Honghua sees pick-up in demand for oil rigs
Demand for oil drilling rigs, which generally lags growth in demand for oil, is showing signs of picking up, according to the chief of Honghua Group, the world's second-largest maker of land-based drilling rigs.
'The recovery is not just talk. We have seen action,' said Honghua chairman and chief executive Zhang Mi. 'We are seeing the kind of quarterly new order flows we saw in 2007 and the first half of last year, especially in July and August.'
But the green shoots of revival would be too late to rescue the group's bottom line in the second half, added Zhang, who reported to shareholders last week that Honghua suffered a disappointing 55.4 per cent year-on-year fall in net profit to 56.11 million yuan (HK$63.68 million) in the first half.
Since then, however, the Sichuan province-based oil rig and component maker had received more than US$200 million worth of new orders and was in discussions with customers on potential orders worth a similar amount, Zhang said.
According to United States oilfield services firm Baker Hughes, the number of active drilling rigs in North America rebounded from a low of 876 in June to 1,009 in the first week of this month. The number had peaked at 2,031 in September last year.
Outside the US, however, the fall in rig counts has been more moderate.
While the rebound in the international oil price had played a role in improving demand for rigs, government support had also helped, Zhang said.
In the US$120 million contract the firm won in July to sell rigs to Russian oilfield services provider Eriell, the latter received credit support from the Export-Import Bank of China.
Another customer, Shanghai Zhenhua Heavy Industry, which ordered 800 million yuan worth of rigs from Honghua, got a US$10 billion, five-year credit facility from China Development Bank. The deal forms part of a US$2.2 billion contract Zhenhua signed to supply drilling equipment to Spain.
'China is boosting exports by supporting demand overseas,' Zhang said, adding that the four- to six-month lead time between orders and delivery meant most orders would be reflected in next year's accounts.
Analysts expect Honghua to post a net profit of 350.26 million yuan for the full year, down 31.6 per cent from last year.
First-half sales were hurt by a decline in rig sales to 27 units from 31 a year earlier owing to depressed global demand and a 13.7 per cent fall in the average selling price, as configuration requirements dropped.
Many orders were delayed or pulled as oil explorers and producers cut back on spending. The group expects to miss this year's sales target of 94 units, and Zhang declined to give a new projection.
To hedge against the risk of future market downturns, Honghua plans to spend about US$5 million to set up an oilfield services unit in the Middle East as it tries to diversify its downstream operations. It plans to build assembly and sales facilities on a site of more than 20,000 square metres in Dubai, United Arab Emirates, and has set up a unit in Hong Kong to run the business.
