AAG Energy mulls reviving IPO in HK

AAG Energy looking to revive share offering plan in the city to raise funds for projects extracting gas in coal seams and acquisitions

PUBLISHED : Friday, 17 January, 2014, 6:42pm
UPDATED : Saturday, 18 January, 2014, 12:39am

AAG Energy, which extracts natural gas trapped in coal seams in Shanxi province, may revive its Hong Kong initial public offering plan that was shelved a year ago, its chairman says.

"Our IPO plan is not just for the money, we are not short of cash," Stephen Zou Xiangdong told the South China Morning Post. "A stock market listing is better than a private share sale as it would give us a better valuation and our initial shareholders more flexibility on their investment."

The company may sell more shares to help fund its operations for this year and next of US$200 million to US$300 million.

US private equity firm Warburg Pincus owns about 30 per cent of AAG, while Baring Private Equity has 25 per cent and Ping An Asset Management 12 per cent. The rest is held by its management and other investors.

In 2012, AAG sought to launch a US$200 million share offering but scrapped the plan sponsored by Barclays and JP Morgan as investors would not give it a high enough valuation.

AAG last year raised US$124 million from private investors and obtained in January a US$100 million loan from HSBC and Standard Chartered.

Zou said with the increased production of its first project, the company's cash flow was enough to meet the investment needs of its two projects, although additional funding would allow it to start exploration work in three projects in Inner Mongolia and consider acquisitions.

AAG was founded by Zou about a decade ago. It has two coal seam gas projects in Shanxi.

Zou said its Panzhuang coalbed methane project was the first and only of its kind on the mainland to have received final development approval from industry regulator National Development and Reform Commission, which marks the end of the exploration and the start of the development phase.

AAG is targeting for Panzhuang to reach its output capacity of 0.5 billion cubic metres by the end of next year, although it has the potential to reach 0.7 to 1 bcm. Its output last year was 0.15 bcm.

The company has signed 15-year deals with buyers, mainly city gas distributors including Hong Kong-listed ENN Energy, which are bound to pay regardless of their offtake volumes.

Zou, a former coalbed methane projects general manager at American firm Phillips Petroleum's China unit, would not disclose the selling prices but said they exceeded those of other producers.

A JP Morgan research report in 2012 said its average sales tax-inclusive selling price was US$5.96 per 1,000 cubic feet in the first half of 2012, and its unit production cost was US$3.14. The cost could fall to less than US$1 by next year after output was ramped up.

AAG's second project, Mabi, is in trial production and the firm hopes to obtain final approval from the regulator next year.

Despite government support for the industry, such as fully rebating its value-added tax and 20 fen (25.6 HK cents) per cubic metre subsidy, Zou said it would be tough to meet Beijing's target to raise national gas output from coal seams and mines to 30 bcm by next year from 12.5 bcm in 2012.

"But we should be able to achieve the 2020 target [of 50 bcm]. We just need more time. The industry is taking off," he said, adding non-state firms' development could be sped up if they were consolidated through mergers and acquisitions.