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China Oilfield Services' biggest growth driver was its drilling division as it deployed more rigs. Photo: Xinhua

Drilling division’s 32.6pc jump in profit boosts China Oilfield Services

China Oilfield Services posted a 39.1 per cent year-on-year rise in first-half net profit to 4.42 billion yuan (HK$5.56 billion) on Tuesday night.

Shares of China Oilfield Services (COSL), the nation’s dominant offshore oil and gas drilling services provider, rose 8.5 per cent on Wednesday after it posted a 39.1 per cent year-on-year rise in first-half net profit to 4.42 billion yuan (HK$5.56 billion) on Tuesday night.

They traded at HK$21.80 at 1.51pm, after surging as much as 13.4 per cent to HK$22.80 – the highest in seven months – in early morning trade.

The profit was 22.5 per cent higher than the 3.61 billion yuan average estimate of analysts polled by Thomson Reuters.

First-half earnings per share grew a lower 31.6 per cent year on year to 93.13 fen, since COSL sold new shares that had an earnings dilution effect.

It’s clear that the global offshore capital expenditure cycle has turned
Neil Beveridge, Sanford Bernstein

The biggest growth driver was its drilling division, which posted a 32.6 per cent year-on-year rise in operating profit to 3.62 billion yuan, as it deployed more rigs, according to COSL’s filing to Hong Kong’s stock exchange.

The growth was also due to the booking of a US$65 million settlement in relation to a fee dispute between COSL and Norwegian customer Statoil Petroleum. Excluding this, the pre-tax profit growth would have grown around 31 per cent year on year.

To meet demand in first half of the year, it leased two jack-up rigs and deployed two others bought last year. Construction of yet another rig ordered by COSL began in May this year.

The two big drivers for the drilling division’s strong profit growth was a 10.2 per cent year-on-year rise in average daily income of its jack-up rigs, and a 31.9 per cent jump in the operating days – a measure of work volume – of its semi-submersible rigs, whose daily income averages more than twice that of jack-up rigs.

COSL operated and managed 33 jack-up rigs and 10 semi-submersible rigs in the first half.

Brokerage analysts were surprised by the increase in COSL’s jack-up daily rates.

“We were surprised that COSL could achieve a 10 per cent increase in jack-ups’ day income, versus our expectation of zero per cent in the environment of declining global jack-up utilisations and expected over-supply leading to a long-term [decline] in day rates,” Jefferies analysts wrote in a research note.

COSL chief executive Li Yong told a press briefing on Wednesday morning the increase was due to renewal of multi-year contracts at higher day rates in overseas projects.

He said another factor boosting drilling revenues was the drilling of two deep-water wells in the South China Sea, which had higher day rates.

“Excluding this and the Statoil settlement, profit was relatively stable year on year,” he said, adding drilling day rates were expected to be relatively stable in the second half of the year, given it had signed almost all of this year’s contracts.

Chief financial officer Li Feilong said deep-water operation accounted for 30 per cent to 40 per cent of revenues in its four operations – drilling, well services, transportation and marine support services, and geophysical and surveying services.

Still, the sharpest growth was seen in COSL’s division that prepares oil and gas wells for production. It saw first-half revenue grow 50.4 per cent year on year to 4 billion yuan, and operating profit jump 142 per cent year on year to 1.05 billion yuan.

Li Yong said it was mainly because of the relatively stable nature of the division’s operating costs, which meant a surge in work volume would bring about disproportionally high growth in profit.

The second-half profit outlook for the division hinges on whether it succeeds in becoming a general contractor in some projects, which could bring greater profits as well as higher risks.

The marine support and transportation services division, however, reported a 72.2 per cent year-on-year fall in first-half operating profit to 81.8 million yuan.

The decline was due to a 143.7 million yuan provision for asset impairment made on four chemical carriers, and higher repair and maintenance expenses for its self-owned vessels, it said.

Its geophysical and surveying services division saw operating profit rise 38 per cent year on year to 430.4 million yuan.

Some analysts have a cautious outlook on COSL despite the strong first-half performance.

“It’s clear that the global offshore capital expenditure cycle has turned, with global drillers offering more cautious forward guidance,” Sanford Bernstein senior analyst Neil Beveridge wrote in a note. “We believe regional day rates could decline at high single-digit rates this year and next year, which will provide headwinds to COSL’s earnings growth.”

He also expected capital expenditure by COSL’s biggest customer, sister firm CNOOC – China’s dominant offshore oil and gas producer – to slow and focus more on cost control, after profits fell last year on rising costs.

Li Yong rejected the concerns, saying: “Ever since 2005, people have not stopped asking if CNOOC’s capital expenditure will fall, but it has never fallen. On this issue, we are very confident.”

CNOOC’s capital expenditure rose to 91 billion yuan last year from 60 billion yuan in 2012 and 40.5 billion yuan in 2011. It has budgeted 105 billion to 120 billion yuan for this year.

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