Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.

PETRO-KING OILFIELD SERVICES LIMITED

百勤油田服務有限公司

(Incorporated in the British Virgin Islands with limited liability)

(Stock Code: 2178) ANNOUNCEMENT OF INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2017

The board (the "Board") of directors (the "Directors") of Petro-king Oilfield Services Limited (the "Company") hereby presents the unaudited consolidated results of the Company and its subsidiaries (collectively referred to as the "Group", "we" or "our") for the six months ended 30 June 2017 ("1H2017").

OVERVIEW

The persistently weak sentiment among most of the Group's customers about investment in exploration and production ("E&P") led to a low level of oilfield service activities in 1H2017 in mainland China and the overseas markets, the Group's revenue in 1H2017 declined by approximately 50% to approximately HK$132.4 million, from approximately HK$266.1 million for the six months ended 30 June 2016 ("1H2016"). The Group's operating costs decreased by approximately 43% to approximately HK$177.6 million in 1H2017 from approximately HK$310.7 million in 1H2016. The Group recorded an operating loss of approximately HK$44.3 million in 1H2017 compared with an operating loss of approximately HK$43.5 million in 1H2016. The Group's net finance costs decreased by approximately 18% to approximately HK$10.7 million in 1H2017, from that of approximately HK$13.0 million in 1H2016. During the period, the Group recorded a net loss attributable to owners of the Company of approximately HK$57.5 million, compared with the net loss of approximately HK$56.7 million in 1H2016.

The first half of 2017 remained challenging for the oilfield service industry. Low profitability and uncertainty in project cash flow led to our cautious approach in seeking and agreeing to undertake new projects. As a result, our 1H2017 results showed that the Group had experienced another challenging half year marked by lower activity levels and continuing pressure on pricing in mainland China and the overseas markets.

During the period, the Group focused on improving its management performance, organisational structure, operational performance and overall competitiveness for its long-term development. The Group took the following measures in 1H2017:

  • Adjusted the Group's organisational structure and further streamlined the operational management mechanism and the cost structure of all service lines.

  • Transformed the Group's human resources management policy for the long-term development of the talent of the Group's engineering team, and adopted a new performance-based remuneration system fostering the staff's team spirit and their sense of being a stakeholder in the Group.

  • Further expanded its marketing and sales team in the Middle East and proactively promoted the Group's core oilfield services which were combined with our own technologies and tools.

    THE CHINA MARKET

    Although major national oil companies ("NOCs") announced that they would increase their capital expenditures in 2017 and the China market showed some signs of partial recovery in certain areas, especially those areas with gasfield operations, substantial and full recovery of the oilfield services activities has yet to come. Most of the oilfield service providers were still under tremendous pressure in tackling the issues of profitability and operating cash flow in the process of negotiating and executing contracts under the current sluggish market environment.

    Notwithstanding the gloomy market in 1H2017, the Group had gained some new customers and won certain bids for tenders in the China market. During the period, we won contracts to provide services for coal bed methane ("CBM") projects in Shanxi and continued to provide production enhancement services in Sichuan and Northern China. The gas projects in Sichuan showed signs of substantial recovery and we expect more to come in the second half of the year and coming years.

    During the period, the Group has introduced to the market its newly developed dissolvable alloy bridge plug, a technology which could substantially shorten the time and save cost of multistage perforation fracturing operations. The recent marketing and promotion of the dissolvable alloy bridge plug has received encouraging feedback from our customers in the China market. In addition, the participation in the successful exploration work of an offshore methane hydrate project indicates that we are at the forefront of the advanced technology for supporting China's development of such new and green energy. We believe that some of these business opportunities that we grasped will start to contribute to the Group's revenue in the second half of 2017.

    Due to the weak market environment, delay in both project execution and trade receivables settlement is still common in the oilfield service sector in China. Taking a prudent approach on working capital management during this long downturn in the industry cycle, the Group continues to tighten its customer credit control and reject certain business opportunities due to uncertainty about the collection of trade receivables.

    THE OVERSEAS MARKET

    Despite a strong recovery in drilling activities of shale oil and gas projects in North America in the first half of 2017, the global market for the oilfield services in general was still associated with the gloomy market environment in 2017 as a result of low budgets for capital expenditures and operating cost control measures implemented by most of the international oil and gas companies.

    In 1H2017, the Group's major customers in the overseas market were still delaying and halting their E&P investments due to the weakening trend of the oil price rebound in the first half of 2017. Although the Group gained significant progress in gaining new customers and in winning service contracts over projects in the Middle East and Central Asia, we expect these projects could only begin to contribute to the Group's revenue from the second half of 2017.

    During the period, the Group continued to restructure its marketing and sales team and its service capacity in various regions in the overseas market. In particular, it expanded its service capacity in the Middle East. The Group had built its reputation as a high-end oilfield services provider with cost competitive solutions in the market of its existing customers and the Group's marketing and operation team continued its marketing effort, so much as that its self-developed completion tools has gained further market recognition in Central Asia, the Middle East, Indonesia and Australia; and its turbine drilling services and production enhancement services have received encouraging feedback from prospective customers in the Middle East. We are expecting more business with certain major oil and gas operators in the Middle East by offering our technologies and services at competitive prices.

    GEOGRAPHICAL MARKET ANALYSIS

    Approximate

    Approximate percentage of

    Approximate percentage of

    1H2017

    1H2016

    percentage

    change

    total revenue in 1H2017

    total revenue in 1H2016

    (HK$ million)

    (HK$ million)

    (%)

    (%)

    (%)

    China market

    68.3

    187.1

    -63%

    52%

    70%

    Overseas markets

    64.1

    79.0

    -19%

    48%

    30%

    Total

    132.4

    266.1

    -50%

    100%

    100%

    The Group's revenue from the China market dropped by approximately HK$118.8 million or approximately 63% to approximately HK$68.3 million in 1H2017 from approximately HK$187.1 million in 1H2016. The decrease in revenue from the China market was mainly due to the low level of E&P investments and operating cost control by most of the NOCs as well as the other upstream investors in China during the long downturn in the industry cycle since 2014.

    The Group's revenue from the overseas markets declined by approximately HK$14.9 million or approximately 19% to approximately HK$64.1 million in 1H2017 from approximately HK$79.0 million in 1H2016. The revenue from the overseas markets decreased mainly because certain customers in South America and the Middle East ceased their operations and stopped using oil field services in view of the low oil price or low economical value of their E&P projects.

    REVENUE FROM THE CHINA MARKET

    Approximate

    Approximate percentage of total revenue

    from the

    Approximate percentage of total revenue

    from the

    1H2017

    1H2016

    percentage

    change

    China market in 1H2017

    China market in 1H2016

    (HK$ million)

    (HK$ million)

    (%)

    (%)

    (%)

    Northern China

    4.8

    17.4

    -72%

    7%

    9%

    Southwestern China

    2.6

    22.0

    -88%

    4%

    12%

    Other regions in China

    60.9

    147.7

    -59%

    89%

    79%

    Total

    68.3

    187.1

    -63%

    100%

    100%

    In 1H2017, the Group's revenue from Northern China amounted to approximately HK$4.8 million, which dropped by approximately HK$12.6 million or approximately 72% from approximately HK$17.4 million in 1H2016. The decrease in revenue was mainly due to the decline in production enhancement services in the Ordos base.

    The revenue from Southwestern China amounted to approximately HK$2.6 million in 1H2017, which decreased by approximately HK$19.4 million or approximately 88% from approximately HK$22.0 million in 1H2016. The decrease in revenue was mainly due to the decline in the provision of production enhancement services (mainly multistage fracturing services) for unconventional oil and gas projects as a result of the reduction of capital investment in prior years by the Group's major customers in the region.

    The revenue from other regions in China amounted to approximately HK$60.9 million in 1H2017, which decreased by approximately HK$86.8 million or approximately 59% from approximately HK$147.7 million in 1H2016. The decrease in revenue was mainly due to the decrease in sales of well completion tools in other regions in China.

    REVENUE FROM THE OVERSEAS MARKETS

    Approximate

    Approximate percentage of total revenue

    from the overseas

    Approximate percentage of total revenue

    from the overseas

    1H2017

    1H2016

    percentage

    change

    markets in 1H2017

    markets in 1H2016

    (HK$ million)

    (HK$ million)

    (%)

    (%)

    (%)

    Middle East

    58.7

    69.7

    -16%

    92%

    88%

    Others

    5.4

    9.3

    -42%

    8%

    12%

    Total

    64.1

    79.0

    -19%

    100%

    100%

    The revenue from the Group's business operations in the Middle East amounted to approximately HK$58.7 million in 1H2017, which dropped by approximately HK$11.0 million or approximately 16% from approximately HK$69.7 million in 1H2016. The decrease was mainly caused by the slow-down in sales of well completion tools in the Middle East and the decline in business of consultancy services, net of the increase in revenue from its services for some oil production projects. The revenue from other overseas regions amounted to approximately HK$5.4 million in 1H2017, which decreased by approximately HK$3.9 million or approximately 42% from approximately HK$9.3 million in 1H2016. This decrease in revenue was mainly due to the shrinkage of the Group's business in South America.

    BUSINESS SEGMENT ANALYSIS

    1H2017

    (HK$ million)

    1H2016

    (HK$ million)

    Approximate percentage

    change

    (%)

    Approximate percentage of total revenue in 1H2017

    (%)

    Approximate percentage of total revenue in 1H2016

    (%)

    Oilfield project tools and services

    115.3

    234.7

    -51%

    87%

    88%

    Consultancy services

    17.1

    31.4

    -46%

    13%

    12%

    Total

    132.4

    266.1

    -50%

    100%

    100%

    In 1H2017, the Group's revenue from the provision of oilfield project tools and services amounted to approximately HK$115.3 million, which decreased by approximately HK$119.4 million or approximately 51% from approximately HK$234.7 million in 1H2016. The decrease was mainly due to the decline in sales of well completion tools in the China market.

    The Group's revenue from consultancy services amounted to approximately HK$17.1 million in 1H2017, which decreased by approximately HK$14.3 million or approximately 46% from approximately HK$31.4 million in 1H2016. The revenue decreased mainly because the Group's integrated project management services stopped the provision of early-stage project management and planning services for a key customer in the Middle East in the second half of 2016.

    Oilfield Projects Tools and Services 1H2017 1H2016

    Approximate percentage

    change

    Approximate percentage of total revenue from oilfield project tools and services in 1H2017

    Approximate percentage of total revenue from oilfield project tools and services in 1H2016

    (HK$ million) (HK$ million) (%) (%) (%)

    Drilling 9.9 13.2 -25% 9% 6%

    Well completion 79.9 187.1 -57% 69% 80%

    Production enhancement 25.5 34.4 -26% 22% 14%

    Total 115.3 234.7 -51% 100% 100%

    Drilling

    The Group's revenue from drilling amounted to approximately HK$9.9 million in 1H2017, which dropped by approximately HK$3.3 million or approximately 25% from approximately HK$13.2 million in 1H2016. The decrease was mainly due to the decline in provision of turbine drilling services in Northwestern China.

    In 1H2017, the Group provided drilling services for 5 wells that are located in China, all of which were completed before 30 June 2017.

    Well Completion

    In 1H2017, the Group's revenue from well completion amounted to approximately HK$79.9 million, which decreased by approximately HK$107.2 million or approximately 57% from approximately HK$187.1 million in 1H2016. The decrease was mainly due to the drop in sales of well completion tools in the China market.

    In 1H2017, the Group provided well completion services for 104 wells, of which 103 wells were completed before 30 June 2017 and the remaining one well was still a work in progress as at 30 June 2017. All the 104 wells are in the overseas markets. In addition, the well completion services were mainly provided in the Middle East, Australia, Indonesia and other regions. In the first half of 2017, we completed the services of the well completion of 7 wells, the wire operation of 3 wells and the maintenance of 93 wellheads.

    Production Enhancement

    In 1H2017, the Group's revenue from production enhancement amounted to HK$25.5 million, which decreased by approximately HK$8.9 million or approximately 26% from approximately HK$34.4 million in 1H2016. The decrease was mainly due to the drop in number of production enhancement projects in the China market, net of the growth in revenue from the Middle East.

    In 1H2017, the Group provided production enhancement services for 53 wells, of which 44 wells were completed before 30 June 2017 and the remaining 9 wells were still works in progress as at 30 June 2017. Among the above mentioned wells, 43 wells are in the China market and 10 wells are in the overseas markets.

    CUSTOMER ANALYSIS

    Customer

    1H2017

    (HK$ million)

    1H2016

    (HK$ million)

    Approximate percentage

    change

    (%)

    Approximate percentage of total revenue in 1H2017

    (%)

    Approximate percentage of total revenue in 1H2016

    (%)

    Customer 1

    40.2

    -

    nil

    30%

    0%

    Customer 2

    39.4

    14.8

    166%

    30%

    6%

    Customer 3

    11.6

    8.7

    33%

    9%

    3%

    Customer 4

    8.9

    7.0

    27%

    7%

    3%

    Customer 5

    6.5

    1.9

    242%

    5%

    0%

    Customer 6

    5.1

    1.7

    200%

    4%

    0%

    Customer 7

    -

    71.4

    -100%

    nil

    27%

    Customer 8

    -

    50.9

    -100%

    nil

    19%

    Customer 9

    -

    38.9

    -100%

    nil

    15%

    Customer 10

    5.1

    21.2

    -76%

    4%

    8%

    Customer 11

    3.8

    5.6

    -32%

    3%

    2%

    Other customers

    11.8

    44.0

    -73%

    8%

    17%

    Total

    132.4

    266.1

    -50%

    100%

    100%

    The revenue from Customer 1 amounted to approximately HK$40.2 million. This revenue was generated from business with a customer who started business relationship with the Group in the second half of 2016, and was contributed by the great efforts of the Group to provide safety-valve well completion tools for the customer. The revenue from Customer 2 increased by approximately HK$24.6 million or approximately 166%, from approximately HK$14.8 million in 1H2016 to approximately HK$39.4 million in 1H2017. This increase was mainly attributable to the growth of revenue from a trade in well completion tools and provision of coiled tubing package services in the Middle East. The revenue from Customer 3 amounted to approximately HK$11.6 million, which increased by approximately HK$2.9 million or approximately 33% from approximately HK$8.7 million in 1H2016. This increase was mainly attributable to the provision of consultancy services and production enhancement services in the Middle East. The revenue from Customer 4 amounted to approximately HK$8.9 million, which increased by approximately HK$1.9 million or approximately 27% from approximately HK$7.0 million in 1H2016. This increase was mainly attributable to the business of logging while drilling ("LWD") technical service projects in the China market. The revenue from Customer 5 amounted to approximately HK$6.5 million, which increased by approximately HK$4.6 million or approximately 242% from approximately HK$1.9 million in 1H2016. This increase was mainly attributable to the provision of professional supervision services in Iraq. The revenue from Customer 6 amounted to approximately HK$5.1 million, which increased by approximately HK$3.4 million or approximately 200% from approximately HK$1.7 million in 1H2016. This increase was mainly attributable to the growth of revenue from submarine petroleum pipeline and seabed exploration projects in Hong Kong. As for Customer 7, 8 and 9, they incurred approximately HK$71.4 million, HK$50.9 million and HK$38.9 million respectively in 1H2016. It was because the business contracts expired at the end of 2016, no further revenue was generated from these three customers in 1H2017. The revenue from Customer 10 amounted to approximately HK$5.1 million in 1H2017, which decreased by approximately HK$16.1 million or approximately 76% from approximately HK$21.2 million in 1H2016. The decrease was mainly due to the persistent shrinkage of the China market. The revenue from Customer 11 amounted to approximately HK$3.8 million in 1H2017, which decreased by approximately HK$1.8 million or approximately 32% from approximately HK$5.6 million in 1H2016. The decline was caused by the decrease in service income derived from the Middle East. The revenue from other customers amounted to approximately HK$11.8 million in 1H2017, which decreased by approximately HK$32.2 million or approximately 73% from approximately HK$44 million in 1H2016.

    HUMAN RESOURCES

    The Group believes that our people are the most valuable assets to our long-term business development. We have implemented human resources policies and procedures that detail the requirements for compensation, dismissal, recruitment, promotion, working hours, equal opportunity and other benefits and welfare. We support employees' growth and strive to secure our core expertise through training and development. To equip our frontline staff with the right skill set and knowledge, we arrange for a series of training courses that cover the latest drilling and completion technologies, blast management, control at wells and environment management. We also work with external organisations such as unions and consultants to provide training for the staff to meet the specific needs of the operations. In 1H2017, the Group arranged 36 trainings, and 146 employees attended these training programs. In addition, the Group implemented a staff development and appraisal system, aiming to reserve the Group's talents pool for its management team for future operations while meeting the talent's goals in their long-term career development.

    To cope with the development trend of the industry, the Group streamlined the organisational structure and the cost structure of all service lines as well as that of the supporting departments. The Company paid close attention to the recruitment of talents and has recruited certain marketing and sales experts in the Middle East to promote the Group's technologies, tools and services in the region. The total headcount was 338 employees as at 30 June 2017, compared with the 349 employees as at 31 December 2016.

    In order to keep the Group's human resources policies and procedures abreast with the industry development, the Group reviewed its human resources management system and made certain changes to it so as to foster the long-term development of the Group's engineering talents in 1H2017. It also implemented a new performance-based remuneration system to foster the staff's team spirit and their sense of being a stakeholder in the Group.

    RESEARCH AND DEVELOPMENT

    As a high-end integrated oilfield services provider, the Group attaches great importance to technology, and prides itself on introducing innovative products and services in various oilfield service lines, such as turbine-drilling, directional drilling, multistage fracturing, down-hole completion, surface facilities for safety and flow control, drilling fluids and fracturing liquid. In 1H2017, the Group continued to seek advancement in technology and introduced new products to the market, including the followings:

  • Developed a new 5 ½" dissolvable bridge plug, which has successfully passed a trial run. This kind of tool can substantially shorten the operation time and in turn save operation cost for multistage perforation fracturing operations.

  • Designed a new 4 ½" tubing retrievable safety valve which can withstand working pressure of 15,000 Psi and thus can be used in wells with extra-high pressure and high temperatures. Most of the safety valve suppliers in the market can only provide safety valve that can withstand working pressure of up to 10,000 Psi.

  • Focused on the development of 7" Psi retrievable packer which can withstand working pressure of 10,000 Psi and is tubing-retrievable without additional pulling tool in order to save time and operation cost during workover.

In 1H2017, the Group had been granted 4 utility model patents and 3 innovation patents. In addition, the Group was applying for 5 innovation patents and 17 utility model patents as at 30 June 2017.

The Group will continue to focus on developing down-hole completion tools and technologies, as well as certain specific high-end drilling tools and technologies. In order to maintain its leading position in the high-end oilfield service sector, the Group has set up a new research and development center to further develop its tools and technologies. It has been developing tools and technologies through in-house research and development and through cooperation with oilfield service technology companies.

OUTLOOK

The Brent crude oil price rebounded significantly in 2016, from its lowest of about US$28 in January 2016 to about US$57 at the end of December 2016. However, the upward momentum stalled in the first half of 2017 due to general market concern about the anticipated increase in production of shale oil that could result from recently increased drilling activities in North America. The Brent crude oil price fluctuated in the first half of 2017 and then went down to about US$47 at the end of June 2017. Nevertheless, it is widely believed that the recent adjustment in oil price would not alter the medium-term uptrend of the crude oil price in the coming years. According to the market consensus from Bloomberg, Brent crude oil price is estimated to reach US$54.8 a barrel in the fourth quarter of 2017 and to reach US$57.5 a barrel in the fourth quarter of 2018.

In 1H2017, the oilfield service industry started to show a strong rebound in drilling activities in North America, but substantial recovery in other regions of the overseas markets has yet to be reflected. In the China market, the signs of market recovery are mixed. The recent investment in E&P focused mainly on natural gas projects, and the demand for directional drilling and production enhancement services at unconventional gas projects (including shale gas and CBM) were picking up gradually in the past few months. We believe that the increase in demand for the production enhancement and fracturing services from the E&P investments in unconventional gas projects could largely increase the utilisation of the Group's production enhancement capacity in the second half year of 2017.

It is the Group's strategy to expand its business operations in the Middle East. During the period, we further expanded the marketing and sales team of our business operations in the Middle East and relocated a substantial part of the Group's resources (including assets and service capacity) from other regions to the Middle East. Our recent activities to market and promote the Group's technologies, tools and services in the region have yielded encouraging results. Our self-developed technologies and tools (such as turbine drilling tools and completion tools) have been granted pre-qualification approvals by various NOCs in the region and we have been invited to bid for various contracts to provide oilfield services (including turbine drilling, well completion, production enhancement and surface engineering services).

Looking ahead to the second half of 2017, we will continue to put effort into the marketing and promotion of the Group's oilfield services, tools and technologies in the Middle East so as to increase our market penetration in the region, especially the business with the NOCs there. In addition, the Group will continue to focus on the advancement of its oilfield service technologies and tools in order to further enhance our capability to provide high-end oilfield services in mainland China and the overseas markets.

Petro-king Oilfield Services Ltd. published this content on 29 August 2017 and is solely responsible for the information contained herein.
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