China’s Brightoil eyes multi-billion dollar oil and gas acquisition

PUBLISHED : Tuesday, 27 September, 2016, 6:23pm
UPDATED : Tuesday, 27 September, 2016, 11:15pm

Brightoil Petroleum (Holdings) said it is looking to buy oil and gas resource assets worth over US$1 billion despite its heavy debt load, after posting a sharp drop in annual profit and making a surprise reversal in asset impairments booked earlier.

The Shenzhen-based company, one of mainland China’s largest privately-controlled oil firms, is banking on a marked recovery in oil prices in the future to support its expansion ambitions and aggressive asset valuation approach.

“We will only consider buying assets worth over US$1 billion, preferably US$2 billion to US$3 billion,” chairman Sit Kwong-lam told reporters on Tuesday. “We are mostly looking at natural gas projects as oil prices have been on a roller coaster ride, while gas is a cleaner energy with good demand growth prospects.”

Brightoil on Monday posted a 39.1 per cent year-on-year fall in net profit to HK$844 million for the 12 months to June 30.

The poor result was blamed on a 80.6 per cent fall in oil and gas production profit to HK$276 million, of which an underlying loss of HK$178 million was recorded from offshore China oilfield stakes it bought in mid 2014 for US$946 million when oil prices were more than double current levels.

These losses were partially offset by a 79.3 per cent jump in fuel transportation profit to HK$547 million on the back of rising crude oil imports by China amid low oil prices. Profit from fuel trading and marine fuel supply fell 4 per cent to HK$727 million.

In late February Brightoil booked HK$619 million of impairment losses on its mining interests, property, plant and equipment in its interim results for the six months to December 31.

However, for the full year it booked HK$107 million of gains on the assets.

Chief financial officer Danny Tan Yih Lin said the reversal came after the firm hired a consultant to reassess the value of the offshore China oilfields, based on a revised project development and production plan.

The revision saw the fields’ peak production cut to 45,700 barrels per day, from 60,000 barrels previously. This entails a deferral of oil production, so that more oil will be produced in later years when oil prices are projected by the consultant to be much higher.

“The revision means our stakes in the fields are estimated to be worth more than their book value, and hence the impairment reversal,” Tan said.

CLSA oil and gas analyst Nelson Wang said Brightoil’s rationale for the reversal within the space of seven months is unconvincing, adding that he believes oil prices will only average US$60 to US$65 a barrel in the long term given ample global supply.

Wang said the reversal also goes against the principles of international financial reporting standards, although he conceded management ultimately has discretion on the firm’s impairment decisions after consulting with its auditors.

In early June Brightoil announced the resignation of Deloitte Touche Tohmatsu as its external auditor, a job it held for more than a decade, with PricewaterhouseCoopers being appointed to take over.

Brightoil said at the time a change of its long-time auditor would help “enhance the independence of its auditor” and improve corporate governance.

Wang said it would be challenging for Brightoil to realise an acquisition of US$2 billion to US$3 billion, given its elevated debt load. Its net borrowings of HK$8.88 billion amounted to 79 per cent of its shareholders’ equity at the end of June.

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