Honghua to move into drilling services after losses from rigs

PUBLISHED : Thursday, 15 April, 2010, 12:00am
UPDATED : Thursday, 15 April, 2010, 12:00am

Honghua Group, the world's second-largest maker of land oil drilling rigs, is diversifying into drilling services to boost sales after it plunged into a loss last year as the global financial crisis hit its export-heavy sales.

The Sichuan company aims to source half its sales from services in three to five years, chairman Zhang Mi said after announcing a net loss of 127.34 million yuan (HK$144.77 million) for last year, against a median estimate of a 296.57 million yuan profit of four analysts polled by Thomson Reuters. The company recorded a profit of 511.97 million yuan in 2008.

A 183.45 million yuan second-half loss was booked last year largely because of a 123.26 million yuan provision on receivables from a Russian customer hurt by the credit crisis.

Sales last year plunged 58.6 per cent to 1.96 billion yuan as falling oil prices saw customers cut drilling and cancelled new rig orders. Almost 90 per cent of sales were from abroad.

Higher expenses on contract talks, technological input from a partner and quality control improvement also hit the bottom line. The company was also affected by an embarrassing 11-month revocation of a key international quality certification, which it regained last month.

Honghua sold only 40 rigs last year, missing a target of 94 set in September and much lower than the 140 to 150 targeted before the crisis hit. It sold 94 rigs in 2008.

The company had uncompleted orders of 50 rigs, Zhang said. He refused to disclose the total contract value. 'This year's sales will certainly be better than last year, but we won't be able to reach 2008 level,' he said.

With an annual output capacity of 150 rigs, the firm is redeploying its resources to develop the drilling services business. It has hired a former PetroChina veteran to head a 200-strong team. It has dedicated three rigs in inventory valued at US$15 million to US$20 million each for the drilling business.

Honghua is also looking to take small stakes in overseas oil and gas projects with a view to get more equipment and service orders, using the HK$600 million of listing proceeds set aside for acquisitions, joint ventures and strategic alliances.

Zhang said it was also eyeing opportunities to sell rigs to a PetroChina and Royal Dutch/Shell joint shale gas exploration project in Sichuan province. Most of Honghua's rigs sold to United States customer Nabors were for the exploitation of hard-to-reach shale gas, whose commercialisation has become possible with technological breakthrough in the US.

Honghua's share price closed 5.9 per cent higher at HK$1.44 yesterday, after falling as much as 3.7 per cent on the results disappointment.

Looking abroad

Honghua Group is eyeing stakes in overseas oil and gas projects

A huge provision on receivables from a Russian customer led the company to record a loss for the year of, in yuan: yuan127m