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Investors and analysts, good morning. Welcome to the 2024 interim results announcement meeting of COSL.
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Please first allow me to introduce the board and management members who attend this meeting. They are Mr. [Foreign language] Chairman and CEO.
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[Foreign language], independent Non-Executive Director.
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[Foreign language] vice president and Board Secretary。
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[Foreign language], chief financial Officer。
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[Foreign language], general manager of Drilling Rig Business Division。
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Mr. 唐海波, General Manager of Support Vessel Business Division.
2024[Foreign language].
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COSL has responded proactively to the new trends, changes and challenges in the global economy and oilfield service industry. In the first half of 2024, it has driven to become a world leading company through reform and innovation, and has achieved new progress in its operation. Driven by the five strategies: technology-driven, cost leadership, integration, internationalization and regional development, the company has pushed ahead with its sustainable operation, balancing economy, social and environmental developments, providing domestic and overseas clients with safe, quality, efficient and environmentally friendly full life cycle services, and bringing win-win results to employees, clients, partners and shareholders while boosting the quality development of the offshore oil industry.
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Today's event has two parts. First, the management will make a presentation about the 2022-2024 interim results and the future outlook. The second part will be the Q&A session. Now I will give the floor to the management.
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Thank you for the introduction. Now we will start the Q&A session. Please ask no more than two questions each person, so as to give more opportunities to other investors and analysts with questions. Before asking questions, please first name yourself and your company. After each question and answer, please give the interpreter time to interpret.
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[Foreign language]
Thank you for the opportunity. I come from Merrill Lynch. I have two questions. Actually, we have noticed that the two rigs have got new orders, and the performance in the second quarter of this year has been very good. My first question is about the income tax. The income tax is very high, and that's with the first two quarters. What's your take on the income tax in the second half of this year? The second question is about the well services. The growth rate of the well service segment has reached 20% and its operating revenue rate has increased from 10% to 80%. How did the company achieve such a growth rate? What's your take on the performance in the second half of this year?
[Foreign language]
Thank you for the question. I will take the first question about the increase of the income tax. Our income tax in the first half of this year was around ¥700 million, and last year in the same period, the income tax was around ¥406 million, so there is a ¥300 million increase, which is quite huge. In the first half of last year, the international tax policies actually have not changed. Almost all the countries keep their original tax rates, but there are several reasons that drive up our income tax.
First is about the payments of the overdue tax in Mexico, which will result in the increase of our income tax. The second problem is about our project in Saudi Arabia, and our client from that country has suspended the project of some rigs. The change of the contracts of the four rigs there will also impact our income tax. So that's the reason why we saw an increase of the income tax. In the second half of the year, I believe our income tax will go back to the normal level without the impact of the factors mentioned before.
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Thank you for the question. I will take the second question about the increase of the operating revenue of the well service segments and the outlook of that segment. There are several reasons to explain the growth in that segment. First, in the past months, we have seen the increase of workload both in domestic market and overseas market, so we have achieved the scale of economy. The second reason, in domestic market, one third of the workload is connected with the high temperature, high pressure and deep water operations. Such difficult environment actually will bring us both opportunities and challenges, and our new technologies and our special technologies, as well as our products, can be well applied in those kind of difficult situations. That will help to create value to COSL.
The third reason, over the past three years, the management of COSL has emphasized on the importance of cost control. We have built up a systemic and comprehensive cost control measures, and we have tried to control the cost at the smallest unit. For example, we constantly try to control the cost of each single rig, each single project, and each single line of business. We have built on some other standards and indicators to ensure we have efficiently control all the costs. We have built up a scientific and a systemic cost control system.
The fourth reason, we have always emphasized the importance of the quality and safety operation, and we have stressed the importance of non-operating time management, and the safety and quality departments of the company makes reports every day about the NPT management in domestic market and in overseas market every day to the management. We have enhanced our NPT managing capability. All the four reasons explain why we saw an increase in the operating revenue of the oil service, well service segments. About the future outlook, I believe in that segment, we will continue to keep the growth of the operating revenue.
That's because, for one thing, we have tried to expand our foreign market over the past years. Our market share of the foreign markets has increased from 60% in 2022, and then 21% in 2023, and eventually to 25% in 2024. We have diversified our markets and clients. We also promote our technologies and services to high-end clients, and our new technology has brought the recognition of our clients. We have improved our NPT management and cost control capability. That's why I believe we can achieve a sustainable development in the future.
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I come from CICC. I have two questions about the risks. Actually, four of the, two of the four rigs have got some new projects, and now on the market, the utilization rate of the jackup rigs has been decreased. So against that kind of backdrop, how can the management of the company find new opportunities for the other rigs? The second question is about the CapEx and the loan and medium term capital allocation. COSL has a very, has a huge depreciation, the cash flow of the company is quite good, but over the medium and the long run, will the company consider to pay out more dividends or try to reduce the debt ratio?
[Foreign language]
I'll take the first question. Despite now we have some issue in Saudi Arabia, but two of the rigs, the Seeker and Zhenh ai actually have got some new projects and they will be put into operation today, and their day rates have increased as well. As for the other two rigs, 936 and Guoj i, actually we are planning to take part in some bidding, and we believe in October there will be huge demand in Southeast Asian countries, Middle East and in some other foreign markets as well. The management of the company will keep the strategy of internationalization. We found that on the market, the supply is not greater than the demand, it's the demand is greater than the supply, especially in the foreign markets.
Actually, there are some other opportunities even for 2027, while trying to find more opportunities in Middle East and Southeast Asia countries and even in Europe.
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I will take the second question about the CapEx. Based on the current situation, I would like to say actually we have passed the phase for large investment. Last year, we invested ¥9 billion, and this year we will invest ¥7 billion in total. In the future, maybe we will continue to invest in rigs and survey vessels and some other kinds of vessels as well, but the investment level will not be as high as what we have seen in last year and this year.
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For the future investment, we will keep investing in the R&D of technologies. At the same time, we will try to transform our intangible assets, namely the technologies, into actual products, and we will try to transform our positive investment into actual assets, so it will be a long term process.
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As profitability and cash flow of the company increase, we will consider to optimize the debt ratio and the payout ratio as well. But the two aspects will impact each other.
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Actually, we have made a three-year plan for the debt optimization, and we will focus on four major aspects. The first aspect is the balance of the long-term debt and the short-term debts. The second aspect is balance the dollar debts and the RMB debt. The third part is the balance between the fixed interest debts and the floating rate debt. There is another aspect, but in total, there will be four. Our overall goal is to reduce the debt ratio and costs.
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After reaching a certain level of debt optimization, we will consider increasing the payout ratio of dividends.
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Despite all the turns, ups and downs in the process, we are moving forward.
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First, congratulations on the good performance of the company in the first half of this year. Mr. Chung has well explained the outlook of the well service segment and some other related details. I have noticed that the profit rate of the overseas market actually is not as good as that in the domestic market. What's the reason behind? So will the profit rate for the overseas market catch up as a level of what we have been seeing here in the domestic market? The second question is about the subcontracting costs. Over the past years, the company have invested to boost its own capability. What's your take on the future ratio of the subcontracting costs to the overall costs?
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Thank you for the question. For our investors or friends who have been very familiar with the internationalization process of the company, might well notice that over the past twenty years of development, at the very beginning, we mainly focused on the drilling rig segments. It was after the thirteenth five-year plan, the well service segment started to contribute a lot to the value and the profits of the company.
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That is because of the feature of the well service segment. That segment requires a lot of investment in the R&D, and it will be a long process. When it comes to the stage of the application of the new technology, we need to wait until the clients accept and recognize our technologies and products, and then after that, we will try to use the new technology at a larger scale and create value.
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We need to analyze the history at the same time, looking to the future. In the past twenty years, we can say that segment has grown from zero to one, and then they continue to grow, and they reach the break-even point, and eventually it could make some profits. As our new products and technologies are accepted by our clients, I believe the future will be much better.
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I would like to add more information to that question to explain why the profit rate of that segment in overseas market is relatively lower, and the prices of the products or technology depends on three different kinds of things. The first one is our own capability. The second one is whether our clients would like to accept our technology or product. The third reason is about the brand reputation. The well service segment is still at the initial stage of the internationalization. At the initial stage of the internationalization of the other two segments, for example, the drilling rigs and support vessel.
At the very beginning, our customers were price sensitive, they were not technology sensitive, so they would not like to pay high prices for our products and services. We also just exported some conventional technology. That's why we could not achieve a high margin in that segment. The third aspect is about the brand reputation, and actually our brand development on the international market is still at the early stage. We need to improve our performance in the three aspects mentioned before. So some clients, they need the technology for some difficult operating conditions, or sometimes they need advanced technologies. Of course, for those kinds of technologies, we can charge higher prices.
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The second question about the high subcontracting rate and whether there are any improvements for this area. Actually, in the well service segments, there are different kinds of services. For example, logging, directional drilling, and the cementing and completion, as well as the completion fluids. We have seen a high subcontracting rate in areas, for example, logging and directional drilling, especially directional drilling, which has a subcontracting rate of about 40%. We have two measures to lower the subcontracting rate. If the workload increases at an annual rate of 30%, it will be very difficult for us to meet all the market demands just by ourselves with the current capacity. So to address the problem, first, we will try to develop our own capability. At the same time, we will try to seek cooperation with our partners.
Namely, we will try to meet the market demands through subcontracting.
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My question is about the drilling rig segment, and from last year's annual and semi-annual financial statements, we can see the day rates of different kinds of rigs. In the semi-annual financial statements and the annual financial statements of 2023, we can see the day rate of the jackup was around $79,000, and that of semi-submersible was around $143,000. However, this year, we can see the day rate of the jackup was lowered to $ 74,000, and that of the semi-submersible was lowered to $ 134,000. I noticed how you calculate the day rate, that is to divide the revenue by the operating days, so the day rate will not be impacted by the non-operating days of the rigs.
Could you please offer the reasons why the day rate of the rigs decrease and what's your take on the future rig rates?
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The two questions you asked are really difficult to answer. I will try my best to answer the questions. You have noticed that the rates of the jackup rigs and the semi-submersible have decreased. 呃，actually our workload has not increased yet, but we still keep, but this profitability of that segment has increased. There are many two reasons behind that. One is because we get a good price, the other reason is because we do quite good in cost control. As for the decrease of the day rate, there must be some other reasons behind that.
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The first reason, over the past two years, we saw a huge demand for rigs that can work in high temperature and high pressure, and rigs that can work in deep water and deeper strata. The rigs that can work in those different kinds of difficult conditions must have advanced technology. That's why the price for that kind of rigs is high.
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In the future, we will see greater demand for rigs that can work in high temperature, high pressure, deep water and deeper strata environments. At the same time, the demand for those conventional rigs, which can work in the normal temperature, normal pressure will decrease.
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Thank you once again for your questions and explanations of the management. I would also like to thank you for your interest in this quarter for COSL. Because of the time limit, the conference concludes now. If you still have some other questions, please contact the company at any time. Thank you once again for your participation. That's the end of the meeting. Thank you.
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