Sunday, April 18, 2021
 
Columnist
Martin Hennecke
 
HONGHUA GROUP
HKEx Stock Code : 00196 
 
Corporate Profile
Principally engages in research, design, manufacture, setting and sale of land rigs and related parts and components, design and manufacture the offshore drilling module. Meanwhile it also provides technical support services and drilling engineering services for clients.

Business Review - For the year ended December 31, 2012

In 2012, the Group maintained adhering to its diversifi ed long-term development strategy of ¡§focusing on the core business of land equipment manufacturing with synergy of other strategic sectors of offshore equipment manufacturing, oil and gas engineering services and unconventional oil and gas resources¡¨. The Group's business effectively produced rapid growth during the Year.

By upholding the ideology of ¡§creative manufacturing¡¨, the Group satisfi ed customers' needs, proactively developed new products and technologies, and ventured into frontier markets for new business opportunities and models in a global context. Relying on the market strategies of ¡§localization¡¨ and ¡§forward-moving sales¡¨, the Group further consolidated its leading position in existing markets, explored emerging markets and trading business, forged long-term partnerships with crucial clients and thus actively enhanced its global market presence and deployment.

Land Drilling Rigs and Related Products Business

Contributed by the active business expansion by overseas subsidiaries, the Group further consolidated the existing markets in Russia, South America and the Middle East, and successfully entered into various large sales agreements during the Year of 2012, the details are as follows: the Group entered into a renewed land drilling sales agreement that was worth approximately US$187 million with Petroleros de Venezuela, S.A. in April, a renewed workover rig sales agreement that was worth approximately US$21.6 million with the National Drilling Company (UAE) in July, a land drilling sales agreement that was worth over US$22 million with Bangladesh Petroleum Exploration & Production Company Limited in August, a trailer drilling rig sales agreement that was worth approximately US$27 million with Weatherford International Limited in September and a land drilling rig sales agreement that was worth approximately US$150 million with OOO Burovoya Kompaniya Eurasia in December. In addition, the Group also successfully penetrated into emerging markets, obtaining 10 land drilling rig sales agreements in Azerbaijan, Kenya, Saudi Arabia, Nigeria and Algeria.

In regards to the domestic market, the Group strengthened expansion in the private drilling market and actively sought out cooperation amid homogeneous competition amongst domestic rig manufacturers. Among other agreements, the Group obtained a sales agreement of 8 land drilling rigs from Jiangsu Xinde Petroleum Machinery Co., Ltd. and successfully uplifted its domestic market share.

Throughout the Year of 2012, the number of accumulated newly signed land drilling rigs amounted to 102 units, worth approximately RMB7.2 billion. Part of the orders has been delivered in 2012.

In terms of parts and components, the Group strived to develop next-generation drilling rigs and high value-added components. The Group's self-innovated serial products of direct top drives achieved satisfactory sales, recording supporting sales of 26 sets and individual sales of 16 sets during the Year, achieving successful sales of top drive products in domestic markets, including Zhongyuan oilfield and Jiangsu oilfield, etc. In addition, the Group actively made full use of its global procurement network to expand into the trading business of rig parts and components so as to provide integrated procurement services for its clients. The Group successfully entered into a natural gas transmission pipeline sales agreement worth approximately US$21 million with Unicorn Equipment Engineering LLP. In February 2013, the Group also entered into a directional drilling equipment sales agreement worth approximately US$181 million with PDVSA Servicios Petroleros, S.A.

Offshore Engineering Equipment and Related Products Business

On 23 October 2012, the Group held an opening ceremony at its offshore engineering equipment production base located in Qidong County, Jiangsu Province, the PRC. The first phase (stage 1) of the construction has been completed and the Group has the manufacturing capabilities to receive offshore drilling platform orders. It is expected that Honghai, a crane with 22,000 tons of lifting capacity and a core piece of equipment to the innovative concept of ¡§land-based manufacturing of offshore equipment¡¨, will be delivered in mid-2014. Post completion of the first phase, this manufacturing base will have the capability to build 10 drilling platforms at the same time.

During the Year, the Group strengthened its marketing promotions of offshore business and proactively outreached to potential clients. The Group successfully signed a sales contract of drilling packages for Tiger series drilling vessels with Shanghai Shipyard Co., Ltd. that worth a total value of more than RMB300 million. This contract signaled a huge breakthrough for a Chinese offshore engineering enterprise into the deep-water drilling package market, which previously had been monopolized by international giants and also a milestone marking the Group's venture into the offshore equipment market. At present, the Tiger project is running smoothly and is expected to be delivered in separate phases in 2013.

Furthermore, the Group has been proactively looking for strategic partners of offshore business. During the Year, the Group entered into strategic partnership with Reignwood Group, a holding company of OPUS. Reignwood agreed that the Group would be the prioritized suppliers of drilling packages for its future offshore equipment purchases and gradually lifted the Honghua's drilling package ratio. In addition, the Group will be the preferential contractor and technical support provider for Reignwood Group in manufacturing jack-up drilling platforms in the future.

Oil and Gas Engineering Services Business

During the Year, the Group achieved breakthroughs in its oil and gas engineering services business in both the domestic and overseas markets. By the end of 2012, 11 projects have been under operation with a total personnel of 554 working in Kazakhstan, Iraq, China's Xinjiang, Northeast China, Sichuan Province, the PRC and the other regions. With continuous improvements in operational efficiency, with just 3 drilling rigs in operation during the Year, the Group completed 24 wells and achieved 90,000 meters of footage drilled. Apart from the conventional drilling business, the Group also proactively extended into oil and gas engineering services. Throughout the Year, 3 teams provided independent drilling fluids services for the Northeast Project and successfully completed the first horizontal well exploration with a horizontal length of 1,400 meters.

Moreover, the Group's Oil & Gas Engineering Services Company started to set up and enhance a set of safety management systems concerning quality, environment and occupational health, and obtained a series of licenses and permits, such as Safety Production License, Sinopec's permit for entering the northeastern market, IADC2012 and Qualification Accreditation for Oilfield Enterprises etc. The company also gained three quality management system accreditation certificates for ISO9001, ISO14001 and GB/T28001, paving the way for a full penetration into the oil and gas services market.

Unconventional Oil and Gas Development Business

From 2011 to 2012, the Chinese Ministry of Land and Resources held two rounds of open tendering for shale gas exploration rights and in return gained substantial support. It will be beneficial to the prosperity of China's shale gas market that the exploration rights are constantly open for bidding by private enterprises. The Ministry of Finance also said it would subsidize shale gas exploration with RMB0.4 per cubic meter. The National Development and Reform Commission prioritized the natural gas price reform in early 2013 and targeted to raise natural gas price within three years. China's shale gas development and exploiting have already kicked off.

During the Year, the Group actively promoted its worldwide initiative of shale gas development solutions and concept, which is ¡§prioritizing distribution network, exploiting gas by using gas while simultaneously producing gas and electricity in an industrialized, assembly line operation format¡¨. Meanwhile, the Group accelerated its R&D process in a series of shale gas special equipment.

Among which, the serial products of flexible water tanks have not only completed well site trials but also won the ¡§Outstanding Innovation Award¡¨ at the Tenth Portland Oil and Gas Exhibition and Technology Seminar in September 2012 and the products will be on sale in 2013. On the other hand, the 6000HP fracturing pump with the world's highest horsepower has already completed individual tests during the Year with the aim of finishing well site online tests both at home and abroad in 2013.

Apart from reinforcing its own strength, the Group actively sought cooperation opportunities with renowned enterprises that specialized in the development of unconventional oil and gas resources. In December 2012, the Group entered into a strategic cooperation memorandum with Baker Hughes, a famous oilfield services company. Proposed cooperation agendas included provision of integrated operation solutions to unconventional oil and gas projects for international companies and independent Chinese investors, establishment of an unconventional energy engineering research center, engagement in shale oil and gas-related research and consultancy services as well as cooperation in related engineering equipment. In January 2013, the Group signed a strategic cooperation framework agreement with Shenhua Geological Exploration Co., Ltd. on the exploration and development of unconventional oil and gas. Pursuant to the agreement, both parties would carry out long-term cooperation initiatives in unconventional natural gas development, research, consultation and equipment.

In addition, the Group conducted factory renovation, production line modification as well as recruitment of new personnel at its subsidiary, Gansu Hongteng Petroleum Machinery Manufacturing Co., Ltd. (¡§Hongteng¡¨) and achieved significant beneficial effects. In terms of the production management, the Group streamlined Hongteng's procurement and supply systems, reinforced its quality control, enhanced product stability and lowered operation failure rates. Hongteng's entire manufacturing process, ¡§technology R&D ¡X manufacturing of core components ¡X integration and assembly ¡X online testing ¡X quality check upon delivery ¡X after-sale services¡¨, has already taken shape, laying a solid foundation for the Company's sustained development. As for marketing, Hongteng proactively established its own sales teams so as to effectively tap foreign markets.

Quality Management, Innovation, Research and Development

The Group constantly attaches significance to the improvement and optimization of quality management system. During the Year, the Group successfully passed a triennial review and verification of ISO 9001 Quality Management System conducted by Det Norske Veritas (DNV) and in January 2013, the Group also passed the recertification review of the American Petroleum Institute (API), all of which were authoritative testimonies that the Group's quality management had reached a new level.

With next-generation drilling rigs, high value-added components, special equipment for shale gas development and key spare parts of offshore equipment as the mainstay, the Group is always dedicated to its research and development as well as new products optimization and has invested a total of RMB58 million in 2012 with outstanding R&D achievements. During the Year, the Group conducted design optimization and industrial tests for its hydraulic super single pipe rigs and the new energy-efficient quintuple mud pumps. More significantly, the Group's self-developed jacking and fixation systems have successfully passed the American Bureau of Shipping (ABS)'s loading tests and obtained the subsequent nondestructive certification. As at 31 December 2012, the Group has fi led 222 patents and 113 of them had been approved.

Business Outlook - For the year ended December 31, 2012

Despite the sluggish global economic recovery, the United States, Japan and other developed economies are healing steadily, the pressure of the European debt crisis has been gradually alleviated and emerging economies have augmented their capabilities to respond to the crisis. All these factors contribute to a positive outlook for the global economy in the next years. The entire oil and gas industry also presents an optimistic development trend. In particular, Latin America, the Middle East and Asia will witness a substantial increase, ushering in a bonanza period for oil and gas exploration and development there and subsequently boosting a robust demand for oil and gas drilling equipment and services.

In regard to land drilling equipment, the Group will keep on implementing its strategies of ¡§localization¡¨ and ¡§forward-moving sales¡¨, enhancing overseas branding and sales of new products, proactively expanding into trade in components and promoting finance leasing so as to meet diversified demands from customers. Meanwhile, the Group continues to attach importance to innovation and R&D and has completed its Technology Innovation Industrial Park. The project is implemented in line with the concept of ¡§creative manufacturing¡¨ and strives to attain objectives of new industry, technology, equipment and manufacturing process, reflecting the Group's endeavor to relentlessly sharpen its competitive edge for continuous development in its second decade of growth since foundation.

As for offshore engineering equipment, the number of the world's new and renovated offshore platforms in the next five years, according to ODS-Petrodata's latest forecast, will reach up to 400- 500 with a combined market volume of US$276.5 billion. The Group will enhance its presence in the offshore equipment market with the aim to sign its first order of offshore drilling platform and reach the breakeven point in 2013. With further verification of and testament to the Group's expertise in offshore engineering, the innovative method of ¡§onshore manufacturing of offshore equipment¡¨ is expected to demonstrate its unique merits in key aspects including delivery period, cost-effectiveness, designing process etc, fueling the Group's advancement in overseas offshore engineering equipment market.

In 2013, the Group will timely extend the scope of its oil and gas engineering services from drilling, dredging, orientation, fracturing and repairing to a wider array of integrated services, aligned with the accumulation of market resources and strengthening of technical foundation. Meanwhile, the Group will vigorously promote and deepen cooperation with reputable drilling companies both at home and abroad with plans like joint tendering with Baker Hughes for unconventional oil and gas development projects. Within the next three years, the Group looks to develop its Honghua Oil & Gas Engineering Services Co., Ltd. into a small and medium-sized, flexible and integrated oilfield service provider that features equipment-based, professionalized and technology-intensive services.

Responding to the boom in unconventional oil and gas development both at home and abroad, the Group is committed to R&D and marketing of new products. New series such as flexible water tanks are scheduled to be rolled out in 2013 and an unconventional oil and gas engineering research center established in collaboration with Baker Hughes in Chengdu, the PRC is also expected to be inaugurated to carry out R&D projects of related equipment. The Group will also keep on seeking cooperation opportunities with unconventional oil and gas developers and promote its innovative concept and solution of ¡§exploiting gas by using gas while simultaneously producing gas and electricity in an industrialized, assembly line operation format¡¨. Furthermore, the Group aims to move upstream along the industrial chain by participating as a minor shareholder in the development projects of high-quality shale gas fields.

Looking forward, the Group will continuously work on the concept and principle of ¡§creative manufacturing¡¨ and maintain a steady and sustained growth in its land drilling business, while proactively in expanding into new strategic segments including offshore engineering equipment, oil and gas engineering services as well as unconventional oil and gas development with new products, business and modes. The Group will strive to achieve annual sales targets of RMB10 billion for 2013 in light of future market trends, and development prospect for specific business segments. By 2015, the Group expects to achieve synergized and mutually complementary development of its onshore and offshore sectors, with equipment manufacturing, oil and gas engineering and unconventional oil and gas resources as three core pillars. Its blueprint of ¡§three major segments plus two key domains¡¨ for the second decade of growth will also be fully materialized, paving the way for the Group's long-term prosperity and shareholders' greater returns.

Source: Honghua Gp (00196) Annual Results Announcement
Chairman Zhang Mi Issued Capital (shares) 3,239M
Par Value HKD 0.1 Market Capitalisation (HKD) 7,416M
 
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