China Oilfield Services (COSL), which is preparing to sell up to US$350 million worth of shares in a global offering, is to report lower profits due to 'abnormally high' depreciation charges stemming from a revaluation of its fixed assets. COSL, a sister company of China's dominant offshore oil producer CNOOC, recorded a 1.2 billion yuan (about HK$1.12 billion) surplus from the April revaluation exercise which must be partly amortised. However, the higher depreciation charges will not affect the valuations by COSL's underwriters, which are valuing the company based on its cash flow rather than profits. The higher future depreciation expenses result from a 357 million yuan deferred tax liability based on a 33 per cent tax rate on the 1.2 billion yuan surplus. The additional depreciation is not tax deductible under mainland tax laws, but is deductible under Hong Kong's system. Merrill Lynch - a joint sponsor of COSL's listing - said in a research report the revaluation was not required under most Western accounting regimes. The revaluation would result in 103 million yuan in additional depreciation charges this year out of a total depreciation expense of 536 million yuan, according to Merrill. 'The depreciation charges are abnormally high as depreciation rates are much lower than the useful life of much of COSL's asset base, which is in excess of 20 years,' Merrill said. COSL is preparing to sell US$250 million to US$350 million worth of shares in its global offering. Merrill has put the company's fair value in a range of 4.5 to 6.5 times the 2003 forecast enterprise value to earnings before interest, taxes, depreciation and amortisation - a cash flow-based metric. That equates to a 4.83 billion yuan to 7.35 billion yuan valuation for the whole company. This compared with the 7.34 billion yuan to 7.87 billion yuan estimated by joint sponsor Credit Suisse First Boston and 6.3 billion yuan to nine billion yuan by underwriter BOCI. Last year COSL sourced 53 per cent of its revenues by providing oil and gas drilling, well services, geo-physical work, marine support and transport services to CNOOC. COSL has operated in offshore China for 20 years, and competes with smaller rivals, including sister company CNOOC Offshore Oil Engineering, and other foreign and domestic players, including Sinopec National Star. Net profit was 88.1 million yuan in 1999. It rose to 287 million yuan in 2000, but fell to 273 million yuan last year due to a weak performance by its geophysical operation. Merrill forecasts a profit of 355 million yuan for this year.