Honghua Group, the mainland's largest maker of rigs for land-based oil and gas drillers, is eyeing opportunities to buy or co-operate with more firms with expertise in making drilling equipment used in unconventional energy exploitation.
The Sichuan province-based firm is keen to acquire know-how in making tools used in the fracturing of underground rock formations to enhance oil and gas recovery, as well as those used to strengthen well holes to enhance efficiency of the flow of petroleum or gas to the surface.
Unconventional oil and gas sources, such as those adhering tightly to coal seams and shale rocks, are hard-to-reach energy resources whose exploitation has only been made economical on large-scale production in the United States in the past few years. This is because the resources are trapped in rock formations with particular characteristics that make them hard to extract using traditional production methods and equipment.
But the growth prospect is good given the resource's huge reserves.
"We don't have specific acquisition targets, but we want to beef up areas where we are lacking, such as tools used in hydraulic drilling," Honghua chairman Zhang Mi said.
In December last year, Honghua formed a joint venture in Gansu province with Gansu Huateng Petroleum Machinery Manufacturing, a maker of trucks and pressure pumps. It took a 70 per cent stake by injecting 42 million yuan (HK$51.3 million) in cash and 39 million yuan in assets. Huateng contributed 36 million yuan in assets.
The joint venture, Honghua's first in the unconventional energy segment, will focus on making equipment used in the fracturing of rock formations to facilitate oil and gas recovery.
So-called hydraulic fracturing involves the creation of fractures in rock layers through injecting pressurised fluid into the rock so that oil and gas can move into a reservoir for pumping.
Zhang said Honghua had been in talks to supply equipment to potential bidders for the second round of shale gas exploration concessions on the mainland. The concessions are expected to be handed out this month. Honghua has yet to receive any shale gas-related order, domestic or export.
Honghua has been showing its demonstration shale gas drilling rig in the US and aims to launch it next year. Many US shale gas producers are loss-making because of low prices and oversupply of gas.
"Cost control is key to success in shale gas production since energy accounts for 70 to 80 per cent of production costs," Zhang said. "By replacing diesel with natural gas as the energy source for the power drilling equipment, we can save operating costs by over 10 per cent through savings on manpower and land area used."
But Honghua's product may need the construction of a local grid to deliver power generated by gas-fired electricity, which takes time to negotiate and build.
Honghua last month posted a fourfold jump in net profit to 209.7 million yuan in the first half from 52.8 million yuan a year ago as sales grew 52 per cent to 1.97 billion yuan. Gross profit margin increased to 37.6 per cent from 25.5 per cent on cost savings from larger production.
The firm was badly hit by the global crisis that saw it post losses of 184 million yuan in 2010 and 128 million yuan in 2009.
Zhang said it had US$660 million worth of uncompleted orders for more than 60 rigs on hand. It delivered 22 rigs in the first half. About 80 per cent of this year's sales were exports, mainly to South America.