China Oilfield sees little impact in price increases

PUBLISHED : Monday, 08 September, 2003, 12:00am
UPDATED : Monday, 08 September, 2003, 12:00am

Long-term horizons on development plans ensure demand for its services

Oil price fluctuations have little bearing on demand for services supporting oil and gas exploration, and drilling activities, according to a senior manager of China's largest offshore services provider.

Wu Mengfei, chief financial officer of China Oilfield Services, a sister company of offshore oil and gas producer CNOOC, said demand for oilfield services would not be affected even if oil prices fell to US$18 a barrel from US$29 now. China Oilfield Services and CNOOC are Hong Kong-listed subsidiaries of China National Offshore Oil Corp.

China Oilfield Services drills oil and gas wells, collects data on rock and petroleum reservoir formations, maintains wells, transports materials and personnel to offshore facilities, and maps undersea geological formations.

For every dollar of capital expenditure CNOOC spends, some 15 cents go to procuring services of China Oilfield. CNOOC accounts for about half of China Oilfield's turnover, and the remainder mainly from foreign oil firms' offshore drilling activities.

'We do not worry about oil price movements,' Mr Wu said. 'As long as it is not going down to US$7 or $8, there would be no problem with demand for our services.'

Major companies' oil field development programmes are based on long-term forecasting of prices - usually conservatively assumed to be less than US$20.

'So today's oil price has no big impact on their long-term capital expenditure on exploration and development,' Mr Wu said. 'Big companies' long-term horizons are not five or 10 years but 20 to 30 years or even longer.' He said many investors found the firm's technical and diverse businesses hard to understand, and tended to treat it like an oil company. While CNOOC trades at a price-to-earnings ratio of only 11.8 times this year's forecast profit, China Oilfield Services commands a ratio of 19.2.

Mr Wu said oil companies' lower price-to-earnings multiples were related to the price risks they faced, while oilfield services firms traded at higher ratios due to their more stable business nature.

'Large oil companies compete by accumulating reserves for production 20 to 30 years later.

'They would not increase or cut their exploration and drilling activities just because oil prices went up or down, whereas small oil firms may react to short-term cash flow changes stemming from oil price movements ' he said. China Oilfield saw a 24 per cent year-on-year revenue drop in its well services division, which focuses on collection of data on rock and petroleum reservoir formations, due to competition and an unusual pattern of demand.

A rebound is expected in the second-half as more development wells are drilled in the second half.

Competition on services for development wells is less keen.