Energy

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

If China Inc. is selling something, is it a good idea to buy?

Follow the Money
Oil services companies haven't raised a cent from IPOs since last July
Source: Bloomberg data

That's the conundrum presented by state-owned giant China National Petroleum Corp.'s rather vague plans to carry out an initial public offering of its oilfield-services division.

You might  think it's not a good time to be marketing this sort of business. The number of drilling rigs in operation worldwide at the end of January was barely half those running 14 months earlier. Just $413 million has been raised in oilfield services IPOs globally since the start of 2015.

Counting Down
The number of drill rigs in operation worldwide just keeps falling
Source: Bloomberg data, Baker Hughes

Still, a listed CNPC oil-services business would be quite a prize. Shaving off its construction engineering, engineering technology, and equipment manufacturing units would create the fourth-biggest company in the sector globally after Schlumberger, Halliburton and Sinopec Oilfield.

Not So Little China
CNPC's oilfield-services unit would be the world's fourth-biggest by revenues as a standalone company
Source: Bloomberg data
Note: Revenue figures are trailing 12-month for listed companies. For CNPC, 2014 revenues for the Construction Engineering, Engineering Technology, and Equipment Manufacturing divisions have been summed

And contrarians could take that miserable rig-count data as a bullish indicator. Oilfield-services businesses are highly leveraged to any turn in the petroleum cycle, and should enjoy an outsized benefit if conditions improve. The oil majors have all been trimming capital spending in recent years as the falling oil price has slashed their operating cash flows, as Gadfly's Liam Denning has pointed out. When cash starts improving, starved capex budgets will be some of the first beneficiaries -- and that's good for the services industry, because oil producers' costs are the services companies' revenues.

Service With a Smile
The S&P 500's oilfield services subindex outperformed the E&P subindex after the 2008 crash
Source: Bloomberg data
Note: Figures have been rebased: Jan. 2, 2009=100

All of which begs the question of why CNPC should be selling. It may be futile trying to divine the motives of China's state-owned enterprises, but there's no urgent need for an IPO at the moment. CNPC isn't short of cash and could count on a State Council credit line even if it was. And generally, companies take advantage of market sentiment by carrying out IPOs of businesses in fashionable sectors, not ones that have been beaten down by a historic slump.

If CNPC is trying to hive off assets to meet Beijing's mandates for SOE reform, its refinery business -- which has attracted investment from Saudi Aramco, and is at a more attractive point in the cycle -- would be a better bet. Perhaps CNPC's managers want to shower blessings on equity market investors out of the goodness of their hearts?

There's one obvious alternative explanation: The company doesn't think those recovery-rally prospects look quite as rosy this time around. China's crude imports in January were 4.6 percent lower than the previous year, and the country's shift away from heavy industry caused exports of refined products to surge in December. Even buoyant automobile sales aren't helping so much, as government mandates encourage a shift toward more fuel-efficient electric and hybrid vehicles. The country's apparent oil demand has been flatlining for 12 months.

Becalmed
China's apparent oil demand has leveled off after a decade of growth
Source: Bloomberg data
Note: Apparent oil demand is calculated as refinery output plus net imports of petroleum products

The alternative to a sharp recovery in oil-services revenues is one where crude demand remains subdued and the debt problems of oil majors curtail fresh investment for longer than seen in previous cycles. That's precisely the situation where a far-sighted investor might want someone else to take on the risk of all their money-losing rigs.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net