August 28th, 2012 | Shanghai Daily Rongsheng chief puts CNOOC on defensive
CHINA Rongsheng Heavy Industries Group Holdings Ltd, already suffering from a slump in the shipbuilding market, risks a loss of business in the promising offshore equipment sector after its chairman was implicated in an insider-trading scandal.
CNOOC Ltd, China’s biggest offshore gas and oil company and a client of Rongsheng, has indicated that its ties with the nation’s biggest private-sector shipbuilder may be affected by a probe being conducted by the United States securities regulator.
The US Securities and Exchange Commission said it is investigating whether Rongsheng Chairman Zhang Zhirong and other traders pocketed millions of dollars illegally from an inside tip ahead of CNOOC’s announcement of a takeover bid for US-listed Canadian oil producer Nexen Inc.
CNOOC, acting on a request from the SEC, said it is conducting an internal inquiry into the possible leak of confidential information about the bid. Last week, CNOOC Chairman Wang Yilin vented his spleen at Zhang.
“A senior leader should take responsibility for what he says and does,” Wang said at an earnings briefing in Hong Kong, referring to Zhang, a Jiangsu Province native who first built his wealth in real estate during the housing boom.
CNOOC’s rant is understandable. The oil and gas explorer certainly doesn’t want its image sullied at a time when it is trying to secure regulatory approvals in the US and Canada for the US$15.1 billion Nexen takeover bid that has been a long time in the making.
If successful, the deal would be China’s largest overseas acquisition and would give CNOOC privileged access to world-class oil sands projects, shale gas resource development and conventional oil from deepwater fields in the Gulf of Mexico, the North Sea and Nigeria. CNOOC is betting that the expertise it will gain from these overseas ventures will help the company deliver long-term, sustainable growth.
Rongsheng, founded by billionaire Zhang, is in a strategic partnership with the state parent of CNOOC. Operating out of the city of Nantong in Jiangsu, Rongsheng has built a deepwater pipe-laying crane vessel for the oil producer, which set sail for the South China Sea in May.
CNOOC was also a cornerstone investor in Rongsheng’s 2010 Hong Kong IPO. Rongsheng’s price has fallen to less than one-seventh of its issue price of HK$8 (US$1.03).
Wang said business ties with the shipbuilder were meant to create benefits for both companies. If that isn’t happening, he said CNOOC “wouldn’t rule out the possibility of terminating the cooperation.”
The same afternoon, in another conference room just blocks away in Hong Kong’s financial district, Rongsheng Chief Executive Chen Qiang tried to downplay the impact of Zhang’s scandal as the company reported disappointing interim results.
He said state-owned companies usually grant major contracts via public bidding, and Rongsheng didn’t expect its tenders to be passed over by CNOOC, a big spender on ocean equipment, in the future merely because of credibility issues related to Zhang. Price and quality should determine a successful bid.
Rongsheng earlier said its business won’t be affected by the Zhang scandal because he is a non-executive director with no day-to-day role in the company. Zhang has disappeared from public view since the scandal broke out and couldn’t be reached for comment.
Still, Chen admitted that Rongsheng doesn’t have any pending projects with CNOOC, but he did confirm his company’s plans to develop ocean engineering with a team based in Singapore. That sector is set to take off as investment ramps up in China’s deepwater energy sector.
“The ocean engineering equipment industry remains one of the few manufacturing sectors with strong growth potential despite an overall economic slowdown,” according to Zhao Zhiming, chief consultant of the China Petroleum and Petrochemical Equipment Association.
Rongsheng posted an 82 percent drop in net profit in the first six months, its sharpest-ever fall in half-year earnings, because of sluggish demand for new vessels. The company would have gone into the red without a subsidy from the Nantong City government.
Rongsheng said it received orders for two vessels in the period, compared with 24 a year earlier. There was no contribution from ocean engineering in the reporting period.
Company Chief Financial Officer Sean Wang said Rongsheng expects a “breakthrough” order for offshore equipment by the end of next year. He gave no details.
Goldman Sachs analysts, writing in a note, said Rongsheng’s outlook in shipbuilding is negative, but its prospects in offshore equipment were more promising.
China may invest 250 billion yuan (US$39.3 billion) in the 2011-2015 period in offshore oil and gas exploration and development, aiming to more than double output, according to the association’s Zhao.
Su Jing, vice project director for CNOOC’s deep-water drilling unit project team, said the company plans to introduce a second batch of domestically built equipment for offshore operations around 2015, after putting in place this year the pipe-laying crane vessel built by Rongsheng and an ultra deepwater drilling rig built by Shanghai Waigaoqiao Shipbuilding Co.
CNOOC officials have called the rig, also in the South China Sea, a “strategic weapon” for promoting the development of China’s offshore oil industry and helping the nation secure energy resources out at sea.
By Richard Fu