Driller SPT well sure of more profit in 2013
But industry analysts see cracks in the bedrock market conditions needed to sustain margins for the sector's service providers
After seeing its share price triple in 2012, oil and gas drilling firm SPT Energy is looking ahead to sales and profit growth in 2013 on par with its 25 per cent average of the past three years, its chief says.
That's despite warnings from analysts that the sector is due for a correction following its 30 per cent to 329 per cent share price gains this year on the back of speculation about demand growth for technology for hard-to-extract energy resources such as shale gas.
Asked if he was optimistic SPT could deliver the profit growth to match its strong share price gains, Oliver Wang Guoqiang, chairman and chief executive of the Beijing-based privately controlled firm, said the gains were not unreasonable and its management was confident of sustaining growth similar to that of the past three years.
"SPT's share price-earnings multiple was much lower than its peers' when we listed [a year ago]. The gap has narrowed as we delivered good financial results," he said.
Investors bet big on industry service providers after reports emerged that China had the world's largest resources of shale gas, natural gas tightly adhered to underground rock formations, and that Beijing had plans to repeat the United States' success in exploiting this kind of previously unviable resource.
"These stocks have been overbought and are prone to profit-taking," Mirae Asset Securities head of energy research Gordon Kwan said. "As we expect next year's oil price to be similar to this year's average and oil and gas producers have to spend more to find new reserves, given the days of easy discoveries are gone, it is questionable whether they are still willing to give service providers the same profit margins."
Despite rapid shale gas development in the US, analysts have warned of slower growth potential in China due to water shortages, complex geology, underdeveloped gas delivery infrastructure, insufficient rivalry among gas producers to spur innovation and greater barriers in obtaining drilling rights.
Wang conceded the challenges meant business from shale gas development would remain a small portion of the sector in the foreseeable future. But he is optimistic of its long-term potential since innovation and experience from the US would be a great help to Chinese firms.
Hong Kong-listed SPT this month won a tender to provide drilling fluid services for 14 shale-gas wells to be drilled by China National Petroleum, parent of PetroChina, next year. While the contract had not been signed, Wang said the work was estimated to be worth 20 million yuan (HK$24.54 million), adding that SPT was only charging a margin in line with that of the entire firm to grab more market share. SPT made a net profit of 181.8 million yuan last year on sales of 1.32 billion yuan.