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Fortune
Oil PLC
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FORTUNE OIL PLC
REVIEW OF OPERATIONS
Infrastructure
The Single Point Mooring (SPM) facility continued
its strong performance and reported a profit of £3.7 million
(US$5.3 million) for the first six months (2000: £4.6 million).
During the period, 21 Very Large Crude Carriers (VLCCs) were
discharged at the SPM with a total volume of 4.6 million tonnes
(2000: 4.4 million tonnes).
Turnover, however, was nearly unchanged at
£7.9 million (US$11.4 million) (2000: £7.6 million (US$11.8
million)) due to an adjustment in the unit throughput fee. The SPM
serves the nearby refinery operated by the Maoming Petrochemical
Corporation (MPCC), under long-term contracts guaranteeing both
volume throughput and unit price. In 1998, an agreement was reached
to increase the annual guaranteed throughput volume from 4.5 million
tonnes to 5.0 million tonnes and the unit throughput rate from US$2.5
per tonne to US$2.8 per tonne, to meet the cost of additional
investment in a new spare buoy. Since actual throughput volume in the
intervening years has been significantly higher than the guaranteed
volume, the additional investment was repaid much earlier than
anticipated. As a result, the unit throughput rate was this year
adjusted back to the original rate of US$2.5 per tonne.
MPCC has recently obtained formal government
approval for a project to supply approximately 10 million tonnes per
annum of oil products through a pipeline network to the provinces of
Southwest China. This project entails an increase in refinery
capacity at Maoming. We are therefore working with the refinery on
the construction of a new SPM, which we are confident will generate
attractive returns to our shareholders.
The second SPM at Maoming will be designed to
receive 300,000 DWT tankers and will be located 6.7 kilometers from
the existing facility. The estimated total investment is US$38
million (£25.3 million), which will be financed 30 per cent by
shareholders and 70 per cent through debt. Fortune Oil anticipates
that our financial obligations can be funded entirely from cash flows
generated by the existing SPM. The Feasibility and Geophysical
studies have already been completed. The Hydrological and
Meteorological Survey is currently underway and should be completed
by the end of 2001.
In view of the strong working relationship
between Fortune Oil and our partners, the outlook for both SPM
facilities continues to be highly promising. The existing cash
generating contracts and the prospects for expansion will ensure that
these projects will constitute a strong source of cash flow for
Fortune Oil.
The Bluesky Aviation Refuelling joint venture
experienced significant challenges in the first half of 2001.
International jet fuel supply prices were very volatile. However, the
sales price to domestic airlines did not reflect this volatility
because of delays in the government's approval process. Consequently,
although sales volume for Bluesky increased by 11 per cent over 2000,
the joint venture just managed to break-even in the first half of
2001 .
For some time, the joint venture partners have
been working together to lobby for reform of the pricing policy, in
order to create a more stable operating environment. As a result of
these joint efforts, a revised pricing policy, which will link sales
prices to the international market, was approved by Civil Aviation
Administration of China (CAAC) in the second half of 2001. In
addition, the joint venture partners are currently studying other
ways to mitigate the effects of price fluctuations. We therefore
expect a modest profit for the joint venture in the second half of
the year.
Construction of the new Guangzhou Airport is well
underway and we expect it to be completed on schedule and within
budget. This should support business volumes at the Bluesky joint
venture in the long term. Currently, domestic flights comprise over
90% of the sales volume of Bluesky. Of the 10% of flights which are
international, the majority are to Asia Pacific destinations. In
addition, we expect that, in contrast to many other countries, air
traffic will continue to grow in China, since its carriers
areunlikely to face the severe pressures experienced by those
elsewhere following the attacks on the World Trade Centre and the
Pentagon. As such, we expect that the tragic events will have little
impact on Bluesky's sales volume.
The West Zhuhai Oil Products Terminal and Storage
project continued to make good progress. Throughput volume reached
0.92 million tonnes, up 15 per cent from 0.8 million tonnes in the
first half of 2000. Revenues of £2.2 million (US$3.2 million)
were achieved, up 56 per cent from the first half of 2000. Profit
increased to £0.5 million (US$0.8 million) (2000: break-even).
We expect these volumes and revenues be maintained in the second half
of 2001. The second phase development of the terminal, which includes
an additional 110,000 cubic meters of oil tanks and two new 1,000
MT-class berths, has been proceeding smoothly. We expect it to be
completed on schedule and within budget. Fortune Oil contributed its
£316,000 (US$447,000) share of additional equity in May this
year. Project loan finance for the project will be provided by our
partner, the China National Petrochemical Corporation (CNPC) and
construction contractors.
The Zhanjiang Fu Duo Liquefied Petroleum Gas
facility continued to experience a difficult market environment in
the first half of 2001. Gross margins were squeezed by fierce
competition from regional refineries. Net loss, however, narrowed to
£197,000 (US$288,000) (2000: £235,000) as the restructuring
in the first half started to show some positive effects.
Administrative expenses were cut by 48 per cent to £112,000 from
£232,000 in the first half of 2000. Subsidiary operations that
were subcontracted out made a contribution to the overall results.
Close cooperation with our product trading arm, the Fortune Oil
Trading Company Limited, helped Fu Duo to gain access to cheaper
import products. We are working to subcontract out the remaining
loss-making subsidiary operations in the second half, which should
further improve performance.
AcroChina Technology Inc. The joint venture,
which develops application software for the oil industry, began
operation in February 2001. It has performed in line with
expectations and much better than many less focused companies in the
applications software field. It reported a small profit of
£97,000 (US$141,000) on turnover of £744,000
(US$1,076,000). We believe there are sound long-term prospects for
this joint venture.
Trading
Turnover decreased substantially to £2.0
million (US$2.9 million) compared to £41.7 million (US$ 65.3
million ) in the first half of 2000. Due to a conservative approach
towards risk management and limited availability of banking
facilities, we have restricted our trading to back-to-back
transactions with customers and to supporting our subsidiary Fu Duo.
Other Business
The success of our SPM facility at Maoming has
led Fortune Oil to examine prospects to expand this business at other
locations in China. We recently signed a letter of intent, with the
Jinzhou Port Authority and CNPC, with a view to constructing an SPM
at Jinzhou, in the north sector of Bo Hai Sea, in North-eastern
China. The Jinzhou SPM will be designed to receive 250,000 DWT
tankers, the same capacity as the existing SPM at Maoming. The annual
throughput capacity of the Jinzhou SPM is expected to be between 10
and 15 million tonnes. The Jinzhou SPM will serve two refineries,
whose combined annual capacity will be 20 million tonnes by 2003.
Prospects
Although the tragic events in New York and
Washington may have some impact on China, including slower growth in
intercontinental aviation traffic and in the shorter term, slower
exports, a continued rise in oil-related energy demand in China will
benefit our core businesses. The excellent working relationships we
enjoy with our joint venture partners, leading corporations in China
in their respective industries, will allow us to capitalise fully on
the opportunities with the entry into World Trade Organization. The
new projects already underway are proceeding smoothly. We are also
now identifying and developing additional infrastructure projects and
businesses associated with energy and petrochemicals where we can
make use of our experience, expertise and strong partners in China.
These projects will produce sustainable growth and income for the
Company and will enhance shareholder value over the long term.
Li Ching
Chief Executive
28 September 2001 |
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Fortune
Oil PLC
2001 |
FORTUNE
OIL PLC
Interim
Results for the six months ended 30 June 2001
CHINA
REVIEW
This November, China is set to gain formal
acceptance to the World Trade Organization (WTO). It is an event of
historical significance, symbolizing both the acceptance by the
country of international norms in the conduct of business and
recognition on the part of the international community of the strides
China has made in the past two decades of economic reform.
This reform has changed the nature of the
economic equation, certainly in Asia and in many
sectors globally. In the early 1990s, China's GDP was about two thirds
the combined GDP of Hong Kong, Taiwan, Korea and Singapore. Now it is equivalent
to those territories' combined GDP and according to US investment bank
Morgan Stanley, will in 10
years' time be twice the size. The country's huge
export manufacturing base dominates global production of consumer items ranging
from shoes to luggage. Less obviously, China's demand for raw materials
means that the country exerts a powerful influence over the prices of
many commodities.
Yet China's nearly US$500 billion of annual
trade accounts for only about half of
GDP - a smaller proportion than for most of its neighbours. China's large and
diversified domestic economy gives it an internal momentum that
enables it to
ride out the storms which have threatened to capsize the smaller ^Asia tiger^
economies. Hence, the country sailed through the Asian economic crisis with
GDP growth still in the 8 per cent range. Now, despite declining exports as
US demand continues to slow, the Government can still realistically forecast
growth of over 7 per cent.
True, exports are slowing. They rose a mere 9
per cent in the first half of 2001,
after soaring in 2000. Since April, growth has slowed sharply, suggesting
export performance for the full year will be lacklustre. Balancing this,
however, the domestic economy continues
to improve. Deflation has been arrested
and this, together with pay increases for the country's sizeable civil
service, has boosted consumer spending somewhat. Retail sales grew 10 per
cent in the first six months. As before, Government spending is also
stimulating demand. State investment in fixed
assets rose 18 per cent year-on-year
in the first half. A record RMB 260 billion (US$31.4 billion) budget
deficit is already in place, and could be increased.
Not surprisingly, given its out-performance as
an economy, China continues to attract
huge amounts of foreign investment. In the first six months, the Ministry
of Foreign Trade and Economic Co-operation (Moftec) approved nearly 12,000
new investment projects. Utilised foreign direct investment (FDI) rose 20
per cent year-on-year, while contracted FDI grew even more strongly
by 38 per
cent. This means that China should attract over US$50 billion in direct foreign
capital this year. A stable currency backed by over US$180 billion in foreign
exchange reserves should ensure that as the country opens its domestic markets,
capital will continue to flow in.
The strength of the economy overall and the
pick-up in domestic activity translates
into ever higher demand for oil products. For some time, observers have
noted an apparent anomaly between rising GDP and falling total energy consumption.
In part, this is attributable
to a more efficient use of energy, as
China shifts away from coal and small-scale power production. In
part, as has
recently been admitted, it reflects a failure to capture all coal-related energy
use in the official statistics. Certainly,
many of the prime consumers of oil in China are showing undiminished
growth. In the first half of the year, imports of vehicles nearly
doubled and sales rose 21 per cent, as China's love of cars reached new heights
following the relaxation of price controls. Analysts expect robust
growth to continue in the next five years.
Meanwhile railways are not being neglected.
A new five-year plan aims to add 8,000 kilometers of track to China's
railway network, to help meet an expected annual 7 per cent increase in
passenger traffic until 2005. In aviation, the Civil Aviation Administration
of China (CAAC) forecasts that air passenger traffic will grow by
8 per cent a year over the same time frame. By consolidating the industry around
three large carriers, China hopes to ensure a steady and sustainable growth
in domestic and international aviation traffic. The slowdown in international
passenger volumes, caused by the recent events in the USA, is not
expected to be experienced in the domestic aviation market.
The long-term picture for China and its
oil-related industries therefore looks bright.
Clearly, there are weaknesses in the economy. The banking system is burdened
by non-performing loans that could amount to 30 per cent of the total.
Reform of the State Owned Enterprises (SOEs) shows modest progress. But
the commitment to reform on the part of the Government remains undiminished
and the private sector of the economy every year accounts for a greater
slice of activity. Even the state sector has become noticeably more
efficient.
For companies operating in China, WTO
membership will increase competition, as major
multinationals gain greater freedom of manoeuvre as trade barriers fall. But
niche markets
will increase in importance and companies with the ability to
work with powerful local partners will be able to expand their role. For those
who know how to do business in China, WTO entry brings improved prospects.
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