Friday, March 30, 2007
China Oilfield Services (2883): Final Look
The CNOOC 2006 results were out yesterday and there's no surprises. It was as good as people had expected under very favorable environment of last year. Management was also very upbeat about new oil finds, citing the replacement/production ratio reached 200% last year, and they expect the oil reserve will continue to grow and hence are investing heavily into E&P equipment. This sounds good to the driller.
I had a quick look at the 5-year operation summary in the 2005 annual report. There I found the r/p ratio has always been over 100% over the period, meaning more oil was found than produced. And at the end of 2005 the reserve life was 15.3 years, almost same as the 2006 figure, reflecting higher production level last year.
But one has to be careful that the excellent results of the past few years was a combination of rising product prices (rental) and increase in utilization rate, which steadily increased from 70% in 2002 to over 90% of capacity last year, as opposed to increase in capacity, ie. production from new oil wells. Utilization will become less of a growth factor in the future and as costs will definitely be going up due to the replacement of the fleet, whether future rental can be raised enough to compensate for it (so far the margin has been stable) is unknown and will be an internal matter between CNOOC and the driller. If the driller has to bear the cost then it might earn 20% less (see my last analysis).
Business for certain will continue to be robust but I'm just not so sure if earnings will be. At 22x p/e and less than 1% yield, I'd take a pass on the driller and rather look for real service companies that have less reinvestment burden and more distribution.
DISCLOSURE: I don't hold 2883 at time of writing.
I had a quick look at the 5-year operation summary in the 2005 annual report. There I found the r/p ratio has always been over 100% over the period, meaning more oil was found than produced. And at the end of 2005 the reserve life was 15.3 years, almost same as the 2006 figure, reflecting higher production level last year.
But one has to be careful that the excellent results of the past few years was a combination of rising product prices (rental) and increase in utilization rate, which steadily increased from 70% in 2002 to over 90% of capacity last year, as opposed to increase in capacity, ie. production from new oil wells. Utilization will become less of a growth factor in the future and as costs will definitely be going up due to the replacement of the fleet, whether future rental can be raised enough to compensate for it (so far the margin has been stable) is unknown and will be an internal matter between CNOOC and the driller. If the driller has to bear the cost then it might earn 20% less (see my last analysis).
Business for certain will continue to be robust but I'm just not so sure if earnings will be. At 22x p/e and less than 1% yield, I'd take a pass on the driller and rather look for real service companies that have less reinvestment burden and more distribution.
DISCLOSURE: I don't hold 2883 at time of writing.
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