 7.3 x 6.6 x 11.1 x 11.0 x 2.0 x 1.7 x 2.5% 2.5% -39.0% 8.6% 13.0% 10.7% 54.3% 48.6%

Aban Offshore INR ABAN IN 0.3 Neutral 402.05 225.00 -43% 7.7 x 6.2 x 6.2 x 4.2 x 0.5 x 0.4 x 1.0% 1.0% -158.7% -6.7% 8.7% 9.6% 81.8% 80.3%

THAILAND AVG 56.0 +33% 5.1 x 4.7 x 7.9 x 7.3 x 1.4 x 1.2 x 5.3% 5.6% 8.9% 12.5% 12.8% 13.0% 23.0% 16.2%PTT THB PTT TB 23.2 Neutral 264.00 304.00 +20% 3.8 x 3.5 x 7.3 x 6.2 x 1.0 x 0.9 x 4.8% 5.6% 7.3% 8.9% 12.0% 12.6% 27.2% 22.3%

PTT E&P THB PTTEP TB 18.4 Outperform 148.00 200.00 +39% 3.1 x 2.9 x 8.2 x 7.9 x 1.4 x 1.3 x 4.2% 4.4% 5.9% 7.7% 15.8% 15.2% 9.1% 4.6%

PTT Global Chem THB PTTGC TB 10.2 Outperform 74.50 91.00 +27% 5.5 x 5.2 x 8.3 x 7.8 x 1.2 x 1.1 x 5.2% 5.0% 14.8% 15.4% 11.9% 12.2% 9.2% -1.4%

Thai Oil THB TOP TB 3.1 Outperform 50.50 74.00 +52% 4.9 x 4.8 x 8.0 x 7.5 x 1.0 x 1.0 x 5.6% 6.0% 10.9% 15.1% 9.6% 9.8% 26.4% 20.1%

Bangchak Petro. THB BCP TB 1.1 Underperform 25.50 27.00 +13% 4.3 x 4.4 x 5.9 x 6.3 x 0.9 x 0.8 x 6.8% 6.4% 3.1% 14.7% 12.2% 10.5% 26.6% 21.3%

Siam Cement THB SCC TB 13.8 Outperform 385.00 555.00 +49% 8.9 x 7.4 x 10.0 x 7.8 x 2.5 x 2.1 x 5.0% 6.3% 11.2% 13.0% 15.2% 18.1% 39.2% 30.4%

JAPAN AVG 33.5 +14% 4.1 x 4.5 x 8.5 x 15.3 x 0.7 x 0.7 x 2.1% 2.0% -16.2% -10.2% 6.7% 5.3% 23.8% 21.4%Inpex Corp JPY 1605 JP 18.4 Outperform 1,280.00 1,675.00 +32% 2.1 x 1.9 x 8.8 x 26.9 x 0.8 x 0.8 x 1.3% 1.3% -3.1% -9.4% 8.9% 4.3% 11.4% 16.3%

JX Holdings JPY 5020 JP 12.9 Outperform 537.00 660.00 +27% 5.8 x 5.1 x 7.9 x 6.8 x 0.7 x 0.6 x 3.7% 3.7% 6.7% 2.9% 5.3% 5.8% 39.1% 37.8%

Japan Petro. Expln JPY 1662 JP 2.2 Underperform 3,955.00 3,200.00 -18% 4.3 x 6.5 x 9.0 x 12.3 x 0.7 x 0.8 x 1.3% 1.0% -52.4% -24.1% 6.0% 5.7% 21.1% 10.2%

TAIWAN AVG 76.3 +7% 11.8 x 10.6 x 14.8 x 14.8 x 2.3 x 2.2 x 4.4% 5.2% 3.3% 5.0% 8.9% 10.1% 23.2% 22.9%FPCC TWD 6505 TT 25.4 Underperform 81.00 74.00 -5% 14.2 x 12.8 x nmf 19.0 x 3.1 x 3.0 x 3.5% 4.3% 2.7% 4.8% 7.9% 9.3% 42.2% 40.3%

FPC TWD 1301 TT 16.9 Outperform 79.00 92.00 +22% 10.6 x 9.8 x 13.9 x 12.6 x 1.9 x 1.8 x 5.2% 5.7% 2.8% 5.1% 10.3% 10.9% 6.3% 7.2%

NPC TWD 1303 TT 17.8 Outperform 67.10 67.50 +5% 10.8 x 9.2 x 15.6 x 12.7 x 1.8 x 1.7 x 4.6% 5.7% 4.6% 5.1% 8.5% 10.0% 21.0% 21.4%

FCFC TWD 1326 TT 16.2 Neutral 82.70 72.00 -10% 11.8 x 11.6 x 25.4 x 23.7 x 1.9 x 1.8 x 2.8% 3.0% 4.5% -2.6% 5.2% 5.4% 21.5% 26.9%

SINGAPORE AVG 23.8 +25% 8.2 x 7.2 x 11.2 x 9.6 x 2.0 x 1.8 x 3.9% 4.6% 0.9% 6.5% 12.8% 13.4% -4.5% -14.7%Keppel SGD KEP SP 15.8 Outperform 11.11 13.00 +21% 9.2 x 8.8 x 12.5 x 11.1 x 1.8 x 1.7 x 4.0% 4.5% 1.3% 2.4% 8.7% 8.7% 13.8% 12.7%

Sembcorp Marine SGD SMM SP 7.3 Outperform 4.41 5.80 +36% 8.2 x 7.4 x 12.5 x 11.4 x 3.0 x 2.7 x 4.1% 4.5% 6.7% 8.6% 21.7% 21.4% -62.8% -86.8%

VARD SGD VARD SP 0.8 Outperform 0.86 1.00 +20% 7.3 x 5.5 x 8.5 x 6.3 x 1.3 x 1.1 x 3.6% 4.8% -5.3% 8.7% 8.0% 10.1% 35.6% 29.9%

MALAYSIA AVG 30.5 +11% 11.3 x 9.4 x 16.5 x 13.5 x 3.4 x 2.8 x 1.6% 1.6% -2.3% 5.4% 20.2% 19.1% -12.1% -27.4%Petronas Chemical MYR PCHEM MK 16.6 Neutral 6.80 6.50 -0% 6.1 x 5.0 x 12.7 x 10.0 x 2.2 x 2.0 x 3.9% 5.0% 7.4% 11.2% 18.6% 21.0% -68.4% -79.3%

SapuraKencana MYR SAKP MK 8.3 Outperform 4.61 4.80 +4% 15.2 x 13.0 x 24.7 x 19.8 x 2.7 x 2.4 x 0.0% 0.0% -17.6% 3.3% 10.1% 9.2% 44.7% 40.8%

Bumi Armada MYR BAB MK 3.6 Outperform 4.05 5.10 +27% 8.8 x 7.8 x 14.3 x 14.1 x 2.4 x 2.1 x 1.4% 1.4% -8.2% -12.0% 9.9% 8.0% 48.4% 52.6%

Coastal Contracts MYR COCO MK 0.5 Outperform 3.59 3.90 +10% 6.0 x 5.8 x 8.0 x 7.8 x 1.4 x 1.2 x 1.6% 1.6% -3.2% 16.2% 18.9% 16.2% -28.9% -58.6%

Dayang MYR DEHB MK 0.9 Outperform 5.78 6.80 +19% 7.3 x 7.5 x 9.9 x 9.9 x 2.9 x 2.2 x 1.8% 0.0% 5.1% 10.0% 32.1% 24.2% -40.7% -75.7%

My E.G. Services MYR MYEG MK 0.5 Outperform 2.81 3.00 +8% 24.6 x 17.2 x 29.4 x 19.6 x 9.0 x 6.8 x 1.0% 1.5% 2.8% 3.6% 31.6% 36.0% -27.5% -43.9%

PAKISTAN AVG 1.7 +22% 4.4 x 3.5 x 6.9 x 6.4 x 2.3 x 1.4 x 8.8% 12.0% 14.3% 14.8% 36.6% 54.6% -6.5% -56.3%Pakistan Oilfields PKR POL PA 1.1 Outperform 511.25 600.58 +28% 4.4 x 3.5 x 8.1 x 6.4 x 3.2 x 2.8 x 11.0% 12.0% 10.8% 14.8% 49.7% 54.6% -39.6% -56.3%

Fatima PKR FATIMA PA 0.6 Outperform 30.16 32.87 +16% 4.4 x nmf 5.7 x nmf 1.5 x 0.0 x 6.7% na 17.7% na 23.5% na 26.7% na

Engro PKR ENGRO PA 0.8 Outperform 162.82 152.70 -6% 4.7 x 4.7 x nmf 8.4 x 1.3 x 1.3 x 0.0% 0.0% 4.7% 4.7% 16.5% 16.7% 45.2% 45.2%

AUSTRALIA AVG 55.5 +12% 8.5 x 5.3 x 17.2 x 11.2 x 1.9 x 1.7 x 3.4% 5.1% -1.0% 9.2% 9.4% 12.4% 30.6% 25.5%Woodside AUD WPL AU 28.2 Neutral 37.70 40.00 +13% 5.7 x 5.5 x 11.9 x 11.9 x 1.8 x 1.7 x 6.7% 6.7% 11.0% 13.2% 13.3% 13.3% 9.2% 3.5%

Santos AUD STO AU 12.7 Outperform 14.33 17.00 +21% 6.0 x 4.3 x 16.9 x 12.9 x 1.3 x 1.2 x 2.1% 3.8% -9.8% 2.9% 6.0% 8.2% 32.4% 31.2%

Oil Search AUD OSH AU 9.8 Outperform 8.03 9.50 +20% 15.6 x 5.4 x 28.1 x 8.6 x 2.6 x 2.2 x 1.7% 5.6% -4.1% 13.1% 4.6% 14.9% 55.6% 47.0%

Caltex AUD CTX AU 4.8 Underperform 19.48 18.00 -4% 6.5 x 6.2 x 12.0 x 11.4 x 1.8 x 1.7 x 3.2% 4.4% -1.2% 7.5% 13.6% 13.3% 25.1% 20.2%

GearingFCF Yield ROACEP/B Divi YieldP/E EV/EBITDA Ratio


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Fig 71 Asia Oil & Gas – Performance, Macquarie vs Consensus


Company Local Price Price Target Upside Cons. Macq. vs.

Curr (local) (local) Price 1 M 3 M 6 M 1 Y 2013E 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E TP Cons.

HANG SENG INDEX -4% -2% +9% -3%

HK/CHINA AVG +28% -2% +9% +13% +20% +23% +18% +4% +6% 13%PetroChina HKD 857 HK 8.14 9.00 +17% -11% -5% -9% -27% 0.67 0.79 0.97 +17% +22% 0.74 0.79 +7% +22% 9.9 -9%

Sinopec HKD 386 HK 6.01 8.00 +39% -9% -3% +13% -15% 0.58 0.74 0.79 +29% +6% 0.65 0.69 +14% +15% 7.4 8%

CNOOC HKD 883 HK 13.84 19.00 +41% -11% -14% +6% -20% 1.51 1.63 1.76 +8% +8% 1.48 1.53 +10% +15% 17.8 7%

COSL HKD 2883 HK 23.05 18.00 -20% -3% +15% +58% +40% 1.44 1.53 1.56 +6% +2% 1.54 1.70 -1% -8% 24.5 -26%

Kunlun HKD 135 HK 13.40 20.00 +52% -4% +18% +10% -19% 0.94 1.17 1.35 +24% +16% 1.04 1.20 +12% +12% 14.9 34%

NewOcean HKD 342 HK 6.22 8.00 +30% +21% +20% +38% +39% 0.48 0.61 0.79 +28% +29% 0.61 0.75 +2% +6% 6.7 20%

Anton HKD 3337 HK 5.14 7.50 +48% +2% +2% -9% +27% 0.19 0.24 0.31 +27% +30% 0.23 0.29 +5% +5% 5.5 35%

SPT Energy HKD 1251 HK 4.59 6.50 +43% -8% +17% -4% +19% 0.21 0.25 0.31 +21% +23% 0.29 0.36 -13% -14% 5.8 12%

Petro-king HKD 2178 HK 4.08 7.20 +76% -0% +3% -12% +24% 0.22 0.31 0.37 +41% +20% 0.30 0.35 +4% +6% 5.1 42%

Hilong HKD 1623 HK 6.43 7.20 +14% +4% +36% +36% +129% 0.24 0.32 0.39 +33% +22% 0.33 0.39 -3% +0% 6.6 10%

Honghua HKD 196 HK 2.26 1.80 -17% -22% -2% -20% -41% 0.20 0.20 0.19 +1% -3% 0.25 0.29 -22% -34% 2.8 -36%

MIE HKD 1555 HK 1.57 1.80 +16% -7% -6% -12% -37% 0.18 0.18 0.16 +3% -11% 0.24 0.19 -23% -13% 2.2 -18%

Green Dragon GBp GDG LN 272.50 650.00 +139% -7% +16% +39% +9% 0.07 0.10 0.26 +43% NM nmf nmf nmf nmf 493.6 32%

INDIA AVG +12% -1% +11% +4% -12% +5% +25% -3% +9% -5%RIL INR RIL IN 854.95 1,100.00 +29% -1% +0% -3% -1% 69.92 79.89 87.89 +14% +10% 71.41 82.10 +12% +7% 988.9 11%

ONGC INR ONGC IN 280.95 355.00 +26% -4% +6% -11% -1% 28.31 30.99 40.72 +9% +31% 30.27 37.33 +2% +9% 342.5 4%

IOCL INR IOCL IN 204.55 300.00 +47% -0% -3% -9% -27% 18.32 30.07 35.00 +64% +16% 21.49 28.09 +40% +25% 255.4 17%

Cairn India INR CAIR IN 319.55 382.00 +20% -2% -1% +10% -5% 58.18 58.15 58.18 -0% +0% 61.45 58.29 -5% -0% 386.3 -1%

GAIL INR GAIL IN 336.20 386.00 +15% -3% +1% +3% -9% 34.25 32.57 36.46 -5% +12% 34.81 36.03 -6% +1% 377.2 2%

BPCL INR BPCL IN 329.80 421.00 +28% -9% -3% -10% -12% 26.01 21.38 29.25 -18% +37% 27.43 32.19 -22% -9% 431.7 -2%

HPCL INR HPCL IN 225.55 255.00 +13% +1% +17% -9% -28% 6.67 26.04 45.02 NM +73% 26.21 32.32 -1% +39% 259.7 -2%

Petronet LNG INR PLNG IN 124.00 95.00 -23% -7% +1% -0% -24% 15.32 10.93 11.05 -29% +1% 15.60 nmf -30% na 144.5 -34%

Aban Offshore INR ABAN IN 402.05 225.00 -44% +14% +82% +62% +1% 29.18 59.31 87.14 NM +47% 69.55 90.11 -15% -3% 362.9 -38%

THAILAND AVG +28% -12% -13% -16% -15% +18% +9% +6% +9% -6%PTT THB PTT TB 264.00 304.00 +15% -13% -17% -24% -21% 34.51 36.88 43.07 +7% +17% 39.81 41.23 -7% +4% 373.0 -19%

PTT E&P THB PTTEP TB 148.00 200.00 +35% -10% -13% -9% -12% 17.07 18.55 19.34 +9% +4% 17.30 16.39 +7% +18% 186.9 7%

PTT Global Chem THB PTTGC TB 74.50 91.00 +22% -4% -1% +3% +3% 7.69 8.99 9.53 NM +6% 8.37 8.58 +7% +11% 90.0 1%

Thai Oil THB TOP TB 50.50 74.00 +47% -19% -16% -25% -27% 5.05 6.27 6.70 +24% +7% 5.92 6.32 +6% +6% 70.9 4%

Bangchak Petro. THB BCP TB 25.50 27.00 +6% -21% -22% -30% -16% 3.41 4.34 4.07 +27% -6% 3.97 4.65 +9% -12% 41.4 -35%

Siam Cement THB SCC TB 385.00 555.00 +44% -5% -11% -9% -14% 30.99 38.16 48.67 +23% +28% 32.95 37.88 +16% +28% 516.7 7%

JAPAN AVG +11% +6% +7% +5% +18% +16% -26% +18% -21% -4%Inpex Corp JPY 1605 JP 1,301.00 1,675.00 +29% +10% +15% +16% +13% 79.62 153.49 50.15 +93% -67% 107.61 112.88 +43% -56% 1,545.2 8%

JX Holdings JPY 5020 JP 537.00 660.00 +23% +4% +10% +8% +8% 86.45 68.66 79.61 -21% +16% 63.53 71.13 +8% +12% 635.6 4%

Japan Petro. Expln JPY 1662 JP 3,955.00 3,200.00 -19% +5% -3% -9% +33% 588.88 443.66 322.79 -25% -27% 427.93 397.93 +4% -19% 4,308.8 -26%

TAIWAN AVG -1% +1% +0% +15% +4% NM +15% +17% +18% -2%FPCC TWD 6505 TT 81.00 74.00 -9% +3% +1% +10% -8% 2.65 3.50 4.20 +32% +20% 2.90 3.35 +20% +25% 75.3 -2%

FPC TWD 1301 TT 79.00 92.00 +16% +2% +0% +16% +2% 4.41 5.70 6.30 +29% +10% 4.03 4.76 +41% +32% 78.0 18%

NPC TWD 1303 TT 67.10 67.50 +1% +1% +2% +14% +13% 3.58 4.30 5.30 +20% +23% 3.31 3.85 +30% +38% 72.2 -6%

FCFC TWD 1326 TT 82.70 72.00 -13% -1% -2% +20% +8% 3.10 3.26 3.50 +5% +7% 4.32 4.57 -24% -23% 87.3 -17%

SINGAPORE AVG +22% +5% +1% +1% -12% +32% +19% +0% +2% 10%Keppel SGD KEP SP 11.11 13.00 +17% +2% +6% +7% +4% 0.83 0.88 1.00 +6% +13% 0.91 0.97 -3% +2% 12.6 3%

Sembcorp Marine SGD SMM SP 4.41 5.80 +32% +2% -2% +1% -6% 0.28 0.35 0.39 +25% +10% 0.31 0.35 +13% +12% 4.8 21%

VARD SGD VARD SP 0.86 1.00 +16% +10% -1% -4% -34% 0.28 0.47 0.63 +66% +35% 0.51 0.68 -8% -7% 0.9 8%

MALAYSIA AVG +9% +4% +8% +7% +21% +49% +18% +16% +17% 1%Petronas Chemical MYR PCHEM MK 6.80 6.50 -4% +1% -0% +3% +8% 0.46 0.54 0.68 +17% +27% 0.48 0.49 +12% +41% 6.8 -4%

SapuraKencana MYR SAKP MK 4.61 4.80 +4% +5% +21% +14% +49% 0.10 0.18 0.23 +87% +25% 0.17 0.25 +7% -7% 5.4 -10%

Bumi Armada MYR BAB MK 4.05 5.10 +26% +4% +4% +3% +5% 0.20 0.29 0.29 +44% +1% 0.22 0.25 +30% +17% 4.3 18%

Coastal Contracts MYR COCO MK 3.59 3.90 +9% +9% +24% +44% +74% 0.32 0.44 0.45 +39% +2% 0.36 0.42 +24% +9% 4.0 -2%

Dayang MYR DEHB MK 5.78 6.80 +18% +8% +20% +20% +135% 0.29 0.57 0.57 +93% +0% 0.45 0.48 +28% +19% 6.4 6%

My E.G. Services MYR MYEG MK 2.81 3.00 +7% +14% +45% +60% +258% 0.06 0.09 0.14 +54% +50% 0.08 0.14 +8% +0% 2.8 8%

PAKISTAN AVG +7% +5% +16% +10% +39% -2% +27% +6% -14% -1%Pakistan Oilfields PKR POL PA 511.25 600.58 +17% +4% +15% -2% +18% 45.78 63.35 80.18 +38% +27% 64.05 75.82 -1% +6% 549.5 9%

Fatima PKR FATIMA PA 30.16 32.87 +9% +5% +18% +17% +16% 4.52 5.27 - +17% NA 4.68 5.23 +13% NA 32.9 0%

Engro PKR ENGRO PA 162.82 152.70 -6% +5% +15% +16% +83% 5.40- 13.60- 19.32 -60% NM 18.49 29.14 NM -34% 174.9 -13%

AUSTRALIA AVG +9% -0% -1% +5% +13% +27% +12% +11% +14% 0%Woodside AUD WPL AU 37.70 40.00 +6% +0% -1% +5% +9% 2.28 2.89 2.88 +27% -0% 2.69 2.70 +8% +7% 39.7 1%

Santos AUD STO AU 14.33 17.00 +19% -2% -6% +8% +27% 0.72 0.86 1.13 +20% +31% 0.66 1.04 +30% +9% 15.9 7%

Oil Search AUD OSH AU 8.03 9.50 +18% -3% -4% +1% +14% 0.13 0.26 0.85 NM NM 0.24 0.63 +7% +35% 9.7 -2%

Caltex AUD CTX AU 19.48 18.00 -8% +3% +5% +5% +3% 1.21 1.64 1.72 +35% +5% 1.62 1.63 +1% +6% 19.1 -6%

Macq. vs. ConsCons EPS (local)Absolute Performance EPS (local) EPS growth



8 January 2014 44

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe

Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie First South - South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada

Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or

down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 31 December 2013

AU/NZ Asia RSA USA CA EUR Outperform 47.89% 60.13% 37.97% 39.49% 59.64% 48.65% (for US coverage by MCUSA, 6.52% of stocks followed are investment banking clients)

Neutral 35.56% 22.65% 46.84% 54.50% 35.54% 32.43% (for US coverage by MCUSA, 4.35% of stocks followed are investment banking clients)

Underperform 16.55% 17.22% 15.19% 6.01% 4.82% 18.92% (for US coverage by MCUSA, 0.00% of stocks followed are investment banking clients)

Company Specific Disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.

Analyst Certification: The views expressed in this research accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd ABN 94 122 169 279 (AFSL No. 318062) (MGL) and its related entities (the Macquarie Group) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General Disclaimers: Macquarie Securities (Australia) Ltd; Macquarie Capital (Europe) Ltd; Macquarie Capital Markets Canada Ltd; Macquarie Capital Markets North America Ltd; Macquarie Capital (USA) Inc; Macquarie Capital Securities Ltd and its Taiwan branch; Macquarie Capital Securities (Singapore) Pte Ltd; Macquarie Securities (NZ) Ltd; Macquarie First South Securities (Pty) Limited; Macquarie Capital Securities (India) Pvt Ltd; Macquarie Capital Securities (Malaysia) Sdn Bhd; Macquarie Securities Korea Limited and Macquarie Securities (Thailand) Ltd are not authorized deposit-taking institutions for the purposes of the Banking Act 1959 (Commonwealth of Australia), and their obligations do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 (MBL) or MGL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of any of the above mentioned entities. 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Recommendations contained in one type of research product may differ from recommendations contained in other types of research, whether as a result of differing time horizons, methodologies, or otherwise. Before making an investment decision on the basis of this research, you need to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of your particular investment needs, objectives and financial circumstances. There are risks involved in securities trading. The price of securities can and does fluctuate, and an individual security may even become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect the value of the investment. 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8 January 2014 45

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Automobiles/Auto Parts

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Zhixuan Lin (China) (8621) 2412 9006

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Banks and Non-Bank Financials

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Conglomerates

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Consumer and Gaming

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Linda Huang (China, Hong Kong) (852) 3922 4068

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Lyall Taylor (Indonesia) (6221) 2598 8489

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HongSuk Na (Korea) (822) 3705 8678

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Best Waiyanont (Thailand) (662) 694 7993

Emerging Leaders

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Elizabeth Lee (China) (852) 3922 1302 Matty Zhao (Hong Kong) (852) 3922 1293 Rakesh Arora (India) (9122) 6720 4093

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Viktor Shvets (Asia) (852) 3922 3883 Chetan Seth (Asia) (852) 3922 4769 Joshua van Lin (Asia Micro) (852) 3922 1425 Peter Eadon-Clarke (Japan) (813) 3512 7850 David Ng (China, Hong Kong) (852) 3922 1291 Jiong Shao (China) (852) 3922 3566

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David Gambrill (Thailand) (662) 694 7753 Find our research at Macquarie: www.macquarie.com.au/research Thomson: www.thomson.com/financial Reuters: www.knowledge.reuters.com Bloomberg: MAC GO Factset: http://www.factset.com/home.aspx CapitalIQ www.capitaliq.com Email [email protected] for access

Asia Sales Regional Heads of Sales

Robin Black (Asia) (852) 3922 2074

Chris Gray (ASEAN) (65) 6601 0288 Peter Slater (Boston) (1 617) 598 2502

Jeffrey Shiu (China & Hong Kong) (852) 3922 2061 Thomas Renz (Geneva) (41) 22 818 7712 Bharat Rawla (India) (9122) 6720 4100

Jurgan Usman (Indonesia) (6221) 515 1555 Miki Edelman (Japan) (813) 3512 7857 John Jay Lee (Korea) (822) 3705 9988

Ruben Boopalan (Malaysia) (603) 2059 8888 Gino C Rojas (Philippines) (632) 857 0861 Eric Roles (New York) (1 212) 231 2559

Regional Heads of Sales cont’d

Paul Colaco (San Francisco) (1 415) 762 5003 Erica Wang (Taiwan) (8862) 2734 7586

Angus Kent (Thailand) (662) 694 7601 Julien Roux (UK/Europe) (44) 20 3037 4867 Sean Alexander (Generalist) (852) 3922 2101

Regional Head of Distribution

Justin Crawford (Asia) (852) 3922 2065

Sales Trading

Adam Zaki (Asia) (852) 3922 2002

Phil Sellaroli (Japan) (813) 3512 7837 Kenneth Cheung (Singapore) (65) 6601 0288

Sales Trading cont’d

Mike Keen (UK/Europe) (44) 20 3037 4905 Chris Reale (New York) (1 212) 231 2555

Marc Rosa (New York) (1 212) 231 2555 Stanley Dunda (Indonesia) (6221) 515 1555 Suhaida Samsudin (Malaysia) (603) 2059 8888

Michael Santos (Philippines) (632) 857 0813 Isaac Huang (Taiwan) (8862) 2734 7582 Dominic Shore (Thailand) (662) 694 7707


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