Drilling services provider COSL expects deep-water revenue boost

PUBLISHED : Tuesday, 28 January, 2014, 1:35am
UPDATED : Tuesday, 28 January, 2014, 1:35am

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China Oilfield Services (COSL), the mainland's dominant provider of offshore drilling services, expects more work and a greater contribution from more capital-intensive deep-water jobs will lift revenues this year.

However, the company warned that the subdued outlook for oil prices will constrain the upside for drilling rates.

Chief executive Li Yong said this year's drilling rates with its largest customer, sister firm CNOOC, were flat, while those for some higher-end overseas jobs would see slight increases.

"Overall, rates are stable … some high-end jobs still have minor increases," he said. "However, hikes are increasingly difficult to negotiate as oil producers' outlook on oil price is not optimistic and this will in turn put pressure on rates for services providers."

Investor and public relations manager Helen Wu Yanyan said COSL expected deep-water operations to account for 20 per cent to 25 per cent of this year's total revenues, up from 17 per cent last year, after adding four deep-water rigs that attract higher drilling rates but also higher depreciation expenses since 2012.

CNOOC, which accounted for about 60 per cent of COSL's revenue last year, said on January 20 that it planned to lift its spending on exploration and the development of new wells by 16 per cent to 33 per cent this year, after a 24 per cent rise last year excluding spending by newly acquired Nexen in Canada. This bodes well for demand for COSL's services.

The supply and demand outlook of [the] global rig market is challenging
NEIL BEVERIDGE, SANFORD C. BERNSTEIN

Twenty-eight analysts polled by Thomson Reuters estimated that COSL would post a 33 per cent rise in net profit to 6.1 billion yuan (HK$7.75 billion) when it reports its results in March.

But Sanford C. Bernstein senior analyst Neil Beveridge projected profit growth of only 3 per cent this year and 11 per cent next year, saying rising costs and pressure on drilling rates would crimp profit margins. Macquarie Securities' analysts also estimated "low-single digit" percentage profit growth for both years.

Despite having raised HK$5.8 billion by selling new shares early this month, Liu said COSL had no concrete plan to buy drilling rigs, saying it would depend on whether it saw long-term demand from customers. Otherwise, it might lease instead of buying.

"It appears that COSL is entering a 'wait and see' mode by holding the investment in the near term and positioning itself to acquire new capacities post 2015 when [the] global rig market becomes [oversupplied]," Beveridge said in a note.

"The company acknowledged the supply and demand outlook of [the] global rig market is challenging with an imminent wave of new rig capacity addition and oil companies' [capital expenditure] cut."