The best growth yet to come, says Cosl

PUBLISHED : Thursday, 22 March, 2012, 12:00am
UPDATED : Thursday, 22 March, 2012, 12:00am

China Oilfield Services (Cosl), the nation's dominant drilling services provider, has rejected concerns it may have seen its profit growth peak as it faces greater rivalry and rising costs.

'I don't believe peak earnings growth is already behind Cosl. We have yet to see it,' chairman Liu Jian said.

In a research report, Macquarie Securities' analysts said they thought Cosl was set to deliver several years of near-zero earnings growth after lifting earnings per share by an average 35 per cent between 2005 and 2010.

They cited double-digit percentage cost inflation in overseas markets in which Cosl is increasingly exposed to, and high start-up costs related to its deployment of three new drilling rigs in the North Sea, as well as a 'multi-year learning period' it has to go through to establish credibility in the technically more challenging deepwater market.

Cosl this week posted a 2.1 per cent decline in net profit for last year to 4.04 billion yuan. This is despite revenues rising 4.9 per cent to a record high of 18.43 billion yuan last year, as the operating profit margin of its main profit contributor, drilling services, fell to 29.9 per cent from 35.6 per cent.

Chief financial officer Li Feilong said the margin decline was due to cost inflation, loss of operating days in some rigs that underwent upgrades or redeployment, and work stoppages in civil-war-torn Libya.

Via the US$2.5 billion acquisition in 2008 of Norway's Awilco, Cosl inherited three deepwater rigs. They will allow it to make higher margins than its fleet of mostly shallow-water rigs in the long term, but in the short term it needs to overcome higher costs and a lack of operating record.

'Cosl's entrance into the deepwater market is not as challenging as some people think as our capability has grown tremendously in the past few years,' chief executive Li Yong said.

Cosl is in talks with its partners in Libya about compensation for damaged equipment. Liu said it was too early to consider resuming work there. He expected work volume to be higher this year, but drilling rates were likely to be flattish. The share price fell 5.1 per cent to HK$10.5.