Sunshine Oilsands battles Hong Kong’s quicksands

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A proposed US$500 to US$700 million initial public offering by Sunshine Oilsands is bearing down on Hong Kong investors, which would make it the largest IPO globally so far in 2012. The roadshow is set to start today (February 6) and pricing is slated for February 14. The company is based in Calgary, Canada. Just what is it doing tapping Hong Kong investors for funds?

Cleary, there is a need in China for the abundant oil reserves and resources that lay in these vast pits. Canada is said to have the world’s third largest proven oil reserves, after Saudi Arabia and Venezuela, largely thanks to this viscous, bituminous grit. Sunshine Oilsands controls more than 465 thousand hectares of oil sands leases, encompassing an estimated 2.2 billion barrels in resources, under one of the measures most commonly used by research analysts – which is a lot. US President Barack Obama recently blocked a pipeline from Canada to the US on environmental concerns. The move immediately sent the Canadians looking to re-route the pipeline to the west coast, so that it could ship the oil to China.

So there is a China angle, and the quality of Sunshine Oilsands’ operations is not in question. The company has no debt. It also recently raised US$227 million in private equity money, which indicates that smart, professional investors see significant value in this entity. And for 25 per cent of its capital, the IPO would value the business at up to US$2.4 billion, excluding an additional US$100 million over-allotment option.

But while Chinese money has been aggressively pursuing investments in Canada’s energy sector, a listing in Hong Kong of what is, at this juncture, a business focused on North American assets, is perhaps at odds with the mandates of the large funds that typically get involved in local IPOs. Such funds are generally interested in firms whose businesses are active in Asia, or otherwise have a strong connection with the region.

True, Sunshine Oilsands now has a number of Chinese names on its register and its executive co-chairman, Songning Shen, formerly worked at Bohai, a subsidiary of CNOOC. The company has also stated that “it is committed to developing a long-term presence in Asia” and that “it positions itself to take advantage of Asian industrial and financial expertise”. But more than 90 per cent of the deal’s net proceeds will be assigned to the development of oil sands and projects in Canada.

China will no doubt provide Sunshine Oilsands with a significant market as oil production comes on stream. But is that a sufficiently intriguing local angle to stir the enthusiasm of Hong Kong investors?

Husky Energy, which is 35 per cent owned by Hutchison Whampoa and listed in Toronto, is another Canadian energy company that has for a while been contemplating a listing in Hong Kong – but this has yet to materialize.

Other listings of Canadian-incorporated businesses in the city haven’t exactly been resounding successes. SouthGobi Resources – which is active in Mongolia and China, and also listed in Toronto – has seen its share price fall more than 56 per cent since its US$439 million IPO in Hong Kong in January 2010. China Gold International Resources, which mines gold on the mainland, has plummeted almost 46 per cent since its November 2010 US$309 million listing in Hong Kong. It is also listed in Toronto. Both stocks are trading on thin volumes locally, suggesting minimal interest in these securities among Hongkongers.

And, while the linkage is indirect and completely tenuous, the sorry saga of Toronto-listed Sino Forest may also have somewhat eroded the bond between equity investors, Chinese capital and IPO stories with a Canadian flavour.

Many of these firms come from the mining and resources sector, which is cyclical, often prone to booms and busts, and which is generally less familiar to Hong Kong investors.

Sunshine Oilsands has a good story to tell but it too will have to win this perception battle.

Philippe Espinasse worked as an investment banker in the US, Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. He is the author of IPO: A Global Guide, published by HKU Press.

[This article was originally published in The South China Morning Post on 6 February 2012 and is reproduced with permission.]

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