SMART MONEY poured into Sky China Petroleum Services just 6 weeks after it fully redeemed its convertible bonds at maturity.
Investors from the oil & gas sector, including the likes of Tah Fuh Gih (younger brother of tycoon Tan Kim Seng and also one of the pioneers of KS Energy), pumped in S$10.7 million this week to help the company expand its fleet of refined oil product tankers.
Not only does the oilfield services group already have a cash cow in its inland oilrig equipment rental business, it ventured this year into trans-shipment of refined oil products in Chinese waters.
”We want to provide integrated oilfield services,” said its CFO Jeff Li during a meeting with NextInsight yesterday.
And the management had identified refined oil product trans-shipment (domestic transportation) as a niche business that holds opportunities unique to China, explained Mr Li.
Riding on booming oil consumption in China
Opportunities in oil product trans-shipment arise from China’s growing oil consumption: McKinsey estimates that China, already the world’s largest automobile market in 2009, will see its vehicle fleet increase tenfold between 2005 and 2030.
Even though China has huge oil reserves, it prefers to import. In fact, imported crude oil accounted for 52% (204 million tons) of its total oil consumption last year.
China National Petroleum Corp and Sinopec Oil currently dominate refining in China, but unlike in other countries, Mr Li tells us that these big petrochemical companies do not have a dedicated oil product shipper.
Niche player in oil product transportation
On 25 Feb this year, Sky China acquired 49% in Wenling Xinghai Ocean Shipping, a vessel charterer specializing in transporting petroleum products along the middle and lower areas of the Yangtze River for petrochemical companies.
Xinghai is one of China’s 3 top domestic shippers of refined oil products, and also provides shipping intermediary service, and distribution of the products for ship and non-dangerous chemical fuel oil.
There are currently only about 200 refined oil product tankers plying Chinese waters, and Xinghai operates 11 of them.
So far, there are only about 30 vessel charterers that provide trans-shipment services for refined oil products on Chinese waters, even though this niche sector is riding on China's growing petroleum consumption.
There are several reasons for this.
| Recent stock price | 20 cts | |
| *Post-placement market cap | S$80m | |
| *Cash reserves post placement and CB redemption |
S$50m | |
| 1H10 revenues | S$35m | |
| 1H10 net operating cashflow | S$23m | |
|
1H10 net margins |
19.7% | |
|
*NextInsight estimates |
Firstly, Chinese maritime law requires refined oil product tankers plying along China's transshipment routes to be China-flagged. So there is little competition from foreign charterers.
Secondly, trans-shipment is too small to interest the likes of the state-owned COSCO Group, which is one of the world’s largest shipping lines and the parent of SGX-listed marine engineering services provider, Cosco.
Thirdly, small players face difficulties obtaining the necessary ship financing: A brand new oil product tanker of 10,000 DWT will set its owner back by some Rmb 100 million at current prices.
This is partly due to government policies introduced to weed out small and inefficient marine and offshore players in an attempt to help the sector tide through the severe downturn in 2008.
Sky China, on the other hand, is able to raise funds in Singapore to expand Xinghai’s fleet.
Oil transportation contributed 50% to 1H10 group revenues, and segment gross margins were 46.2%.
