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Investment Thesis
Outlook
The front sections of this report provide a comprehensive review of the oil services and oil
logistics sectors in China (including a review of China’s shipbuilding and repair industry in
which the oil services companies also have an interest). We’re positive on the operating
outlook for these sectors primarily due to the likelihood of an extended up-cycle in upstream
oil and gas investment in China which is likely to be driven by:
Continued strong demand for oil - the IEA estimate oil demand to increase on average
by 5.6% p.a. to 10.0mb/d by 2012 driven largely by transportation fuel consumption
Security of energy supply is a key government objective – the likelihood of increasing
dependence on oil imports (strong oil consumption combined with declining domestic oil
production) should result in rising levels of domestic exploration and development spend
Further development of a domestic natural gas market: we are bullish on natural gas
consumption growth in China. We also expect large recent gas finds and the likelihood of
rising gas prices to encourage further upstream gas exploration and development
Increasing focus on offshore exploration - offshore exploration presents the greatest
potential for new discoveries in China. Upstream offshore activities are typically more
expensive than onshore activities and allow for a greater role by oil services companies
Stronger for longer oil prices – DB recently revised up its global oil price assumptions.
Higher oil prices justify greater exploration and development activity
We also include company reports on:
Jutal Offshore Oil Service Ltd: we initiate coverage with a BUY rating and Price Target of
HK$5.60/share. Jutal is an oil field service company servicing China’s NOCs and
international oil companies investing in China
Titan Petrochemicals Ltd: we initiate coverage with a BUY and Price Target of
HK$1.00/share. Titan is an integrated oil logistics company with services in oil
transportation, supply, distribution and storage
COSL: we have upgraded the stock to BUY with a new target price of HK$19.50/share.
The upgrade is based largely on our more bullish view on longer term earnings
Valuation
Our preferred valuation methodology for the oil services sector is DCF which takes into
account varying medium term growth profiles as well as different capital costs between
stocks. Our DCF-based valuations suggest 75%, 89% and 11% upside for Jutal, Titan and
COSL respectively (see pages 24, 48 and 71 for details). On 2008F P/E Jutal trades at 15.1x
and Titan trades at 8.4x, both well below peer group averages. COSL trades above its peer
group but we think this is justified by its stronger earnings growth.
Risks
The key downside risks to the sector include a slowdown in upstream investment in China
resulting from a potential collapse in the global oil price, slowing global economy, and project
delivery risk. Key risks to the upside include higher than expected investment from the China
NOCs which could result from higher than expected oil prices or a faster than expected
decline in domestic Chinese oil and gas production.
Table of Contents
Investment Thesis ............................................................................. 3
Outlook ....................................................................................................................................3
Valuation ..................................................................................................................................3
Risks ........................................................................................................................................3
Extended capex up-cycle .................................................................. 4
Key points ................................................................................................................................4
An overview.............................................................................................................................4
1. Oil demand in China will continue to remain high.................................................................5
2. Security of supply a key political objective............................................................................6
3. Development of a natural gas market supports upstream capex..........................................7
4. Offshore exploration and development activity to increase..................................................9
5. Stronger for longer oil prices to support upstream capex...................................................12
China Oil Services Sector ............................................................... 13
Key points ...............................................................................................................................13
Oil services in China – A little bit of background .....................................................................13
Key sector drivers ...................................................................................................................15
China’s oil logistics sector .............................................................. 17
Key points ...............................................................................................................................17
Overview of the oil logistics supply chain...............................................................................17
Key sector drivers ...................................................................................................................19
Shipbuilding & repair ...................................................................... 20
Key points ...............................................................................................................................20
Global overview ......................................................................................................................20
Strong growth for China’s ship building industry ....................................................................21
We are also bullish on China’s ship repair industry.................................................................23
Jutal Offshore Oil ............................................................................ 24
Titan Petrochemicals Ltd ................................................................ 48
China Oilfield Services Ltd.............................................................. 71
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