China Oilfield Services eyes overseas growth to offset domestic woes

Offshore driller posted a first-half loss of 8.4bn yuan including goodwill writedown on Norway-based Awilco

PUBLISHED : Tuesday, 30 August, 2016, 6:53pm
UPDATED : Tuesday, 30 August, 2016, 6:53pm

China Oilfield Services (Cosl), which is embroiled in a dispute with Norway’s Statoil over suspension of service contracts amid a protracted industry downturn, has turned to the overseas market for growth to offset shrinking domestic demand.

Cosl, the sister firm of state-backed offshore oil and gas producer CNOOC, could see half of its revenue coming from foreign projects in four to five years, as its cost competitiveness may help it grab market share from international rivals, chief executive Qi Meisheng told reporters.

A decline in domestic orders, while those from abroad are on the rise, saw the contribution to Cosl’s total revenue from the overseas market surge past 40 per cent for the first time, in the first six months of 2016. That compares with 25 per cent in 2010.

“We’ve been working on expanding our overseas business in regions like North America and the Middle East,” Qi said. “We are also in talks on potential contracts in Africa and the Far East region, we expect to make some real progress in the year’s second half and next year.”

Cosl Monday posted a net loss of 8.4 billion yuan for the year’s first half, after booking 7.14 billion yuan in impairment of property, plant and equipment as well as goodwill writedowns. The results were in line with the company’s profit warning issued late last month.

The difficult times will linger around for one to two more years
Li Feilong, CFO, China Oilfield Services

The goodwill writedown was on Norway-based Awilco, which cost Cosl US$3.8 billion and was its largest acquisition to date. It was bought in 2008, at the height of a crude oil price boom.

Goodwill is an intangible asset in accounting terms, measuring how much premium a firm paid to buy another company above its fair market value.

Awilco had operations in the North Sea, Vietnam, the Middle East, Libya and Western Australia.

Cosl chief financial officer Li Feilong said further major asset writedowns were unlikely, unless the oil market further deteriorates.

“The toughest time should have already passed us,” he said. “But it does not mean there will be a substantial turnaround ... the difficult times will linger around for one to two more years.”

Chairman Liu Jian expected Cosl’s second-half operating profitability to be similar to that in the first half, when it booked an underlying loss of 1.3 billion yuan excluding asset writedown.

All four divisions of the company suffered operating losses.

Drilling services, which contributed half of total revenue in the first half, saw an operating loss of 400 million yuan, while well services, that help boost a field’s output and accounted for 31 per cent of total revenue, posted a loss of 180 million yuan.

Marine support services recorded a loss of 150 million yuan, compared with a 269 million yuan loss at the geophysical and surveying division.

The average utilisation rate of Cosl’s more than 52 drilling platforms stood at almost 60 per cent, close to the global industry average, Li said.

Cosl’s biggest customer CNOOC has slashed its capital expenditure by 33 per cent year-on-year in the first half of 2016, denting the former’s profits.

Cosl has also been hit by Norwegian oil producer Statoil’s cancellation of service contracts on two rigs around five years before they expired. One of these was resumed in March while the other one is still the subject of negotiation.

Cosl is seeking compensation from Statoil and reserved the right to take legal action.

Sanford Bernstein senior analyst Neil Beveridge said in a note that although Cosl has halved its capital expenditure on new capacity in the year’s first half to 2 billion yuan, the spending is still high relative to its net operating cash flow of minus 1.7 billion yuan.

“We are worried that incremental returns on new assets will be significantly below historical averages as work volumes reduce and day rates [of drilling rigs] get cut globally,” he wrote.

Li said full-year spending is expected to be within 4 billion yuan, all of which will be spent on existing projects.

The tough industry conditions have also hit Hong Kong-listed Anton Oilfield Services, which Sunday reported a first-half net loss of 65 million yuan, compared to a loss of 73.8 million yuan in the year-earlier period.

While the onshore services provider has won 1.49 billion yuan of new orders in the year’s first half, up from 1.28 billion yuan a year earlier, helped by a 49 per cent surge in orders from overseas - mainly Iraq - the proportion of foreign orders that were realised as revenues has fallen to 24 per cent from 39 per cent due to project delays.

“We have seen a pick-up in the pace at which customers are executing their orders in recent months ... although cash flow remains very tight for us,” chairman Luo Lin told reporters on Monday.

Cosl shares Tuesday closed 0.5 per cent higher at HK$6.04, compared to the Hang Seng Index’s 1 per cent gain. They have tumbled 9.3 per cent year-to-date, underperforming the index’s 5.2 per cent rise.