During the six months ended 31 December 2016 (“the period under review”), the total revenue of the Group increased by approximately 44% from HK$21,649 million to HK$31,257 million for the same period last year. The increase in revenue was mainly due to the growth in sales volume of International Trading and Bunkering (“ITB”) business as well as the recovery of oil price.

The Group recorded a gross profit of HK$1,214 million as compared to HK$665 million for the same period last year. Adjusted gross profit, which takes into consideration of the fair value change of derivative financial instruments used for hedging of oil price, remain stable at HK$1,043 million for the period under review compared to HK$1,159 million for the same period last year.

EBITDA contribution to the Group for this period increased from HK$761 million to HK$1,465 million, representing an increase of 93% compared to same period last year.

The increase mainly arises from ITB and Upstream business segment, where ITB business recorded an increase of 110% EBITDA from HK$232 million to HK$488 million and Upstream Oil and Gas business recorded an EBITDA of 339% from HK$791 million to HK$180 million for the same period last year. The increase was due to an increase in the sales volume for ITB, increased upstream oil and gas assets production and the recovery of oil price, together with the recognition of the impairment loss of Caofeidian oil fields in China of HK$619 million for the same period last year. However due to the freight rates not as good as last year, our Marine Transportation business recorded an EBITDA of HK$216 million, representing a decrease of 50% from the HK$433 million for the same period last year.

Profit after tax for the period amounted to HK$412 million compared to a loss of HK$523 million for the same period last year, and the Group recorded basic and diluted earnings per share of HK4.07 cents and HK4.07 cents respectively.

Liquidity and Financial Resources

At 31 December 2016, the Group had total cash and bank and including pledged bank deposits of approximately HK$1,254 million. The bank balance and cash decreased by HK$4,025million compared to 30 June 2016 as a result of timing difference in receiving the trade debtors.

Total bank borrowings of HK$12,955 million, which mainly included loans for oil tankers of HK$2,249 million, loans for upstream assets of HK$4,493 million, trade financing trust receipts and loans for ITB business of HK$5,594 million and loans for holding company of HK$619million.

The Group considers its foreign currency exposure is mainly arising from the exposure of exchange between Hong Kong dollars, Singapore dollars, Renminbi and United States dollars. The Group manages its exposures to foreign currency transactions by monitoring the level of foreign currency receipts and payments and ensures that the net exposure to foreign exchange risk is kept to an acceptable level from time to time.

Contingent Liabilities

At 31 December 2016, the Group did not have any significant contingent liabilities.

Upstream Business

The Group’s upstream business consists of three oil and gas production projects, two of which are natural gas development projects, namely the Dina 1 Gas Field and the Tuzi Gas Field in the Tarim Basin, Xinjiang, China. We operate these two gas fields with a 49% working interest, and the partner is China National Petroleum Corporation. The Group also owns an offshore oil development project located at Caofeidian in Bohai Bay. It is developed in partnership with China National Offshore Oil Corporation, which is the operator. The Caofeidian Oil Field is composed of two conventional shallow water blocks – contract area 04/36 and contract area 05/36 – with a working interest of 40.09% and 29.18% for the Group respectively.

As at 30 June, 2016, according to the evaluation by the American petroleum consulting firm D&M, the total proven and probable reserves (“2P”) for each project are as follows. The 2P reserves of the Dina block are 8.75 billion cubic meters of natural gas and 495,000 tons of condensate, out of which the Group’s share is 4.1 billion cubic meters of natural gas and 233,000 tons of condensate with an a net present value (NPV10) of US$470 million. The Tuzi block contains 2P reserves of 9.8 billion cubic meters of natural gas and 64,000 tons of condensate. Within this total, the Group owns 5.27 billion cubic meters of natural gas and 34,000 tons of condensate with a net present value of US$531 million. Caofeidian oil field has 2P reserves of 115 million barrels of oil equivalent (“boe”), and the portion owned by the Group is 37.61 million boe with a net present value of US$1.07 billion.

During the first half of the financial year 2017 (“FY2017”), the production of our upstream projects continued to run smoothly. Dina 1 Gas Field had two wells in production with a daily production of approximately 1.1 million cubic meters. Tuzi Gas Field had a daily production of approximately 2 million cubic meters with 14 wells in production. During the period under review, the natural gas production of the above two gas fields was 540 million cubic meters in total, with an average selling price of RMB1.0265 per cubic meter and the total cost including tax ranging between RMB0.46 and RMB0.65 per cubic meter. The two natural gas projects contributed HK$280 million in earnings before interest, tax, depreciation and amortization (“EBITDA”) and HK$145 million in net profit after tax (“NPAT”). In the oil segment, the daily production of Caofeidian oil field in Bohai Bay was about 35,000 boe. During the period under review, crude oil production reached 5.96 million barrels of oil equivalent, with an average selling price of US$ 44.7 per barrel. The corresponding total cost including tax was approximately US$50 per barrel; the total cash cost is about US$20 per barrel, which is made up of an operating cost of US$12 per barrel and a financing cost of US$ 8 per barrel. The Caofeidian project brought HK$512 million in EBITDA and HK$110 million in net loss after tax.

Looking ahead to the second half year of FY2017 and the near future, all the upstream projects will achieve considerable increase in production. The overall development plan of the Dina project consists of three wells, among which one well (Dina 1-3) is still under construction. It is expected to be completed in March 2017 and is planned to put into production in July 2017. At that time, the daily production of Dina block will increase to 1.7 million cubic meters. According to the technical information provided by the joint management committee in the second half of 2016, the gas-water interface in Dina Gas Field is found to be about 80 meters below the previous forecast level, which provides a scientific basis for the future production and reserve increase of Dina Gas Field. In Tuzi Gas Field, 5 new wells were completed in December 2016 and two of which were successfully put into production in January 2017. The preparatory work of production is also complete in the remaining new wells. Once all of them are put into operation, Tuzi Gas Field will have 19 operating wells and the daily natural gas production can reach

2.75 million cubic meters. Moreover, the Tuzi 4 deep exploration well completed in 2016 has discovered new gas layers at 3,100 meters, 3,800 meters and 4,300 meters underground, and has already obtained commercial airflow. The contingent natural gas resources are estimated at 38 billion cubic meters. This discovery of new reserves will drive the future commercial development in the Tuzi block. As for our oil production business, Caofeidian Oilfield is about to implement the adjusted overall development plan. A total number of 89 new drilling rigs will be put into operation gradually over time by May 2019, and the daily production of Caofeidian Oilfield will then reach 60,000 boe.

At the macro level, Chinese oil and gas demand has experienced rapid growth. In 2016, China’s crude oil import stood at 380 million tons at a 13.6% YoY increase. The supply-demand gap of natural gas is even more pronounced. In 2016, natural gas consumption grew by 6.6% YoY to 210 billion cubic meters, which far exceeded China’s own production volume of 140 billion cubic meters. This caused the import volume to increase 17.4% YoY to 72 billion cubic meters. Against the background of industrial gas power generation, urban haze pollution management and a growing demand of clean energy, it is foreseeable that China will continue to develop natural gas with full effort. According to China Natural Gas Report 2016 issued by National Energy Administration, natural gas only accounts for 10% of the industrial fuel usage at the present. The Chinese government has made natural gas one of the national key energy sources following coal and oil, and strives to increase the proportion of natural gas consumption to reach 15% in 2030. As a reference, the corresponding current ratio is 40-50% for developed countries.

As natural gas will gradually replace part of the coal consumed in the areas of industrial production, urban gas supply, and natural gas power generation, natural gas outpaces oil in demand growth in China. As a result, the price of natural gas is expected to rise faster than that of oil. To promote the development of natural gas, the Chinese government will implement an open competitive pricing system in accordance under the principle to “control the middle section and deregulate both ends” where gas prices, city-level gate prices and customer-end sales prices are determined by free market mechanism. The aforementioned demand increase and industry reform are conducive to a long-term rise of natural gas price, supporting the sustainable development and profit growth of the Group’s upstream business. The Group anticipates that our existing Dina-Tuzi Gas Field and Caofeidian Oilfield will stand to achieve higher economic returns under the favorable environment of sustainable oil and gas demand in China.

International trading and bunkering was historically the first business segment of the Group. As for international trading, our crude trading team has long been working with the Chinese oil majors to develop long-term supply contracts. As the Chinese government has further raised its crude oil import quota, the Group has actively cooperated with the local refineries in China, providing a rationalized procurement solution to address their bottlenecks in raw material demand, so as to expand sales channels and profitability. For resources procurement, the Group continued to maintain purchasing advantage in the Middle East and South America while actively involved in the procurement and allocation of resources in West Africa.

Our fuel oil and marine bunkering business has continued to be active in Asia Pacific markets such as Singapore, China, Taiwan, Korea and Japan. In recent years, considerable savings in operating costs and increase in profit margins have been achieved through light asset operation resulted from resource optimization as well as the cooperation of our experienced trading and execution teams. The Group has also purchased six bunker barges to meet the bunkering demand in Singapore, among which three 7,000 DWT barges and two 4,100 DWT barges were awarded the certification of the Mass Flow Meter (“MFM”) system by Maritime and Port Authority of Singapore. The remaining 4,100 DWT barge is used as marine diesel fuel bunker barges. This achievement has received praise and recognition from world class ship owners due to the enhanced bunkering efficiency and significantly reduced complaints and disputes arising from quantitative differences and also laid a solid foundation of full implementation of MFM in Singapore Port after 1 January 2017.

Furthermore, the Group launched an e-commerce platform for marine bunkering in January 2016. On this platform, not only can customers inquire and manage orders, but also receive the latest information through mobile devices, including shipping market news, the international oil market trend, oil prices among different oil supply ports, and the current nine-month forward fixed price. The e-commerce platform made a great convenience to the ship owners and gained numerous sticky users in more than twenty countries and regions.

During the period under review, there was a divergence in economic performances among different regions. In particular, the US economy showed good growth with strong stock markets and interest rates, while China faced downward pressure on the economy and the government continued to implement the Belt and Road initiative as well as supply side reform to offset the pessimism in the market. Against this background, the international shipping market was still under pressure, leading to bankruptcies, restructuring, mergers and acquisitions and integration between large ship owners. This situation represents a future with ample opportunities in the shipping market. In this same period, Brent crude oil prices fluctuated in a range of US$42-58 per barrel. A series of geopolitical events – Brexit, the US presidential election, the agreement to cut oil production between OPEC and part of the non-OPEC oil producers – has caused significant volatility in international crude oil prices and also pushed up the market expectation for future oil prices. The pronounced volatility in oil prices has brought new trading opportunities in the market. Through macroeconomic analysis and massive data-based research, the Group’s trading team has actively captured market opportunities and created profits for the Group.

During the first half year of FY2017, the Group’s international trading and bunkering business sold 59.8 million barrels of crude oil and 3.6 million tons of fuel oil, with the sales volume increase of 60% and 38%, at the average selling price of US$46 per barrel and US$280 per ton respectively. The EBITDA of this segment reached HK$600 million; and the NPAT was HK$500 million. Looking ahead to the second half year of FY2017, profits are expected to grow further due to oil price recovery and continued sales increase.

In the future, the Group will continue to develop its international trading of crude oil, fuel oil and other products as well as the marine bunkering business. With commissioning of Zhoushan oil storage and terminal facilities, the Group will enjoy more high value-added trading opportunities and will be able to transport crude oil with VLCC’s to the storage depot directly. Through the oil pipeline network connected to our Zhoushan storage depot, our crude oil can be delivered to all the refineries located in Eastern China, which facilitates the operation of existing and potential customers and optimizes the efficiency of the entire supply chain. Leveraging on the advantages of our Zhoushan oil storage facilities, the Group will enhance our regional competitiveness and expand our market share through procurement of VLCC-sized arbitrage cargo and in-storage blending. The expected cost reduction will translate to a 1% sale margin improvement based on the current bunker price level. Under the full implementation of flow meter for fuel oil supply on January 1, 2017, Singapore – the world’s largest offshore oil supply port – has set up a common supply standard which regulates the market operating environment. Thus, the Group’s six bunker barges are expected to operate with improved utilization and efficiency.

The Group will also continue to build out and develop a comprehensive e-commerce platform for maritime transportation, by way of new technology and the Industrial Internet. We will also launch an upgraded marine bunkering platform alongside an energy information platform on which customers can not only receive the latest information about shipping market news and international oil market trend via mobile devices, but also experience a one-stop solution for shipping. Furthermore, based on the world’s strong demand for clean energy in future, especially from China, the Group will actively participate in the international trade of liquefied natural gas and supply it to the end customers in the Chinese market.

Marine Transportation

The Group currently owns 15 vessels in total, including 5 VLCC’s, 4 Aframax vessels and 6 bunker barges, with a total tonnage of more than 2 million tons. The Group is committed to providing customers with safe and efficient ocean shipping services for crude oil and fuel oil transportation, participating in the long route to the Middle East, West Africa, and the Far East as well as the short route to the Far East and Southeast Asia region. We continue to adhere to our China-focus strategy, with target customers being large-scale Chinese oil enterprises such as UNIPEC and PetroChina. In the first half of FY2017, almost one hundred percent of cargos were covered by Chinese charterers.

During the period under review, the fleet transported 7 million tons of crude oil and the revenue of marine transportation business was HK$530 million. The corresponding EBITDA was HK$240 million; and an NPAT of HK$84 million was recorded. The average time charter equivalent (“TCE”) of the Aframax vessel reached US$14,000, while the average TCE of VLCC was around US$32,000. We have managed the business with diversified strategies for VLCC and Aframax: VLCC vessels focus on repositioning and short-long haul combination; while Aframax vessels pursue efficiency by minimizing the waiting days of the voyage. Time charter business has also been applied and has achieved a higher return compared to the spot market, which will also be one of our key tactics in 2017. Moreover, we have also made our best effort in cost control. Due to the tight control over expenses and the depreciation of RMB, the average port cost in China reduced by around 7% in 2016. In the meanwhile, the insurance cost for Hull and Machinery insurance and Protection and Indemnity insurance was brought down by about 9%.

As predicted, the freight market fluctuated in the second half of 2016 with a slightly lower performance compared to the same period in 2015, mainly driven by the sped-up fleet expansion. After years of mild growth, the global VLCC and Aframax fleets experienced a tonnage expansion of 7.1% and 5.6% in 2016 respectively. However, on the positive side, the total volume of crude and fuel oil lifted by VLCCs grew by 6.6% in 2016, which has effectively eased the tonnage supply surplus. The outage in Nigeria during Q2-Q3 was another major factor which reduced the ton-miles demand. But after Nigeria exports recovered in Q4, the daily return on VLCC has climbed back in a short time, reaching close to the Q1 averages. Moreover, the port congestion in China at the end of the year also supported the freight market by cutting tonnage supply indirectly. All in all, the average freight of crude tank in second half of 2016 continued to maintain at a healthy level.

Looking into the second half year of FY2017, the average TCE of our VLCC’s is expected to rise, while the Aframax rent is forecast to stay at the current level. These expectations are based on the following positive factors at play.

The average crude oil price in 2016 was approximately 16% lower than that in 2015, but it kept firming up throughout the year, from about $30 USD/bbl to the $60 USD/bbl level. A volatile crude market usually creates more opportunities for oil trading houses as well as ship owners. In the past year, various major world events had an impact on the oil price. In particular, the OPEC and non-OPEC countries struck a landmark deal to cut production. We believe that crude oil price will continue to fluctuate in 2017, which will be a positive sign for traders and ship owners.

According to the International Energy Agency, a positive oil demand growth is expected in 2017, which will be around 1.3 million bpd. Approximately 0.9 million bpd of this growth is seen originating from Asia-Pacific. In Asia, China and India still play the key role as the major oil import countries. On a related note, the Baltic Dry Index has also added a new route called TD3C (the Middle East-China) as a benchmark. China’s import for the purpose of building its strategic petroleum reserve averaged near 1 million bpd in 2016, which was an important part of VLCC demand growth for the year. At the same time, the demand from Chinese local refineries has been on the rise and several such refineries have already started chartering in VLCC’s on their own since the second half of 2016. Moreover, there will be further expansions of state-owned refineries in production capacity in 2017.

Marine Transportation – Continued

Although the next 2 years will be the high tide of new-build delivery, the aging structure of global fleet should not be ignored. For instance, there are now about 157 VLCC vessels over 15 years old, which accounts for more than 20% of the current global VLCC fleet. The two regulations that have recently been approved by the Marine Environment Protection Committee of the International Maritime Organization – namely the Ballast Water Convention and the 0.5% sulfur cap for bunker fuels starting in 2020 – are expected to marginally encourage fleet removal of older tonnage. It will also make an impact on the cost of bunkers, crude price and product trade in the long run. As such, the next few years will present great opportunities in the tanker transportation market.

Besides the traditional shipping business, our innovative marine e-commerce project is progressing as planned. The platform is to provide integrated marine services to shipping players including but not limited to ship owners, charterers, ship agents, shipping chandlers, crew managers, seamen, etc. A dedicated team consisting of shipping and IT professionals has been set up and working together on an integrated e-commerce platform for marine transportation, with the target online date set for the first half of 2017. The whole development process is divided into three stages and we are currently in the final stage before the launch of the platform. The development of some of the product modules have been completed and passed tests in the second half of 2016. The team is currently working hard on the remaining modules and the integration of all the modules.

When the final product is put online, our work focus will move to daily commercial operation, sales and marketing, in attempt to attract and guide potential clients. Meanwhile, an offline service team is being set up and trained to provide professional marine related services to support the online business. Like all other new products, our e-commerce platform is expected to face challenges when they enter the market, but our team is confident because our E-commerce platform is specifically designed and developed to meet the potential demands in the traditional shipping through providing convenience and efficiency. We are looking forward to making E-commerce another profit center to support the sustainable development of our shipping segment.

Given economic and population growth as well as fuel consumption of the transport and chemical industries, oil will still be one of the world’s major energy sources, accounting for one-third of global energy demand. Chinese oil consumption will maintain growth, albeit at a slow pace, and the foreign-trade dependence ratio will exceed 65%. As import increases, large storage facilities have become highly required. Oil tanks in combination with large terminal facilities are scarce in China.

Addressing the above demand-supply gap, the Group’s oil storage and terminal facilities in Zhoushan and Dalian are advantageously positioned at China’s deep water harbors and commodity trading centers, with its connection to national oil pipelines and nearby refineries by virtue of their leading scale and design throughput. Our terminal facilities with berths for up to the 300,000 DWT VLCC vessels will be a distinct competitive advantage to our oil storage and terminal business in China.

The Zhoushan project is located at Waidiao Island in the Zhoushan Archipelago area of the Zhejiang Province. The remarkable location at the center of Yangtze River Delta region, which includes metropolises such as Shanghai, Hangzhou and Ningbo, provides distinct geographical advantages to become a hub for processing, transferring, warehousing and trading of oil and other commodities. The Zhoushan oil storage facility carries a total capacity of 3.16 million cubic meters and is developed in two phrases. Phase 1 offers a capacity of 1.94 million cubic meters while Phase 2 has a capacity of 1.22 million cubic meters. The facility provides storage service of petroleum products including crude oil, gas oil, diesel, aviation kerosene, fuel oil and petrochemicals. The terminal facility will be equipped with 13 berths which can accommodate vessels ranging from 3,000 to 300,000 DWT. After the completion of both phases, our Zhoushan project will be the largest oil depot by throughput capability in the Zhoushan Archipelago area. More importantly, it will be one of the two largest oil depots which are equipped with VLCC-sized berths and rent storage space to third parties simultaneously.

The construction of Phase 1 of the Zhoushan project is currently close to completion. It is expected to finish in the second half of 2017 and become operational by the end of 2017. Phase 2 is expected to open to business in the first half of 2018. The construction of the terminal with 13 berths is complete, with the related ancillary facilities being developed. The terminal is expected to commence operation in the second half of 2017 together with Phase 1 of the storage facilities.

The commissioning of the Zhoushan project will greatly enhance the Group’s capability to integrate our resources. In addition to providing customers with competitive storage and transport services, the Zhoushan oil depot will become a great aid in our spot trading of crude oil and fuel oil and the provision of value-added services such as blending and arbitrage. It will also provide strong support to our marine bunkering and our e-commerce platform – Brightoil Online – and forge a strong synergy with the other business segments of the Group.

The Dalian project is located in the government-approved petrochemical industry base on Changxing Island, Dalian, which is one of the key such bases set out in the national planning. As a major piece of the logistics infrastructure there, our Dalian storage and terminal facilities will emerge as a center for trading, storage and transshipment of oil products such as crude oil and fuel oil in the Bohai Bay region and even Northeast Asia. The oil storage facilities in Dalian will be built in two phases, with a total design capacity of 7.19 million cubic meters. Phase 1 and 2 can hold 3.51 million cubic meters and 3.68 million cubic meters respectively. The terminal facilities will be equipped with 13 berths capable of accommodating tanker vessels from 3,000 to 300,000 DWT. Currently the site leveling work has been completed and the preliminary work of construction is under way. The Group will devise the construction plan and proposal at a suitable time depending on the market conditions and the progress of the project procedures.

The Group’s oil e-commerce platform – Brightoil Online – was launched at the beginning of 2016. After one year of development, we have already developed refueling and oil storage functions as well as diversified card products, in order to meet the different consumption and investment needs of users. Through innovations in products, business models, and the industry landscape, Brightoil Online has built a foothold in in the oil consumption market with a remarkable competitive edge, amassing close to two million registered users already. In the meanwhile, convenient refueling for Brightoil Online users has materialized through a combination of swift refueling operations, a mobile payment settlement system and a large network of petrol stations. Brightoil Online is built on the model of the internet plus core competitiveness, by integrating instant online access with our superb storage and supply capabilities.

In the next phase of development, Brightoil Online will create a car owner ecosystem for fuel consumption step by step. It will further enhance its online customer conversion rate, strengthen the innovative customer experience, and improve the operational efficiency of online ordering and offline services. In conjunction with nationwide consumer-end branding and promotional activities, the network of offline gas stations has been fully expanded, extending our coverage to the whole of China. Besides the improvement in the offline system, Brightoil Online has collaborated with multiple banks to launch co-branded credit cards and is planning to add car insurance products. Hence in the fields of petroleum consumption and finance, our platform will be strengthened by a more comprehensive offline system and a more robust backstage support.

In a market of more than 100 million car owners and transport operators with an annual spending of RMB4000 billion on oil products, Brightoil Online sets out to remake the traditional petroleum consumption mode and consumer experience. We are committed to delivering lower fuel costs and optimal experience to our customers. Propelling the synergistic growth in our physical supply chain, Brightoil Online will create new momentum for the future development of the Group.

Full Report

Source: Brightoil Petroleum