anton oilfield 3337

Disclaimer: This report is for information only and is not to be construed as an offer to buy or sell securities. While the report is compiled using sources believed to be reliable, Core Pacific– Yamaichi International (H.K.) Limited (“CPYI”) does not guarantee its accuracy or completeness. CPYI may update or change any information contained in this report without any notice.Neither CPYI nor any of the companies of Core Pacific Group nor any individuals connected with the Group shall accept any legal responsibility arising from the use of or reliance upon thereport. The copyright of this report belongs to CPYI and no person may reproduce or publish any part of this report for any purpose without CPYI’s written consent. The authors of this reportare Licensed Representative of Securities and Futures Commission and they guarantee that all the views expressed in this report accurately reflect their personal views. CPYI, any of the companiesof Core Pacific Group, its directors and/or its employees may have positions in, and may effect transactions in securities mentioned herein which may be opposite to the position you take.

Core Pacific - Yamaichi

- 4 -

China / Oil & Gas

7 February 2011

YK Lee, CFATel: 852 2826 [email protected]

BUY

Close Target

HK$1.05 HK$1.45

Key stock data

12-month High / Low HK$1.07/0.651m avg da i l y vo l 4 .46mIssued shares 2 ,093mMarket cap HK$2,198mPEG FY10-12F (x) 0.62P/E FY10F (x) 16.9ROE FY09A (%) 2 .1Gearing FY09A (%) Net cashBoard lot 2,000Major shareholder Luo Lin

(32.93%)Source: Bloomberg

Performance 1 M 3 M 1 2 MAbsolute (%) 22.09 29.63 32.91Rel (HSI) (%) 20.08 30.61 17.53Source: Bloomberg

Anton Oilfield (3337 HK)An emerging high-end PRC oilfield services provider

By building R&D capabilities and reputation in China’s onshore oil and gas(O&G) E&P market over the past decade, Anton Oilfield Services (3337 HK) isnow poised to enter a new growth phase by providing high-end oilfield services(OFS) to develop complex O&G wells (including unconventional gas wells) andenhance oil recovery (EOR) to mature oilfields in China. Anton will also growits overseas market rapidly after years of establishment in other developingcountries. Anton’s success in winning new carbon capture and storage (CCS)and underground gas storage (UGS) projects will be a trump card. Therefore,we expect Anton to register profit CAGR of 29% in 2010-12. Its laggard priceperformance and undemanding valuation seem not yet to reflect such highgrowth potential. We initiate coverage of the counter with BUY and 12-M TP atHK$1.45 based on target PEG multiple of 0.8x.

High-end OFS demand from mature oilfields and complex wells.Due to China’s harsh geophysical conditions, newly discovered O&G fieldsin China are difficult to develop. Moreover, most mature oilfields in Chinaare facing the problem of production decline. We believe advanced OFStechnology will be a solution to solve these problems.

High-end OFS demand from unconventional gas resources and otherclean energy related projects. We believe China’s unconventional gasindustry will enter explosive growth in the next decade on government supportand the country’s huge resources. UGS facility is under-invested relative toChina’s rapid growth in natural gas consumption while CCS may be a way,though expensive, to help reduce CO2 emission. All these projects requireadvanced OFS technologies.

Anton’s competitive edges. With its advanced technology, Anton canprovide high-end OFS, which is not the strength of SOEs, for the whole lifecycle of a well. Anton can also compete with global OFS companies withmore competitive pricing and better knowledge in China’s market.

Initiate coverage with BUY and 12-M TP at HK$1.45. Our 12-M TP ofHK$1.45 is derived from a target PEG multiple of 0.8x, which is justifiedgiven our positive view on oil price and Anton’s rapid growth in the next twoyears. We initiate coverage of the counter with BUY.

Key FinancialsYear to 31 Dec 2008 2009 2010F 2011F 2012FRevenue (RMBmn) 763 690 847 1,092 1,369Growth (%) 55 (10) 23 29 25Net profit (RMBmn) 68 32 112 145 187Growth (%) (39) (53) 249 30 29vs IBES (%) - - (6) (7) (1)EPS (RMB) 0.033 0.015 0.053 0.069 0.089Growth (%) (37) (53) 249 30 29P/E (x) 27.7 60.5 16.9 12.7 9.5P/B (x) 1.2 1.3 1.2 1.1 0.9EV/ EBITDA (x) 12.8 29.8 9.6 7.3 5.7Yield (%) 2.6 0.8 2.7 3.5 4.7Source: Bloomberg and Core Pacific – Yamaichi

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Core Pacific - Yamaichi 7 February 2011

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Table of Contents

Overview of global oil market and related E&P capex .................................................................................................................... P. 6

Growth opportunities in China’s conventional oil and gas market for oilfield services company- Higher onshore oil E&P spending in China on higher oil price and stimulation demand ..................................................................... P. 7- Robust long-term consumption growth of China’s natural gas market .............................................................................................. P. 8- Huge demand for gas field services ................................................................................................................................................ P. 9- Advanced oilfield technology – a solution to China’s complex oil and gas fields ............................................................................ P. 10- Increasing adoption of advanced oilfield technology in China ..........................................................................................................P. 11

Growth opportunities in China’s unconventional oil and gas market for oilfield services company- Unconventional gas – China’s big hope to NG self-sufficiency ....................................................................................................... P. 12- Unconventional gas – explosive growth in coming decade in China .............................................................................................. P. 13

Other new business opportunity for domestic OFS company- UGS facility – likely to grow explosively in China ........................................................................................................................... P. 14- Greater oilfield services demand from SOEs’ overseas projects .................................................................................................... P. 15- Greater oilfield services demand from private E&P plays in domestic market ................................................................................. P. 15

What services does Anton provide? ............................................................................................................................................... P. 16

Company strengths- Advanced OFS expertise to capture conventional O&G and unconventional gas opportunities in China ........................................ P. 17- Strong R&D capabilities with highly experienced management ....................................................................................................... P. 18- Close customer relationships to tap OFS market at home and abroad ........................................................................................... P. 19- How Anton differentiates itself from local & global rivals? ............................................................................................................. P. 20

Financial analysis and forecasts ................................................................................................................................................ P. 21 - 23

Valuation- Laggard to the price rallies of oil and peers .................................................................................................................................. P. 24- Undervalued OFS company. BUY with 12-M TP HK$1.45 .............................................................................................................. P. 25

Major risk factors ............................................................................................................................................................................... P. 26- Low order visibility- Higher customer concentration- Highly sensitive to oil price change- Keen market competition from international OFS companies- Great progress in OFS capability of SOE companies- Slower-than-expected progress in unconventional gas and other new markets- Tight working capital cycle

Appendix I: China’s natural gas fields ............................................................................................................................................. P. 27

Appendix II: The development of US shale gas market ............................................................................................................... P. 28

Financials ................................................................................................................................................................................................P.29


- 6 -

Source: Baker Hughes

Figure 3: Worldwide active rig count rebounded in 2010

Source: Baker Hughes

Figure 4: The change of active rig count by region

Source: BP Statistical Review, US EIA forecasts

Figure 1: Higher oil consumption and price in 2011-12

Source: Bloomberg and Core Pacific - Yamaichi

Figure 2: Strong correlation between oil price and USD

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High oil prices encourage E&P spending in the world

High oil price encourages E&P spendingWe forecast crude oil prices to trend higher in 2011, largely driven by the recovery in globaloil demand, lower OECD inventory and US dollar depreciation. Recently, IEA raised the2010 global oil consumption growth forecast by 0.2mb/d to 2.3mb/d. We also expect USdollar to remain weak in 2011 as the Federal Reserve will maintain its loose monetarypolicies (low interest rate and ample money supply) to keep the greenback at a relativelylow level. Based on the short-term forecasts of US Energy Information Administration (EIA),crude oil price would head to US$93.4/bbl in 2011, up 18% or US$14/bbl yoy. Based on ourregression model compiled on monthly data from Jan2000 to Nov2010 (refer to figure 2), thelower the US Dollar Index, the higher of the oil price. On the backdrop of high oil price, oilcompanies’ E&P activities will increase and likely add E&P spending in 2011 and this wouldbenefit the O&G equipment and service providers.


- 7 -

Source: CNPC

Figure 7: Declining oil production from Daqing oilfield

Source:Sinopec

Figure 8: Flattish growth in oil output of Shengli oilfield

Source: respective companies, BP

Figure 5: PRC NOCs’ oil R/P ratios were low in 2009

Source: respective companies, BP

Figure 6: PRC NOCs’’s E&P capex mainly affected by oil price

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Higher onshore oil E&P spending in China on higher oil priceand stimulation demand

Recovering onshore oil & gas E&P spending by Chinese NOCsOwing to their low R/P ratios (figure 5), Chinese NOCs are eager to build up their oil reservesvia both foreign acquisitions and organic growth. More importantly, given the recovery ofglobal economy and the crude oil market, the O&G E&P capex planned by the ChineseNOCs would rebound as the changes of their E&P capex largely followed the crude oil price(figure 6). PetroChina had already budgeted a higher O&G E&P capex for 2010. As such,China-based E&P oilfield services companies are likely to have greater chance to win projectsfrom the Chinese NOCs.

Great demand for high-end oilfield services to stimulate the mature oilfieldsMature oilfields in China are mainly concentrated in the northeastern regions, including theDaqing, Liaohe and Shengli oilfields, as well as in the northwestern region, the Karamayoilfield. These mature oilfields are facing the problem of flattish or even diminishing outputvolume (figures 7 & 8). This phenomenon is notable in Daqing oilfield, which was discoveredin 1959 and is the largest oil producing oilfield in China. Unlike its huge NG reserves (seeappendix I, figures 13 & 14), China’s proven oil reserves are shrinking (figures 9 & 10) andthus maintaining the productivity and lowering the cost of existing mature oilfields becomecritical to offset the diving oil reserves. PetroChina had stated secondary recovery in matureoilfields is one of its top priorities for oilfields development. Horizontal well, well fracturingand acidization are the common methods to lift the production and recovery rate and alsolengthen the steady production phase of a mature oilfield. Therefore, we expect the adoptionof these more advanced oilfield technologies, largely learnt from the US, will increasinglyreplace China’s conventional oilfield technology, which was mainly derived from the formerSoviet Union, resulting in greater demand for high-end oilfield stimulation services in China inthe future.

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Source: company data

Figure 11: PetroChina’s NG sales and ASP

Source:CEIC, China Customs, China Petroleum and Petrochemical Engineering Institute (CCPEI)

Figure 12: Shortage of Chinese domestic NG supply

Source: PetroChina

Figure 9: PetroChina – declining oil reserves with smalldevelopment potential (unused reserves was 30% of totalreserves)

Source: Sinopec

Figure 10: Sinopec – declining oil reserves with smalldevelopment potential (unused reserves was 11% of totalreserves)

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Long-term positive on China’s NG industry

Robust long-term growth of China’s NG marketIn order to help reduce CO2 emission by 40-45% in 2020 from 2005 levels and optimize thecountry’s energy mix, the central government targets to boost the NG consumption to 8.3%/10% of total energy consumption in 2015/20 from 2.8%/3.9% in 2005/09. As domesticconsumption will continue to outstrip domestic production, the problem of NG supply shortageis expected to last for at least the next five years. According to a report by China GeneralAdministration of Customs in early 2010, China’s NG supply deficit would balloon to 40bnm3 in 2015 from 30bn m3 in 2010. To better rationalize the domestic onshore NG price andease the excess demand, the NDRC raised the wellhead NG price by RMB0.23/m3 in earlyJun2010 but we believe the excess demand situation will continue to exist. Thanks to robustlong-term NG demand and recent NG price hike, we expect domestic gas producers –PetroChina and Sinopec, to accelerate their gas production growth rate in the next decade.


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Source: PetroChina

Figure 13: PetroChina - rising NG reserves, of which 51%remain undeveloped

Source:Sinopec

Figure 14: Sinopec - stable NG reserves, of which 74%remain undeveloped

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More aggressive development plan of gas fields under 12th Five-year PlanIn early Jan2011, the NDRC said the country would accelerate the construction of three gasfields of Tarim, Southwestern China and Changqing with a combined annual output of 20bnm3 under the 12th Five-year Plan. In addition, the National Energy Administration (NEA)recently issued guidelines for the development of China’s energy industry for the next fiveyears - a preview of the Mar2011 release of the central government’s 12th Five-year Plan. TheNEA guidelines emphasize supply increases from new gas fields in the northwestern TarimBasin. To date, only 12% of the Basin has been explored and already it claims around athird of China’s 107 Tcf proven reserves.

Bigger NG E&P capex to further develop NOCs’ huge NG reservesIn a bid to capture the abovementioned huge opportunity in domestic NG market, we expectChinese NOCs to expedite their capex in NG E&P. For instance, PetroChina views NG as itskey growth driver in the future and plans to boost NG annual output to 120bn m3 by 2015,compared to 75bn m3 in 2009; such aggressive NG output target would drive the spending inNG E&P in the next five years. Starkly contrasted to the high usage rate of proven oilreserves in China, the usage rate of proven NG reserves in China is only 36.1%. Specifically,both NG reserves of PetroChina and Sinopec have been tapped and the proportions ofundeveloped NG reserves remain large (figures 13 & 14), resulting in huge potential forfurther lifting their NG production.


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Advanced oilfield technology – a solution to China’s complexoil and gas fields

Most of China’s O&G fields are complex wellsTo reverse the declining proven developed reserves, PetroChina needs to expedite itsdevelopment in some newly discovered oil and gas fields such as Tarim Basin, Ordos Basinand Sichuan Basin (most fields in Sichuan are NG fields). However, the geological conditionsof these regions are unfavorable to traditional oilfield technology and feature complex wells,such as HTHP (high temperature, high pressure) wells, deep-zone wells and low permeabilitywells. Oil reserves at low permeability oilfields represent 31% of China’s overall reserves,compared to US’ 8% and world average of 20%. Low permeability reservoirs are difficult totap due to their deeply buried and thin hydrocarbon-bearing layers, as well as their poorpetrophysical properties and unfavorable pressure sensitivity. As such, the exploration anddevelopment of reserves is becoming more complex. For instance, in Changqing oilfield,70% of the proven oil reserves are contained in reservoirs with a permeability of ~1 millidarcies(mD). In the Jilin complex of the Songliao Basin, for example, ~73% of oil reserves arecategorized as low permeability oilfields. According to the Ordos Basin Extra-low PermeabilityOilfield Development publication, it is estimated that the reserve additions in low permeabilityoilfields as a percentage of total reserve additions in China surged from ~27% prior to 2000to ~70% between 2001 and 2005.

In addition, gas field with high sulfur, high CO2 and low permeability accounted for 70% ofunused gas reserves in China. According to CNPC, ~19.9bn m3, or ~29% of total NG outputwas derived from low permeability gas fields in 2009, compared to ~2bn m3, or ~11% of totalNG output in 2000. This indicates Chinese NOCs’ NG production growth will increasinglydepend on production from complex gas fields in the future.

Advanced oilfield technology is a cost-effective solution to developcomplex wellsTo tackle the rising difficulty of developing the unused complex wells, Chinese NOCs have toresort to advanced oilfield technology and the production results of using advanced oilfieldtechnology to develop complex wells are encouraging. For instance, by using the technologiesof horizontal well and open-hole multi-staged fracturing, CNPC had enabled efficientdevelopment of a low permeability Sulige gas field in Changqing by shortening the averagehorizontal drilling period from 130 days to less than 50 days with daily gas output at thehorizontal well exceeding 100,000m3, more than six times that of any vertical well in thesame region during 2009. Based on the US experience, although the cost of drilling ahorizontal well can be 2-4 times that of a conventional vertical well, the economic value ofhorizontal well is much higher than vertical well as horizontal well can produce daily gasvolume at least 3-5 times that of vertical well and gas output velocity 10 times the vertical well.


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Source: Jereh

Figure 17: Jereh experienced rapid growth in oilfieldequipment sales, thanks to domestic robust demand forhigh-end oilfield services

Tab le 1 : Jereh ’s product l is t o f advanced o i l f ie ldequipments

Cementing equipment1. Fracturing unit2. Coiled tubing unit3. Nitrogen pumper4. Hot oil unit5. Snubbing unit6. NG compressor package7. HP triplex plunger pumpSource: Jereh

Source: CNPC

Figure 15: Increasing number of drilled horizontal well

Source: CNPC, US DOE

Figure 16: Drilling footage in China matched the uptrend ofthe US

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Increasing adoption of advanced oilfield technology

Rising demand for and adoption of high-end oilfield techniques to developcomplex wellsExcept in 2009 when the number of drilled horizontal wells dropped sharply amid the financialcrisis, CNPC has significantly lifted the weighting of horizontal well (figure 15), though thiswas still far lower than that of the US (8,998 horizontal wells were drilled in 2000, making up30.7% of total wells drilled during the same period). In terms of footage drilled per well, thewell depth drilled by CNPC has been getting deeper over the past years and this trendcoincided with that of the US (figure 16), indicating that upstream drilling and developmentactivity are increasingly shifting to deep wells, where most of the proven reserves are untappedand require more advanced oilfield technology. Yantai Jereh Oilfield (002353 CH), whichmanufactures advanced oilfield equipment in China (China was 79% of 1H10 revenue)experienced strong growth in sales of advanced oilfield equipments, related parts andequipment maintenance (figure 17); this can be viewed as a proxy of China’s demand forhigh-end oilfield services. We expect the Chinese NOCs to continue to spend on high-endoilfield services in the coming decade in a bid to accelerate the development and enhancethe recovery rate of complex wells.


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Source: US DOE, IEA, Advanced Resources International

Figure 18: Comparison of shale gas reserves by region

Source: US DOE

Figure 19: CBM proven recoverable reserves by region

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Unconventional gas – China’s big hope to NG self-sufficiency

Huge unconventional gas potential in ChinaUnconventional gases refer to coal-bed methane (CBM), shale gas and tight gas. Constrainedby the old oilfield technology (of the former Soviet Union), China has yet to developed itshuge unconventional gas potential (figures 18 & 19). In light of the advancement of oilfieldtechnology, in particular the revolutionary development in the US’ shale gas market in recentyears, experts believe China is able to develop its unconventional gas reserves economically.Wood Mackenzie predicted unconventional gas to be a quarter of China gas supply by 2030.In 2009, 19 coal producing provinces produced 2.51bn m3 of CBM, accounting for only 2.9%of total domestic NG production.

China’s unconventional gas production likely to enter rapid growth stageIn the face of China’s rising dependency on import NG, we expect China to expedite theE&P of unconventional gas at home by employing the advanced oilfield technologies, includinghorizontal well and hydraulic fracturing, in order to enhance the NG self-sufficiency rate. Webelieve the coming two years are critical and may see production of unconventional gas takeoff due to the following new developments:

Central government’s policy blessing: The central government is drafting the EmergingEnergy Development Plan for 2011-20 and some government officials revealed the totalinvestment would be RMB5trn during the period. The development of unconventional gasis one of the focal points under the Plan. The Ministry of Land and Resources (MLR) inearly 2010 set a goal to locate one trn m3 of shale gas reserves, produce 15-30bn m3 ofshale gas to comprise of 8-12% of China’s total NG output by 2020. The centralgovernment is expected to again set aggressive CBM production targets for 2015 and2020 (table 3) following the 2010 output target of 10bn m3 set by the 11th Five-year Plan.

Shale gas exploration works are in full swing: Despite its huge shale gas reserves,currently China has not produced any shale gas yet as on-site exploration works areinadequate in China. There are signs that China is strengthening related works (table 2).

Table 2: China is preparing its venture into shale gas developmentDate Chinese party Event highlightsJan-2011 MLR Announced open China’s first tender for eight shale gas blocks in 1Q11 to local and

overseas E&P companiesDec-2010 Sinopec Started exploration work of Pengshui shale gas block in ChongqingAug-2010 CNPC PetroChina Exploration and Development Research Institute set up a national shale gas

laboratoryJun-2010 Sinopec Set up a shale gas exploration arm that eyes exploration breakthrough in three years

and industrial production in five yearsMay-2010 Sinopec Started shale fracturing at its Fangshen 1 well in Guizhou provinceApr-2010 PetroChina Completed the survey of three shale gas test wells in Sichuan BasinNov-2009 MLR Drilled a test well in Chongqing and confirmed shale gas depositsSource: respective companies, NDRC, Core Pacific-Yamaichi


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Table 5: Through a series of acquisitions and foreign cooperation, Chinese NOCs are accumulating advanced techniquesfor the development of unconventional gasDate Chinese party Event highlightsJan-2011 CNOOC Acquire 33.3% undivided interest in Chesapeake’s 800,000 net shale oil and gas leasehold acres in the Denver-Julesburg

(DJ) and Powder River Basins in northeast Colorado and southeast Wyoming for US$570mn.Dec-2010 CNOOC Media reported CNOOC acquire a 50% stake in China United Coalbed Methane Corp (CUCBM) for RMB1.2bn.Dec-2010 CNOOC Purchased 50% stake in five Australian CBM blocks from Exoma Energy for US$49mn.Nov-2010 CNOOC Acquired 33.3% interest in US-based Chesapeake Energy’s Eagle Ford shale gas assets in Texas for US$1.08bn.Jun-2010 CNPC Signed an agreement with EnCana Corp (ECA) to develop shale gas reserves at Horn River, Greater Sierra, and

Cutbank Ridge in northeast British Columbia. EnCana would be operator of all developments, with CNPC investingcapital to earn return from the assets and gain an advanced understanding of unconventional gas development throughan ongoing sharing of tehcnical knwoledge.

Jun-2010 PetroChina Working with Exxon Mobil to jointly research and develop an unconventional block with potential tight gas reserves inthe Ordos Basin.

Mar-2010 PetroChina Teamed up with Shell to acquire a 50% stake in Australian CBM producer Arrow Energy.Mar-2010 CNPC Signed a 30-year production sharing contract (PSC) with Shell to develop tight gas in the 4,000 km2 Jinqiu Block in

Sichuan Basin.Mar-2010 CNOOC Purchased 5% stake in UK-based BG Group’s CBM wells in Queensland’s Surat Basin for US$270mn.Jan-2010 Sinopec In talks with BP to jointly explore and develop shale gas in China. Sinopec charted 2,000 km2 in Kaili, Guizhou

province and 1,000 km2 in Huangqiao, Jiangsu province as potential cooperation blocks.Nov-2009 PetroChina Reached an agreement with Shell to jointly evaluate shale gas reserves of the Fushun-Yongchuan Block in Sichuan

Basin.Nov-2009 Central government Launched the Sino-US Shale Gas Resource Cooperation Initiative and signed a technology transfer agreement with the

US government.Oct-2007 PetroChina Signed contract with Houston-based Newfield Exploration Company to evaluate shale gas resources at the Weiyuan

field in the Sichuan Basin.Source: respective companies and Core Pacific-Yamaichi

Tab le 3 : Aggressive product ion targets set by thegovernment and SOEsCompany/unit Gas type 2015 target 2020 target

(bn m3) (bn m3)CNPC CBM 4.5 -

Shale gas 0.5 -Sinopec CBM+Shale gas 2.5 5.0CUCBM CBM+Shale gas - 10.0Central government Shale gas - 15-30

CBM 30.0 50.0Source: respective companies, NDRC

Table 4: Policy support to CBM developmentPolicy DetailsTax benefits 13% VAT rebate, income tax reductionProduction subsidy Central government.

Local governments also provide additional subsidy.Source: NDRC

Unconventional gas – explosive growth in coming decade

Aggressive production targets by NOCs: The two onshore Chinese NOCs had alreadyset their long-term unconventional gas production targets. Sinopec aims to produce2.5bn m3 of shale gas and CBM annually in 2015 while CNPC hopes to spend >RMB10bnto develop and produce 4.5bn m3 of CBM production capacity and output by 2013 and2015 respectively from planned 400mn m3 in 2010 and 500mn m3 of shale gas in 2015from current nil;

Acquiring technology: Besides the high-level of shale gas E&P technology cooperationbetween China and the US, the big three Chinese NOCs have actively acquired andaccumulated the technology of exploring and developing unconventional gas, mainlythrough acquisitions of overseas unconventional plays and co-development ofunconventional gas resources in the homeland (table 5). Once the Chinese NOCs absorbthe advanced technology from overseas, they will apply the new technology to acceleratethe development of unconventional gas in their homeland;

More policy incentives to unconventional gas plays: CBM development had beenincluded in the 11th Five-year Plan, enjoying a series of policy supports (table 4). InNov2010, an NDRC official said the government will likely offer subsidies and tax incentivesto shale gas production, similar to that of CBM.


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Source: Schlumberger’s Oilfield Review

Figure 20: World working-gas volume mix by region (2004)

Source: US DOE

Figure 21: US working-gas volume mix by UGS type (2008)

Salt cavern5.5%

Depletedreservoir85.1%

Salineaquifer9.4%

Eastern Europe42%

N. & S. Ame.35%

Middle East2%

Western Europe19%

Asia2%

UGS facility – likely to grow explosively in China

Urgent need in UGS facilities to solve seasonal NG shortage problemSimilar to the experience in developed markets, China’s long-distance pipeline capacity isnot sufficient to supply NG to large population centers during peak-demand periods. Forinstance, China in the winter of 2009 suffered nationwide NG shortage due to peak demandin winter and several inland provinces even suspended gas supplies temporarily. To balancethe gas-demand cycle, a gas-storage network is needed to inject gas into USG facilitieswhen demand is low and to release gas during periods of high demand. This buffering ofdemand is referred to as “peak-shaving”.

Under-investment in UGS facility in China compared to the worldThere are >600 USG sites in the world and US alone has ~400 active fields but China onlyhas two operated by CNPC located in Huabei Oilfield and Dagang Oilfield. In 2008, the NGstorage ratios (i.e. the proportion of working-gas volume to overall gas consumption) in theworld and US were 15% and 20% respectively but China’s ratio was only 3%. Such low NGstorage ratio will exacerbate the seasonal NG shortage problem in China in the face ofsurging NG consumption in the future.

Aggressive investment plan for UGS tanks in ChinaOn top of the existing two depots and the other two under construction (i.e. Jintan andLiuzhuang in Jiangsu province), CNPC is planning to build ten new UGS tanks in the nextfive years with total investment exceeding RMB50bn and total working-gas volume of >22bnm3, accounting for 8-10% of the country’s total NG consumption volume. For instance, CNPCsaid in Feb2010 it planned to invest RMB20bn to build a UGS depot with total storagecapacity of 12bn m3 in Changqing Oilfield. In the longer-term, it is estimated China will havemore than 30 UGS depots with working-gas storage capacity of >30bn m3 by 2020.

Construction of UGS needs high-end OFSDue to the long life expectancies of a UGS depot – usually more than 80 years, the constructionpractices of storage wells are different from nonstorage wells. Storage wells of a UGS facilitymust be able to tolerate high injection rates, high production pressures and frequent cycling.Given such strict well construction practices, high-end rather than conventional well drillingand completion services are needed.


- 15 -

Source: CEIC, National Energy Bureau estimates

Figure 22: Increasing oil dependency rate in China

Source: CNPC, company data

Figure 23: Increasing overseas O&G production by PRC NOCs

Table 6: Investment budget and production target of CNPC’s overseas projectsProject Planned investment (US$bn) Production targetal-Ahdab 4 Reach 200k bpd in 6 yearsRumaila 15 Increase output from current 950k bpd to 2,850k bpd in 7 yearsHalfaya 6 Increase output from current 3k bpd to 535k bpd in 13 yearsSource: company data

36

47

76

87

105

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2004 2005 2006 2007 2008

mn tons

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2020F

mn ton

20

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60

70

80%Consumption (LHS) Import dependency rate (RHS)

Greater oilfield services demand from SOEs’ overseasprojects and private E&P plays in domestic market

Encourage outbound O&G investments to secure strategic assetsAccording to the National Energy Bureau, China’s crude oil demand will hit 600mn tons in2020 but domestic production will only remain at ~200mn tons, implying ~67% of overalldemand has to be satisfied by imports. As such, the PRC government encourages outboundinvestment by local oil companies to secure strategic resources overseas. According toDealogic, there were 56 announced cross-border acquisitions and investments involving ChineseO&G companies between Jan2005 and Jun2010, with an aggregate transaction size ofUS$46bn. The targeted geographic areas of China’s outbound O&G investments are broad,spanning from Central and Southeast Asia to North America, Latin America and Africa.According to the former head of National Energy Agency (NEA), China has invested a totalof US$72bn on 131 projects in 43 countries on oil and gas acquisitions since 2005.

More capex will be incurred to develop the overseas O&G assetsChinese oil companies have invested over RMB500bn in overseas oilfields and it is expectedmore capex have to be committed into development and production of those overseas O&Greserves in the future. For instance, PetroChina and its parent company said it would investover US$10bn in Iraq on Iraq’s post-war reconstruction and hopes the proportion of O&Gproduction from overseas market to jump to >50% in 2015 from current <10%. CNPC alsoplans to ramp up production in its overseas oilfields (table 6) and we expect demand foroilfield services provided from third parties to surge as the Chinese state-owned OFScompanies have inadequate service capability in overseas market.

Surging high-end oil field services demand from private E&P companiesIn Feb2005, the State Council issued the “Thirty Six Policies” which encouraged investmentsfrom private capital in traditionally monopolistic, state-dominated sectors, including upstreamO&G industry. In May2010, this policy direction has been reinforced by the “new non-public36 statute”. Under this government guidance, more private companies are expected to investin China’s small-to-medium-sized and marginal O&G fields (which are under the radar ofstate-owned companies, whose focus is on large O&G fields) and in unconventional gas.Lacking O&G upstream expertise and operation scale, private companies would be moredependent on outsourcing oilfield services than the current big three NOCs and this will inturn drive the demand for total package and integrated technical OFS.


- 16 -

Figure 24: Anton’s one-stop OFS to the whole life of a O&G well

How to reduce How to increase How todrilling costs and production and maintain

increase the rate of smoothen the production production?reservoir encountered? in the long run?

Well life Drilling Well completion Production

Drilling services Well completion services

Down-hole services

Anton’ssolution Chemicals services

Equipment services

Oilfield tube services


Table 7: Outlines of Anton’s OFS provided and related technologyBusiness DescriptionWell Completion Services * Use well completion tools to solve the problems arising from the

well cementing and well completion in ultra-deep and deep wells

Down-hole Services * Enhance production by changing the formation of reservoir(i.e. well workover and * Increase the safety of exploration and productionintervention)

Drilling Services * Complete directional and horizontal wells and increase drillingefficiency and reservoir contact

* Integrated services

Oilfield Tubular Services * Detection of tubular damages during the course of drilling andprotection of tubular from corrosion damages as measures tominimize drilling costs


Major technology1. Integrated well completion technology2. Sand screen completion technology3. Gravel-packing technology1. Multi-stage horizontal well acidizing technology2. HTHP well fracturing technology3. Coiled tubing technology4. Tubular helium testing technology1. Directional drilling technology2. Multi-lateral drilling technology3. Casing exist technology4. Integrated technology1. Tubular testing, repair and coating technology2. Tubular manufacturing technology

What services does Anton provide?

Outlines of Anton’s operationsAnton is one of the leading privately-owned onshore technical oilfield services providers inChina. The company has four business divisions: drilling technology, well completion tool,down-hole operation technology and oilfield tube services. Through these divisions, Antonprovides one-stop service covering the entire well life across the exploration and productionprocesses.


- 17 -

Table 8: Comparisons of some conventional and more advanced oilfield services technologiesConventional More advanced AdvantagesConventional gravel packing Frac-packing Bypasses formation damage and enhance well productivity by

eliminating many productivity impairments that are common inconventional cased-hole gravel packs.

Wireline logging MWD (measurements-while-drilling)/LWD (logging-while-drilling) Enhance efficiency, improve safety, reduce formation evaluationuncertainty and better withstand elevated temperature and pressure

Wireline conveyance Tractor drive technology, coiled tubing Unrestricted by gravity and thus can be used in high-angle andhorizontal wellbores

Vertical drilling Horizontal & rotary steerable drilling Increase reservoir contact area, productivity and the rate ofpenetration (ROP) and less restricted by geometric conditions

Workover rig Coiled tubing No need to pull completion equipment and kill the well). Reducecontamination of the slurry

Source: Schlumberger, Core Pacific-Yamaichi

Anton’s OFS expertise to capture conventional O&G andunconventional gas opportunities in China

Anton’s advanced techniques and sound track record in conventional O&Gfields

Advanced techniques: Being engaged in the high-end OFS market in China since2001, Anton has sophisticated and advanced expertise and equipments to provide high-end solutions to upstream E&P customers for developing complex O&G wells. As shownin tables 7 & 8, Anton possesses some advanced oilfield technologies on top of theconventional ones, leading to Anton’s strong competitiveness in China’s high-end OFSmarket.Track records: Anton had completed numerous high-end oilfield works but we onlyhighlight two representative cases here to illustrate Anton’s strengths in OFS technology:In 1H10, Anton secured PetroChina’s orders of multi-stage sanded fracturing services for77 horizontal wells out of 102 wells in the Sulige O&G field, with average service fees ofRMB2.2mn per well. Management said the company beat other leading global OFScompanies in open bidding, underlying Anton’s technological strength;In Aug10, Anton beat other global OFS giants to win the bid for drilling and related workscontract of the Carbon Capture and Storage (CCS) model project from Shenhua Group.CCS project requires high standard of oilfield techniques covering drilling, wireline logging,mud logging, well testing, coring, cementing, well completion, perforating, fracturing andinstallation of monitoring apparatus and the on-going monitoring and maintenance works.The winning of the bid further affirmed Anton’s sophisticated techniques and high-endposition in the OFS market.

Strong OFS expertise and sound track record in conventional E&P laysfoundation for expansion into the new E&P market of unconventional gas

Proven techniques: With years of experiences in horizontal drilling and fracturing appliedin the development of conventional oilfields, Anton would be able to capture the high-endOFS demand from China’s future development boom in unconventional gas, whose majorinvestments are horizontal drilling and hydraulic fracturing technology.Track records: Without any shale gas production in China, there is no track record forAnton in this regard. Nevertheless, Anton has extensive experience in horizontal drillingand hydraulic fracturing for CBM wells. It is providing integrated oilfield services (fromdrilling to well completion) to Enviro Energy International (1102 HK), which is a privately-owned CBM E&P company with key CBM assets in Junggar Basin in Xinjiang province.Enviro Energy set aside capex of US$30mn and US$45mn for the phase 1 developmentof CBM and shale gas projects respectively.


- 18 -

Table 9: Highly experienced management teamManagement Position Date Industry experience

joined No. of PreviousAnton years company

Luo Lin Chairman & CEO Founder, 18 CNPC /2002 Sinopec

Ma Jian Executive vice president Founder, 19 Halliburton2002 China /

CNOOCWu Di Executive vice president 2010 >20 CNPCLiu Enlog Executive vice president 2010 >28 CNPC /

EnCanaShen Haihong Executive vice president 2007 >20 CNPCChen Wei Executive vice president 2000 >26 CNPCSource: company data


Figure 25: >50% employees have above college level

Doctor1%

Bachelor45%

Secondary orbelow21%

College19%

Master14%

Strong R&D capabilities

Solid OFS expertise underpinned by strong R&D capabilityWe attribute Anton’s strong expertise in the OFS market to its strong R&D capabilities,which are accumulated through years of talent incubation and technical development. Assuch, Anton can develop and innovate a set of advanced OFS technologies, including theproprietary MWD/LWD services, well completion of gas storage tanks, tubular helium testingand entire technological system for exploration of unconventional gas reserves. The followingaspects demonstrate Anton’s R&D capabilities:

Ability to incubate and attract talents – Anton is the only non-government-owned OFSprovider in China that is granted permission to establish a “post-doctoral research program”by the Ministry of Personnel as part of a prestigious nationwide government-approvedprogram for seconding select post-doctoral personnel to qualified institutions for scientificand technical research. Such a program allows Anton to provide support to its post-doctoral employees in their research and attracts high quality personnel from bothdomestic and international markets to join the company. Anton also established a R&Dcenter in Houston;Ability to develop technical skills - Through in-house innovations, Anton’s possession ofpatent rights increased to 275 as of end-Jun2010 from only 43 patent rights as of end-Jun2007, with 31 patents newly registered in 1H10;Strategic alliance with leading research institutions in China – In 2009, Anton and China’sUniversity of Petroleum jointly established Anton Research and Design Institute of ChinaUniversity of Petroleum. In addition, Anton established strategic cooperative partnershipby signing strategic cooperation framework agreements with three engineering andtechnology research institutes, namely Oil-drilling Engineering Technology ResearchInstitute of CNPC, Mud Technology Service Branch of CNPC Bohai Drilling EngineeringCompany and Gas Production Engineering Research Institute of PetroChina SouthwestOil & Gasfield Company. The strategic cooperation with the above institutions furtherenhanced Anton’s R&D strength and core competitiveness in the technical area;Seasoned management team — Anton has an experienced and professional managementteam with long work experience in the O&G industry. This enables Anton to have a clearunderstanding of the needs of China’s E&P companies.Strong foreign partner — Anton has partnered with BJ Services, which was acquired byBaker Hughes in late Apr2010, to introduce advanced products at competitive prices inChina. For instance, BJ provides sophisticated fracturing materials and relatedtechnological expertise to Anton’s high-end fracturing and acidization services.


- 19 -

Table 10: Anton had sound track record of acquisition in OFS marketTarget company Consideration Acquisition Core

(RMBmn) date technologyJilin DongXin Oil Engineering Technology 36.7 Mar-08 Down-hole operation servicesShandong Precede Petroleum Technology Co 160 Sep-08 Gravel pack sand control technologyBeijing Hinen-Hitech Petroleum Technology Development CoBeijing Huarme Petroleum Technology CoSource: company data

150 Nov-07 Sand control sales

Close customer relationships to tap OFS market at homeand abroad

Strong connection with CNPCAnton has provided OFS to CNPC and its affiliates since its inception in 2002 and CNPCand its group members now account for ~70% of Anton’s total revenue. We attribute Anton’sclose relationship with CNPC to the career background of its senior management. The closerelationship was further solidified in 2009 by establishing strategic alliances with the PetroChinaOil Drilling Institution and PetroChina Sulige region oilfield unit.

Set to capture business opportunity from Chinese companies’ overseasprojectsUnder the strategy of “overseas accompanying”, Anton built up its overseas OFS sales networkin Middle East, Central Asia and Africa in 2008-09 in order to cater the OFS needs ofoverseas oilfield exploration of its Chinese customers such as PetroChina, Sinopec, CNOOC,CITIC Group, Zhenhua Oil and Sinochem. By establishing strategic cooperation with UAEUni-Arab and Strad Downhole, Anton also targets to generate revenue from domestic clientsin the Middle East and Central Asia. Given the increasing overseas O&G upstream investmentby Chinese enterprises, we believe Anton can generate more revenue from the overseasmarket. Management expects revenue from overseas market to account for 40% of totalrevenue by 2013 compared to 15% in 1H10.

Abundant cash position to make more acquisitionBesides organic growth, Anton also aims to achieve faster growth rate through acquisition,and this was the case in the past few years (see table 10). The company plans to set up itsown chemical materials operation by acquiring one chemical materials company in a bid tomeet demand on drilling fluid and completion fluid. As of end-Jun2010, it had a net cashposition of RMB138mn, which should be abundant for future acquisitions.


- 20 -

Table 11: Anton’s strengths and weaknesses against international giantsAnton

Strengths * In-depth local knowledge and strong local brandrecognition

* Strong serv ice capabi l i ty provided by anexperienced expert team

* Own technology with international standards butwith lower cost base

* Strong local sales network and supply chainand timely service to meet customer needs

Weaknesses * Short development history* Relatively small size* Relatively narrow product range


International OFS companies* Strong brand recognition in the international market

* Most technologically advanced

* Affluent capital

* Insufficient investment in China OFS market* Lack of knowledge about the local market* Lack of professional service capability to meet timely

demand* Expensive products and services

Table 12: Anton has narrower product/service range than international giantsSLB HAL BHI Anton

Subsea ✖ ✖

Well CompletionsFormation evalautionGeophysical analysis ✖ ✖ ✖

Fluids ✖

Chemicals ✖ ✖

Sand controlPressure pumpingArtificial lift ✖ ✖

Well interventionCementingDrillingWirelineTubular services ✖ ✖

Pipeline services ✖ ✖

Drill bits services ✖

Source: respective companies

How Anton differentiates itself from local & global rivals?

Anton’s strengths and weaknesses compared to international OFScompaniesIn our view, Anton’s key strengths against the global big four OFS peers, namelySchlumberger (SLB US), Halliburton (HAL US), Baker Hughes (BHI US) and Weatherford(WFT US), are its familiarity with the domestic market and lower service costs, though itsmajor weaknesses are less advanced technology and narrower product/service range.Nevertheless, we believe Anton will gradually overcome those weaknesses by strengtheningits R&D capability and acquiring the missing business segment (such as fluids and chemicals)from third parties.

Anton’s strengths and weaknesses compared to state-owned OFS companiesIn our view, Anton’s key strengths against the OFS subsidiaries of the three state-ownedO&G developers, namely CNPC, Sinopec and CNOOC, are its high flexibility (versus thebureaucracy of state-owned firms) and more advanced technology in developing complexwells. Anton has almost 10-year experience in developing complex wells in China. In contrast,CNPC focused on developing conventional wells over the past half-century, though it is nowdeveloping high-end OFS technology actively. Anton also operates OFS at lower operatingcost than the SOEs. For instance, the operating cost of integrated technology service providedby Anton is 65-75% lower than those of SOEs.


- 21 -

Source: BP and company data

Figure 28: High correlation of Anton’s revenue to oil pricechange


Figure 29: Anton’s 1H10 revenue mix by service segment


Figure 26: High correlation of Anton’s results with SOEs’ NGCapex


Figure 27: High correlation of Anton’s results with SOEs’development of horizontal well

1,647

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Wellcompletion

39%

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Tubular26%

Drilling6%

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Chg YoY Oil price Anton revenue

Financial analysis and forecasts

Conventional well development alone would drive Anton’s revenue growthDue to its high reliance on PetroChina and Sinopec, Anton’s revenue and earnings are highlysensitive to the changes of their capex and number of developed horizontal well (see figures26 & 27). Since the SOEs’ E&P capex was highly correlated to the oil price (as shown infigure 6), Anton’s revenue in turn should be highly correlated to oil price as well (figure 28).Riding on higher oil price, PetroChina’s ambitious NG output plan, increasing proportion ofdeveloping complex wells and increasing OFS demand from overseas markets and private oilE&P companies, we expect the development of conventional O&G fields alone can fuelAnton’s revenue growth substantially in the coming years. Our estimated revenue CAGR of27% in 2010-12 has not factored in any contribution from shale gas and other new businesspotentials such as CCS and UGS and acquisition. Therefore, any positive progress of shalegas development, CCS and UGS projects in China will be the upside risk to our forecasts.


- 22 -

Table 13: Anton’s revenue change by service segment2007 2008 2009 2010F 2011F 2012F 2010-12F CAGR

Well completion (RMBmn) 153 241 214 321 404 493yoy chg (%) - 58 (11) 50 26 22 24

Down-hole operation (RMBmn) 72 112 100 240 365 515yoy chg (%) - 55 (10) 140 52 41 46

Drilling technology (RMBmn) 33 70 88 84 115 149yoy chg (%) - 112 25 (5) 37 30 33

Tubular services (RMBmn) 236 341 288 202 208 212yoy chg (%) - 45 (15) (30) 3 2 2

Source: company data and Core Pacific-Yamaichi estimates


Revenue analysis by segmentAmong Anton’s four business segment, we forecast the down-hole operation to have thefastest 2010-12F CAGR of 46%, largely driven by the strong demand for acidization andfracturing, coiled tubing and helium leak detection services. We believe the acidization andfracturing and coiled tubing services can cater to the need of stimulation of mature oilfieldsand development of complex wells in China. With the development technologies in deep/horizontal wells and large-scale development of NG, higher requirement for sealing performanceof tubing and casing is key. To minimize the potential risk of accidents due to leakage ofpremium connections, helium detection has become mandatory requirement in most oilfieldsin North America, Mexico and South America. We believe China’s helium leak detectionservices is still in its rapid growth stage. Drilling technology services will have the secondfastest 2010-12F CAGR of 33% as the demand for horizontal and directional drilling will soarto develop complex gas wells and stimulate mature oilfields in China. Well completion servicessuch as gravel packing, sand screens and integrated well completion technology serviceswill grow in line with E&P capex of Chinese NOCs. Despite the higher O&G capex goingforward, growth in tubular services will only be steady as these services are relatively low-end compared to the other three service segments. As such, the revenue weighting oftubular services would contract significantly in the coming years. The company plans to spinoff or dispose part of the tubular business to third party and this corporate action wouldaffect the revenue stream of this business line, as such we cannot make any projection atthis early stage.

Revenue analysis by geographical segmentSince its foray into overseas O&G OFS market in 2008, the revenue from overseas marketas proportion of total revenue climbed to 15.5% in 1H10 from less than 10% in 2008. Bypursuing the strategy of “overseas accompanying” of the SOEs, Anton targets to boost therevenue contribution from overseas to 40% of total revenue in three years. As such, wewould see overseas market revenue CAGR of >70% in 2010-13F.

Management revenue growth target is more optimisticOur estimated revenue CAGR of 27% in 2010-12 is more conservative than management’starget of 30-40% CAGR in 2011-15. Anton reiterated that it would meet its revenue target ofRMB5bn in 2015. Management is highly confident they will gain from China’s surging NGindustry, horizontal well development and overseas oilfield projects. It estimated that China’sinvestment in natural gas will exceed RMB600bn and develop ~2,000 horizontal wells annuallyin the next 10 years compared to RMB90bn in the past 10 years and the current 500-700horizontal wells.


- 23 -

Source: company data and Core Pacific - Yamaichi

Figure 30: Anton’s EBIT margin trend


Figure 31: Anton’s 1H10 opex mix

Materals51%

DD&A9%

Others18%

Sales tax &subcharge

1%

Staffs21%

34.4

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%


Mild improvement in operating marginAnton’s operating margin sharply plunged 13.2ppt yoy to 5.4% in 2009, mainly hit by lowerproduct ASP, higher opex for hiring new staff and higher opex for overseas sales networkexpansion. 1H10 EBIT margin rebounded sharply to 17.9% and we expect FY10 margin tobe 19.5% and to slightly improve to 20.0% in FY11 and 20.8% in FY12 on increasingrevenue proportion of high-end OFS while the tubular service division, a low-tech/low marginbusiness, will shrink proportionally. This will translate into the lower weighting of materialcost, the biggest opex component, to total opex, as high-end technical services consumefewer materials than the tubular manufacturing business. However, we expect staff costsand R&D costs to surge rapidly to match the rapid growth of technical services, which relyheavily on talent and R&D capabilities. Anton earmarks 8% of total revenue as R&D expensesper year and plans to add more technical staff from international and state-owned OFScompanies in the future.

Faster net profit growth than revenue growthWe estimate Anton to register net profit CAGR of 29% in 2010-12, faster than the top-lineCAGR of 27%. Net margin will improve modestly from 13.2% in 2010 to 13.6% in 2012,primarily boosted by bigger profit contribution from high-end technical services (versus low-end tubular business). Our forecasts are much more conservative than management’s targetof 12%-18% throughout the next five years.

Low leverage with abundant funding for capexAnton had a net cash position of RMB138mn as of end-Jun2010, and we forecast the companyto elevate its gearing level at highly comfortable levels of 0.2% and 4.6% in order to fund itscapex of RMB195mn and RMB215mn in FY11/12 respectively. Management indicated anorganic capex budget of RMB500mn in next three years.

Weak working capital managementThe company’s account receivable day was lofty at 234 and 263 in FY09 and 1H10 respectivelydue to the favorable trade terms granted to the large state-owned customers namely CNPCand Sinopec. Although management said it would strive to improve the working capitalmanagement, we do not expect receivable turnover to improve significantly in the near futureas CNPC and Sinopec have strong negotiating power over their service suppliers.


- 24 -

* Oil Services Index includes BHI, CAM, DRC, FTI, HAL, NOV, SLB, and WFTSource: Bloomberg

Figure 32: OSX Index tracks the oil price in the previous up-cycle

Source: Bloomberg and Core Pacific-Yamaichi

Figure 33: Forward PER and EPS growth of OSX Index duringthe previous up-cycle

A laggard to price rallies of oil and peers

Global oil service sector in the process of re-rating amid an oil market up-cycleThe oil industry is in the up-cycle and this will last for several years with oil price (in termsof WTI) likely to exceed US$100/bbl in the coming years. Referring to the previous oilindustry up-cycle, the US Oil Services Index traded at a range of 10.3x – 35.6x 12-Mforward PER during May2003-Jun2008. Currently, the US OFS peers trade at an average of14.8x forward PER, suggesting that current valuation is undemanding and there is room forfurther upside if oil price continues to head higher.

Anton – a laggard in an oil bull marketAlthough the Oil Services Index and COSL share prices have rebounded sharply from theirtrough along with the oil price, Anton’s price lags behind them despite its faster growthpotential (figure 34). We believe Anton would catch up with peers in the future if it can deliverstrong results in the next two years.

Source: Bloomberg

Figure 34: Anton’s price rebound is the weakest but iscatching up

Source: Core Pacific-Yamaichi

Figure 35: Anton’s forward PER and standard deviations

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- 25 -

Undervalued OFS company. BUY with 12-M TP HK$1.45

Set 12-M TP at HK$1.45 based on PEG methodology. Initiate with BUYDue to the cyclical nature of the oil and gas E&P industry, we do not prefer PB or DCFmethods to valuate an OFS company. PE method should be the most appropriate methodbut we do not think it suitable for Anton due to Anton’s relatively short operating and listinghistory. PEG should be the best methodology to capture the oil market rally and Anton’srapid growth rate in the near-term. Compared with US peers 10-12 PEG at an average of0.89x while COSL at 1.12x, we believe Anton’s 0.62x is relatively low despite its faster EPS10-12 CAGR of 29.2% versus US peers’ average of 22.8% and COSL’s 12.9%. Weconservatively set our target PEG multiple at 0.8x, translating into 12-M TP of HK$1.45. Ourtarget PEG multiple is at a discount to those comparables because Anton has poorer stockliquidity, smaller operation scale and shorter operating and listing history.

US OFS companies should be the closet comparablesThere is no independent OFS company listed in Hong Kong and A-share market for directvaluation comparison with Anton. We think US OFS companies are the best comparables,followed by China Oilfield Services (COSL) (2883 HK).

Comparison to US-listed peers: We view the US OFS companies as having the mostsimilar service offering with Anton but the geographical business mix is starkly different asthose US peers are much less focused on China market. Although Anton’s technology leveland product range are inferior to the US peers, Anton would enjoy much faster growth thanUS peers as China’s high-end OFS market is in its rapid growth stage and Anton’s technologylevel and service quality are rapidly catching up with those of the US peers.

Comparison to Hong Kong-listed peer: COSL is the closet comparable to Anton amongthe Hong Kong-listed stocks but there are two main differences between them: 1) COSLsolely provides offshore OFS versus Anton’s onshore OFS and 2) COSL’s offshore wellservices segment accounted for ~25% of total 1H10 revenue versus Anton’s 66% of1H10 revenue.

Table 13: Sector valuation comparison of oil and gas E&P equipments and services companies (as at 2 February 2011)Company Bloomberg Closing Mkt cap PER PBR Yield PEG EPS

code (Local (mn, (x) (x) (%) (x) CAGR(%)currency) LC) 09 10F 11F 09 10F 11F 10F 11F 10-12E 10-12E

PRC O&G E&P equipments & servicesTSC Offshore Group 206 HK 1.88 1,276 na 15.2 10.5 1.1 1.1 1.0 0.0 0.0 0.34 45.1China Oilfield Services 2883 HK 15.24 112,850 13.5 14.6 13.0 2.9 2.7 2.3 1.1 1.3 1.12 12.9Honghua Group 196 HK 1.03 3,321 na na 16.1 0.8 0.8 0.8 0.6 1.1 0.49 353.9Anton Oilfield 3337 HK 1.05 2,198 58.8 16.5 12.7 1.4 1.4 1.3 2.9 4.1 0.62 29.2Shandong Molong 568 HK 10.02 7,834 11.1 8.6 5.8 2.5 1.5 1.2 1.2 1.2 0.25 33.7Anhui Tianda Oil Pipe 839 HK 3.63 2,946 13.8 14.1 6.6 1.8 1.7 1.4 1.2 2.1 0.20 70.0Sub-average 24.3 40.5 10.8 1.8 1.5 1.3 1.2 1.6 0.51 90.0Global OFS companiesSchlumberger SLB US 89.64 41,393 30.7 23.3 17.9 7.9 6.5 5.5 0.8 0.8 1.06 22.1Halliburton HAL US 45.51 29,564 22.1 15.6 13.2 1.3 1.3 1.1 0.9 0.9 1.04 15.0Baker Hughes BHI US 68.55 18,039 30.5 18.4 14.7 5.2 4.7 4.2 0.0 0.0 0.90 20.5Weatherford WFT US 24.33 3,361 44.2 19.2 13.3 3.6 3.5 2.9 0.4 0.4 0.57 33.7Sub-average 31.9 19.2 14.8 4.5 4.0 3.4 0.5 0.5 0.89 22.8Total average 23.6 24.7 14.8 3.0 2.8 2.4 1.2 1.4 0.83 37.1Source: Bloomberg and Core Pacific-Yamaichi (estimations for TSC Offshore and Anton only)


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Investment risks

Low order visibilitySince Anton’s OFS is project-based, the revenue stream is highly uncertain and may notrecur in the future. Moreover, the delivery duration of OFS is short and order visibility isextremely low in the OFS market.

High customer concentrationAnton’s revenue relies heavily on PetroChina, whose revenue contribution made up ~70% ofAnton’s total revenue, followed by Sinopec. Any significant capex reduction and deteriorationof business relationship with these two PRC onshore oil giants would hit Anton’s earningssubstantially.

Sensitive to oil price changeSince PetroChina and Sinopec’s E&P capex are highly sensitive to oil price change, anysharp fall in oil price would dent Anton’s OFS revenue substantially. Anton may also faceOFS price reduction risk during the oil market down-cycle, which had happened once in 2009.

Keen market competition from international OFS companiesIf the international OFS companies, whose technology and service ranges are superior toAnton, shift their focus on and strengthen their presence in China onshore OFS market,Anton may not be able to compete with them.

Great progress in OFS capability of SOE companiesState-owned oil giants may strengthen their high-end OFS capability substantially and thismay pose a threat to Anton’s high-end OFS business in China.

Slower-than-expected progress in unconventional gas and other newmarketsThe development of unconventional gas in China may not be as smooth as the centralgovernment expects and thus Anton may not be able to reap additional growth opportunityfrom this new market. The development in UGS, CCS and overseas O&G fields may also beslower-than-expected and Anton would lose another growth driver.

Tight working capital cycleAlthough trade credit quality of PetroChina and Sinopec is high, Anton may find it difficult tospeed up its cash conversion cycle due to its weak bargaining power against the two SOEs.


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Table 15: China natural gas resources by gas basin (trn m3)Prospective Geological Recoverable

Tarim 11.3 8.9 5.9Ordos 10.7 4.7 2.9Sichuan 7.2 5.4 3.4East China Sea 5.1 3.6 2.5Qaidam 2.6 1.6 0.9Yinggehai 2.3 1.3 0.8Bohai Bay 2.1 1.1 0.6Qiong Southeast 1.9 1.1 0.7Songliao 1.8 1.4 0.8Others 10.8 6 3.6Total 55.9 35 22Source: CNPC (latest resources survey in China, 2005)

Source: CNPC

Appendix I: China major natural gas fields


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Source: US DOE

Figure 36: Shale gas proved reserve jumped sharply in US

Source: US DOE

Figure 37: Increasing shale gas production in US

162 166 168 170 174 184 191 193 189 193

60.634.423.3

0

50

100

150

200

250

300

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Tcf Conventioanl NG Shale gas

18 18 17 17 17 16 17 16 16 16

1.3

3.12.1

0

2

4

6

8

10

12

14

16

18

20

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Tcf Conventional NG Shale gas

Appendix II: US shale gas market development

What is shale gas?Shale is sedimentary rock that is rich in organic materials. Shale gas is natural gas producedfrom shale formations that usually function as both the reservoir and source for the naturalgas. Shale gas is primarily comprised of methane (CH4), but some formations do producewet gas as well.

New technologies lead to commercialization of shale gas production inthe USNew applications of hydraulic fracturing technology and horizontal drilling have been thegame changers of the US shale gas market. Horizontal drilling is highly effective because asignificant amount of natural gas is often trapped within the spaces and fissures of the shale.These fractures are vertical and are often missed by traditional drilling. Rather than drillingstraight down, horizontal drilling bores a well deep into the earth to the appropriate layer,and subsequently drills sideways through the shale. Then drillers employ a process calledhydraulic fracturing. This aids in the recovery process by increasing the size of the existingfractures or creating new fractures altogether. The particulates used in the fracturing processkeep the fractured areas open, which allows the natural gas to flow upward through the wellmore easily. The shale ordinarily has insufficient permeability to allow significant fluid flow toa well bore. Thus, most shale deposits are not commercial sources of natural gas. However,hydro fracturing provides the permeability necessary to extract significant quantities of naturalgas economically.

Unconventional gas becomes the main gas reserves of the USLed by the new drilling technologies, shale gas in the US is rapidly increasing as a sourceof natural gas, offsetting declines in production from conventional gas reservoirs and leadingto major increases in reserves of US natural gas. The industry has found proven reserve ofshale gas of 60.6 tcf or ~22% of existing US total dry NG reserves, according to the USDepartment of Energy (DOE). The DOE also estimates that total annual production volumesof 3-4 tcf may be sustainable for decades with these new resources. By 2018, the DOEestimates that unconventional gas (shale, coalbed, tight gas) will account for ~39 bcf/day.The majority of the supply growth from 2010 to 2018 is expected to come from shale gas.The DOE’s shale gas production estimate of ~10.8 bcf/day in 2013 equates to annualproduction of ~4 tcf, which will double the ~2 tcf produced in 2008.


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Profit and loss (consolidated)Year to 31 Dec (RMB mn) 2008 2009 2010F 2011F 2012FRevenue 763 690 847 1,092 1,369

Well completion 241 214 321 404 493Down-hole operation 102 89 240 365 515Drilling technology 70 88 84 115 149Tubular services 341 288 202 208 212

Opex (607) (656) (683) (875) (1,085)Other income (15) 4 1 1 1EBITDA 167 72 225 293 375EBIT 142 37 165 218 285Net finance costs 13 2 (0) (5) (9)FX gain/(loss) (51) (1) 0 0 0Results of associates 1 (1) (1) 1 1Profit before tax 105 38 164 213 276Income tax (33) (1) (36) (48) (63)Minority interests (4) (6) (16) (20) (26)Net profit 68 32 112 145 187EPS (RMB) 0.033 0.015 0.053 0.069 0.089DPS (RMB) 0.027 0.009 0.024 0.031 0.040

Balance sheet (consolidated)As at 31 Dec (RMBmn) 2008 2009 2010F 2011F 2012FTotal Assets 1,925 1,791 2,101 2,419 2,696Current Assets 1,307 1,068 1,262 1,459 1,612

Cash & equivalents 423 344 188 162 91Inventory 203 212 378 460 538Accounts receivable 453 430 557 658 758Others 229 83 139 180 225

Non-current Assets 618 724 839 959 1,085PP&E 248 334 397 469 557Intangible assets 291 312 365 413 450Associates & JCEs 52 51 50 50 51Others 27 27 27 27 27

Total Liabilities 375 245 413 601 712Current Liabilities 369 243 397 572 681

Accounts payable 124 103 189 264 321Bank borrowings 7 50 74 141 155Others 239 90 134 167 204

Non-current Liabilities 5 2 16 29 32Bank borrowings 0 0 13 25 27Others 5 2 3 4 4

Total Equity 1,551 1,546 1,688 1,818 1,984Shareholders’ equity 1,519 1,511 1,638 1,747 1,887Minority interests 31 35 51 71 97

Net cash / (debt) 416 294 101 (5) (92)Net working capital 938 825 865 887 931Total invested capital 1,135 1,252 1,587 1,823 2,076

Sources: company data and Core Pacific - Yamaichi

Cash flow (consolidated)Year to 31 Dec (RMBmn) 2008 2009 2010F 2011F 2012FOperating Cash Flow 11 52 1 145 202

Pre-tax profit 105 38 164 213 276DD&A 26 35 60 75 90Change in WC (175) (26) (185) (95) (100)Others 56 5 (37) (49) (64)

Investing Cash Flow (323) (279) (175) (195) (215)Free Cash Flow (312) (284) (192) (100) (79)Financing Cash Flow (302) 196 20 33 (38)

Equity financing 43 0 0 0 0Chg in bank loans (157) 43 38 79 17Dividend 0 (57) (18) (50) (65)Others (188) 210 0 5 11

Net cash flow (614) (30) (154) (17) (51)Ending cash 313 277 119 102 50

Financial ratiosYear to 31 Dec (%) 2008 2009 2010F 2011F 2012FMomentum

Revenue 55 (10) 23 29 25EBITDA 16 (57) 212 31 28EBIT 6 (74) 340 32 31Net profit (39) (53) 249 30 29EPS (37) (53) 249 30 29

MarginEBITDA 21.9 10.4 26.5 26.9 27.4EBIT 18.6 5.4 19.5 20.0 20.8Net profit 9.0 4.6 13.2 13.3 13.6

ReturnROIC 7.8 2.8 8.1 9.3 10.6ROE 4.5 2.1 6.8 8.3 9.9ROA 3.6 1.8 5.3 6.0 6.9

Financial riskNet gearing Net cash Net cash Net cash 0.2 4.6Interest coverage (x) na na 700.5 40.5 30.0

LiquidityCurrent ratio 3.5 4.4 3.2 2.6 2.4Quick ratio 3.0 3.5 2.2 1.7 1.6

OthersEffective tax rate 32 2 22 23 23Payout ratio 83 56 45 45 45

Semi-annual breakdownYear to 31 Dec (RMBmn) 1H08 2H08 1H09 2H09 1H0FRevenue 310 453 324 366 337Opex (253) (354) (299) (357) (277)Other income 0 (15) 2 2 (0)EBIT 57 84 26 11 60Profit before taxation 20 85 29 10 59Taxation (12) (21) (4) 3 (13)Net profit 8 60 21 11 40

anton oilfield 3337

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