Beware the shifting sands
Sunshine Oilsands, founded by Canadian oil and gas industry veteran Michael Hibberd and geologist Shen Songning in 2007, is seeking to raise up to US$700 million in Hong Kong's first initial public offering of an oil sands developer.
While high oil prices have made oil sands economically viable in recent years, analysts said investors should still be aware of the risks of early-stage project developers like Sunshine, which lacks a track record in bringing projects to production.
The producer of petroleum from oil sands in northern Alberta province, based in Calgary, western Canada, aims to sell 923.3 million new shares at HK$4.86 to HK$5.08 each. If demand exceeds the shares on offer, it may sell 15 per cent more shares.
According to joint book runner BOC International, the asking valuation represents 46 to 48 US cents per barrel of proved and probable reserves, plus its best estimate of contingent resources.
It compares favourably to the 52 cents per barrel current valuation of oil sands assets in the same Athabasca region where Sunshine's projects are located, it said.
BOCI and the other two joint book runners, Deutsche Bank and Morgan Stanley, have helped line up well-known cornerstone investors for the deal.
Sovereign fund manager China Investment Corp, oil and gas major Sinopec Group and private equity firm EIG Global Energy Partners have agreed to buy a total of US$350 million worth of Sunshine's IPO shares - half the maximum size of the shares offer.
These so-called 'strategic investors' enjoy special terms, in that they have the right to ask Sunshine to buy back their shares and give them an additional 15 per cent annual rate of return if Sunshine fails to pull off a successful IPO, according to its preliminary listing prospectus.
Sunshine last year raised C$226 million (HK$1.7 billion) from Hong Kong businessman Tseung Hok-ming's Orient International Resources Group, investment units of Bank of China and China Life Insurance, and Hong Kong private equity fund Cross-Strait Common Development Fund.
While the financial commitment by prominent investors may make potential investors more confident about Sunshine, analysts warn that they should be prepared for the risks involved.
Although oil sands have become an important source of the world's incremental crude oil supplies, developers of early-stage projects are only suitable for investors with high risk appetite or well-capitalised firms with a large diversified investment portfolio, said Mirae Asset Securities head of energy research Gordon Kwan.
'Unlike the auditing process for companies, reserves assessment for the oil and gas industry is still an art, not an exact science, because engineers can't actually smell or count the volumes of oil and gas in the sub-surface,' he said.
'While reserves valuation might look cheap versus the long-term growth potential, there are significant uncertainties associated with early-stage assessment of discoveries of firms that do not have a production track record.'
Oil sands are a mixture of sand, water and viscous petroleum that is usually liquefied and extracted by injecting steam underground. The extra-heavy bitumen produced needs to go through costly processing before they can be refined into usable fuel.
Sunshine has raised C$451 million since its inception and spent C$332 million to buy exploration and mining rights and fund drilling, project planning and regulatory applications.
With C$122.6 million of cash at the end of September, it plans to spend C$780.9 million by the end of next year on projects development.
It has a non-binding letter of intent from Bank of China to lend it up to US$200 million.
It aims to produce at a rate of 200,000 barrels a day by 2024, and expects to have 5,000 barrels a day of capacity next year, rising to 20,000 barrels a day in 2015.
BOCI expects it to be loss-making until 2014, when a net profit of C$11.3 million is forecast.
According to the prospectus, based on preliminary assessment by its technical adviser GLJ Petroleum Consultants, it has 93.5 million barrels of proven reserves, 419 million barrels of probable reserves and 561 million barrels of possible reserves.
CLSA head of Asian oil and gas research Simon Powell advised investors to monitor closely how effectively Sunshine converted probable reserves into proven reserves.
In addition, Sunshine said it has 5.06 billion barrels of 'best estimate' contingent resources. Contingent resources are potentially recoverable, but are not currently commercially recoverable due to economic, technological, regulatory or other reasons. They could also be resources of projects in early stages of evaluation.
However, Sunshine said: 'None of the volumes or values of our reserves or resources have been risked for chance of development or, in the case of prospective resources, chance of delivery. Contingent resources ... are not estimates of the volumes of petroleum that may be recovered. Actual recovery may be substantially less.'
Sunshine also said some of the assumptions on technology deployment that it made differ from those of its technical adviser GLJ. The assumptions result in greater petroleum recovery and lower capital and operating costs than its adviser's numbers.
'We cannot assure you that we will be able to achieve our planned production targets with the level of capital and operating expenditure we currently anticipate,' Sunshine said. 'Many of the assumptions made ... are subject to change and may, over time, deviate from actual events.'