Honghua Group unfazed by losses in drilling services

Mainland's leading rig builder sets aggressive targets to turn around sector next year

PUBLISHED : Monday, 25 August, 2014, 3:34am
UPDATED : Monday, 25 August, 2014, 3:34am


Honghua Group, the mainland's largest exporter of drilling rigs, expects to be able to turn around its loss-making oil and gas drilling services operation next year after a slump in the first half due to order delays amid a corruption probe at PetroChina.

While a new senior management at the nation's largest oil and gas producer might be more cautious when awarding contracts to third-party suppliers on conventional drilling services, the opposite might be true for unconventional gas drilling, said Honghua chairman Zhang Mi.

"As PetroChina is increasingly co-investing with other firms on new shale gas projects, the procurement of drilling services will be more transparent and open, which would give independent players like us more opportunities," Zhang told the South China Morning Post.

At least six senior executives of PetroChina and its parent firm China National Petroleum Corp have been detained to assist corruption probes and removed from their posts, resulting in delays in new projects and capital spending as new managers were installed.

PetroChina teamed up in May with state-owned energy-to-shipping conglomerate State Development and Investment Corp and state-owned oil-to-property conglomerate Sinochem to co-invest in exploring for natural gas trapped in shale rock formations in Chongqing.

It has also joined forces with Sichuan Energy Investment Group, a state-owned asset management arm of the Yibin municipality in Sichuan, and Beijing Guolian Energy Investment Fund for shale gas explorations in Changning, Sichuan province.

Previously, it mostly conducted explorations independently, or cooperated with international oil firms such as Eni, Hess and ConocoPhillips.

Honghua, which has an offshore engineering base in Jidong, Jiangsu province, said it had received a letter of intent from oil rig investor Orion Engineering and Management to build an offshore oil rig for US$320 million. A contract is expected to be signed in two months.

Honghua this month also signed a preliminary agreement to build six oil tankers for South Korea's Udin Engineering for more than US$200 million, to be delivered next year and in 2016.

Barclays' analysts said in a research note many first-time offshore rig builders would run into project delays and overruns.

"We believe Honghua faces an uphill task in avoiding that trend," the report said.

Zhang said it aimed to deliver within 30 months of the rig order, compared to the industry average of 36 to 42 months, and the price it would charge was 20 to 30 per cent below that of its rivals.

Despite the aggressive targets, he believes Honghua will not make a loss on its maiden offshore rig.

He also said the company had recruited experienced managers who worked for Korean and Singaporean rivals to head an offshore engineering team of more than 200 staff.

First-half profit of Honghua's bread-and-butter business, land-based drilling rigs manufacturing, jumped 37 per cent year on year to 426 million yuan (HK$536.4 million), but gross profit margin fell to 15.6 per cent from 17.7 per cent. Zhang said this was due to lower sales from high-margin products.

Its drilling rig parts procurement business saw operating profit fall 42.5 per cent to 43.9 million yuan, with operating margin dropping to 3 per cent from 6.5 per cent.

Sichuan province-based Honghua said last week its net profit for the period dropped 16.5 per cent to 199.7 million yuan. That was 16 per cent lower than the 237 million yuan average estimate of 16 analysts polled by Thomson Reuters.

Jefferies equity analysts said in a research note the lower-than-expected profit was due mainly to weak profit margins at Honghua's drilling services operation, which posted an operating loss of 60.9 million yuan.

The operating loss of the company's offshore oil rigs production operation amounted to 46.7 million yuan, compared to a loss of 28.6 million yuan a year earlier. The business has yet to record any profit since it began in 2011.