Wednesday, March 28, 2007
China Oilfield Services (2883): Supplementals
Today I did some more digging into the equipment cost issue where I left off yesterday.
According to the prospectus the fixed assets were revalued twice, once in 1994 and once before listing in 2002, under the replacement cost method. Whatever that was the book cost shown should be reasonably current, which is comforting. The discomforting part is that while these revaluation surplus nicely showed up as reserves, there's no cash set aside for replacement. The driller will need to incur debt or sell shares to finance these replacement, which unlike capital expansion won't generate new earnings (but one can argue the new rigs should be more efficient and have lower operating costs). Either way is gonna negatively affect per share earnings by higher interest or dilution.
In 2002 there were $10.2b of fixed assets (cost basis) supporting operations of 12 rigs, or $8.5b per rig. In 2005 the book cost was $13.9b and there were 15 rigs, so the unit cost was increased to $9.3b per rig. The 2005 annual report showed just the rig alone to be delivered at the end of this year would cost $11.5b, another 24% increase. If all rigs are to be replaced then eventually depreciation should go up by similar proportion. My estimate shows this will cost 20% of future earnings, if these increases can't be passed on to customers.
Most importantly and before costs, are there enough oilfields to be drilled? What's the use of having new rigs if there are not enough discoveries? Almost all the rigs now are on sites that are just as old as the rigs itself. What's gonna happen after these wells are done with. I got from the prospectus that in terms of E&P activities, China off-shore seemed much less developed than the Mexico Gulf of the US. So that seemed to suggest the China off-shore oilfields would have a long life. Anyhow, this is such a fundamental issue but I only raise it in the end of my analysis! I guess this shows I still have a long way to go.
I'll try to make a conclusion after I read CNOOC's results tomorrow.
DISCLOSURE: I don't hold 2883 at time of writing.
According to the prospectus the fixed assets were revalued twice, once in 1994 and once before listing in 2002, under the replacement cost method. Whatever that was the book cost shown should be reasonably current, which is comforting. The discomforting part is that while these revaluation surplus nicely showed up as reserves, there's no cash set aside for replacement. The driller will need to incur debt or sell shares to finance these replacement, which unlike capital expansion won't generate new earnings (but one can argue the new rigs should be more efficient and have lower operating costs). Either way is gonna negatively affect per share earnings by higher interest or dilution.
In 2002 there were $10.2b of fixed assets (cost basis) supporting operations of 12 rigs, or $8.5b per rig. In 2005 the book cost was $13.9b and there were 15 rigs, so the unit cost was increased to $9.3b per rig. The 2005 annual report showed just the rig alone to be delivered at the end of this year would cost $11.5b, another 24% increase. If all rigs are to be replaced then eventually depreciation should go up by similar proportion. My estimate shows this will cost 20% of future earnings, if these increases can't be passed on to customers.
Most importantly and before costs, are there enough oilfields to be drilled? What's the use of having new rigs if there are not enough discoveries? Almost all the rigs now are on sites that are just as old as the rigs itself. What's gonna happen after these wells are done with. I got from the prospectus that in terms of E&P activities, China off-shore seemed much less developed than the Mexico Gulf of the US. So that seemed to suggest the China off-shore oilfields would have a long life. Anyhow, this is such a fundamental issue but I only raise it in the end of my analysis! I guess this shows I still have a long way to go.
I'll try to make a conclusion after I read CNOOC's results tomorrow.
DISCLOSURE: I don't hold 2883 at time of writing.
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