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Hey investors and analysts, good morning. Welcome to our annual results presentation of COSL. I am the board secretary Wu Yanyan. We are conducting the meeting today online, and some of you are joining us through the telephone line. Thank you very much for your coming.
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First of all, let me introduce our management to you first. Today with us are Mr. Qi Meisheng, Chairman of the Board and the CEO; Mr. Zhao Shunqiang, Executive Director and President; and Mr. Zheng Yonggang, our CFO. While we grow our business, we have received great amounts of attention and support from all of you. We have been keeping communication with our shareholders and their investors, as well as sharing our results of our growth with our customers, shareholders and employees to realize the high quality of growth in COSL.
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The flow of the results presentation will be like this: Mr. Zheng Yonggang , our CFO, will walk you through our business performance. After that, we will open the floor for Q&A. We have already had some investors that have joined us online, so we are going to take questions from the telephone line first. For those investors online, please drop your questions in text. We have already collected some questions by way of public announcement before. For some questions that are commonly concerned for all investors, those questions will be addressed during the Q&A session if possible.
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Now the floor is yours, Mr. Zheng.
Good morning, ladies and gentlemen. Thanks for attending COSL 2020 annual results press conference. Please takeaway notes our disclaimer. Today's presentation will be divided into two parts. First is the 2020 results overview. In 2020, under the impact of COVID-19 pandemic and low oil price, the global investment in oil and gas industry fell sharply. Multiple upstream exploration and development projects were suspended, postponed, or canceled. The oilfield service market was impacted and challenged seriously. Facing challenge, COSL insisted to implement the strategy of technological and international development, actively coordinates the pandemic prevention control, specifies the implementation plan of improving efficiency with higher quality and lower cost, and speed up R&D and conversion into core technology.
In 2020, under the severe industry environment and the service price pressure, COSL's revenue was CNY 28.9 billion, and profit for the year was CNY 2.7 billion, which achieved an increase of CNY 190 million year-on-year. Look at the specific performance of our four major segments. For drilling service, the overall drilling volume declined because the investment in upstream exploration and development decreased globally. For well service, revenue had declined and gross profit margin had increased year-on-year, appearing advantage in comparison. For marine support service, the operation days of self-owned vessels remained stable. Operation capacity and safety performance improved steadily.
The business volume of geophysical acquisition and survey declined due to the impact of pandemic and low oil price. Facing the challenge of insufficient demand and oversupply in the equipment segment, COSL tracked the development trend of industry closely, and strove to achieve high quality development through continuously enhancing management and strengthening cost control. The equipment utilization rate of geophysical acquisition survey, drilling, and marine support of the company were higher than our peer companies. In 2020, the company continued to perform well in cost control on the target of reducing cost and increasing efficiency. The total variable cost was reduced by CNY 2.1 billion through reducing material consumption, repairing, subcontracting, as well as leasing cost and others. For market exploration, the company made achievements in both domestic and overseas market, signed 70 new overseas contracts.
COSL was also awarded the Best Contractor of the Year 2020 by PETRONAS, due to the safe and efficient service. COSL Confidence received praise from the PEMEX, and the COSL Hunter received praise from the customer for its high quality and efficient operation. For overseas market, the COSL made full efforts to promote the construction of our six main area and optimize layout of a global equipment to improve profitability of 2020. The company made a significant achievement in Asia Pacific, Middle East, America, and other regions. COSL adheres to the strategy of technological development, continuously optimizing system, promoting research on the key technology, and speeding up industrialization of independent technology to help to increase reserve and the production of oil and gas. COSL insisted on the core position of innovation and improve capability of assuring energy security.
As of 2020, the company had 805 sets of technical equipment, a net increase of 211 sets compared to the beginning of 13th Five-Year Plan. The independently researched and developed [DNW] equipment increased from 0- 66 sets. COSL own a large number of key technologies and equipment, which assures efficient implementation of Seven-Year Action Plan. In December 2020, COSL completed the first offshore application with a self-developed high speed pulser well drilling, filling the gap of the application of high speed pulser technology in China. COSL became the third company owning this technology in the world. COSL always adheres to the principle of safety first, and carry out in-depth investigation to eliminate hidden dangers and measure emergency. The annual OSHA index reached 0.065. The outstanding performance in quality and safety management was a crucial foundation to assure the internationalization of COSL.
In addition, the company attach importance to the energy conservation and environmental protection. Actively participate in public welfare and organize activities of safety and culture with customers. Here are the honors our company obtained in capital market in 2020. The company won various awards, such as Excellent Management of Corporate, Most Valuable Investment Award, and the Top 100 Chinese Enterprise Award of 2020. Receiving honors and recognition from the capital market, the company has secured a continuous improvement for its brand reputation. In the next part, I would like to share with you the outlook of 2021. According to the latest IHS report, the annual average price of Brent Crude oil will be $57 per barrel in 2021, and average oil price will be around $60 per barrel in 2022. The gradual recovery of oil price is conducive to the recovery of oil and gas company's capital investment.
The total CapEx of global upstream exploration development will increase in 2021 compared to 2020, among which onshore business grows faster. Let's look at the domestic exploration and the production environment. From China energy consumption structure, we can see that oil and gas continue dominating China energy consumption structure. According to the latest Bloomberg data, nearly 70% of the crude oil in China depend on importing. The Seven-Year Action Plan of Domestic Oil and Gas Companies will guarantee the prosperity of oil service industry in the certain period. As we all know, CNOOC is our important customer. According to its latest figure, CNOOC, the latest CapEx budget is around CNY 90 billion-CNY 100 billion, which is expected to provide stable workload for COSL in 2021.
Under this background, COSL will center on the five aspects: innovation driving, green and low carbon, overseas development, market leadership, and the talent-based development of enterprise to build capability respected by the industry. The company will focus on high quality development and realize the strategy of technological and international development, gradually developing itself into an integrated oil service provider, covering multiple energy fields and being internationally competitive. In 2021, the company will continue to speed up the serialization and the industrialization of technological products on the foundation of previous achievement and experience. To ensure a new layout of a mutual promotion of domestic and international dual circulation, COSL will aim at the development direction of the industry, deeply understand the needs of customer, and accelerate R&D of mainstream technology in the industry.
At the same time, COSL will give full play to its industrial chain advantage, improve the comprehensive service, achieve efficient allocation of resources, and cultivate and improve its core competitiveness. COSL firmly implements green and low carbon development strategy. Through various ways of rent, management, purchase, and construction, the company has formed a diversified equipment group in the whole sea area. The improvement equipment strength lays a solid foundation for the company's development. Next, let's look at the domestic market. At present, the China offshore market is our core market, and CNOOC is our core customer, which are the obvious advantage different from other competitors. In the current industry environment, COSL will explore new business and cooperation models, improve the competitiveness, reduce operating costs, firmly seize the strategic opportunities of national energy development, and try our best to meet domestic exploration and development needs.
Based on the domestic market situation, we prepare one slide to present contract information about the two jackup drilling rig and the 10 semi-sub drilling rig that we operate and manage in China currently. As some of the contracts still in the process of bidding or negotiation, we will update the information if there are any change. For the international market, COSL will build a dual circulation of domestic and international market. With the domestic market as the main body to promote internationalization effectively. COSL will focus on the six main overseas area of Asia Pacific, Middle East, Far East, Europe, America, and Africa to enlarge the international market. The company will continue to give play to the competitive advantage in the industry and achieve scale effects gradually to expand the scale of overseas revenue.
Next, looking at the operation of drilling rigs in the overseas market and the contract information about 11 jackup and three semi-sub drilling rigs that we operate and manage overseas so far. As some of the contracts still in the process of bidding and negotiation, we will update the information if there are any change. As mentioned above, oilfield service market is still under fierce competition in 2021. COSL will continue with the process cost control, strictly carry out prudent capital investment, pay attention to the dividend return to the shareholders, and maintain the leading edge in cost. The capital expenditure in 2021 will stand around CNY 4.3 billion. COVID-19 pandemic is a global serious crisis of public health over the past 100 years.
In 2021, COSL will continue to perform well in the prevention and control of the normalized pandemic, strictly implement the requirement of prevent overseas case, prevent domestic rebound, and protect both people and materials, and pay attention to various measures to prevent and control the pandemic. In 2021, COSL will remain committed to the goals of technological and international development and further transform the cost into the core competitiveness.
Based on the company's unit integration advantage, stable financial structure and a team with extensive experience in management and operation, COSL will create more valuable returns for our shareholders, customers and all parties. Thanks again to all shareholders and investors. This is all for today's presentation. Now we are happy to take your questions. Thank you.
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Thank you very much, Mr. Zheng, for your presentation. As I said before, some investors are joining us via web and some via telephone line. For the sake of a better communication, we would like to take questions from the telephone lines first. After that, we will take questions from the web. For interest of time, please remember that for each investor, maximum two questions. We have an interpreter online, and if you ask the question in English, our interpreter will happy to help you with the translation. Thank you.
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The first question is from Tony Wang from Zhongtai International. Two questions for the management. The first one is carbon emission and carbon peak are the heated words because it involved in the national strategy, and the government has already put forward this strategy before. In June, the carbon trading system will be kicked off. Just want to know that being a upstream service company in the oil industry, what measures are you going to take in order to cope with the carbon management? The second question is that it is said that COSL has already started acquiring resources in the upstream in UAE. Just want to understand what is the operations they did for right now, and do you see any new possibilities of a business growth there? Thank you.
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Thank you very much for your questions. I'm going to take the first one. Talking about the carbon emission and the carbon peak, absolutely it is a long-term goal for the country and it is also the planning and vision from the central government. Chinese companies have already started planning and establishing their own system in order to hit these goals. As for COSL, we focus on three areas.
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Specifically, first, we actively participate and coordinate with our customers in their designs from the tech level on how to hit this target of carbon emission and carbon peak. Secondly, for COSL itself, we started our own internal top design in our own system and also planning for the carbon emissions. Number three, from the social and industrial point of view, we also actively get engaged into the top design as well as the measure establishment.
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For more specific examples regarding these three areas and for the sake of interest, I'm going to give some very brief examples. For the customers' end, for example, some of the customers, they have operations in Mainland China, and in terms of the manufacturing and production from their offshore equipment, we provide our assistance and get involved into the top design.
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In terms of our COSL's internal system design, since several years ago till now, we have already launched 12 LNG powered vessels for supply and engineering services to our groups. This has already started our leadership in guiding the whole industry into clean energy.
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After launching these 12 vessels, if they are successful, this will promote the conversion from the conventional energy powered vessels to clean energy powered vessels in ourselves as well as in the whole industry, because we have over 140 vessels that are still using conventional energy.
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Meanwhile, we are also working very actively with some European countries. For example, Norwegian government is one of our partners in such a cooperation in the areas of energy management, particularly for those large-scale equipment for the offshore oil services.
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The third area, as I mentioned before, is about the whole society or the whole industry. Currently, we have already invested great a lot on the exploration and the development. For example, for the offshore wind power as well as onshore clean energy.
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This is to your first question about carbon emission and carbon peak. As we all know that carbon emission and carbon peak are very important to the government and to the country. This is the beginning, the first year, of the 14th Five-Year Plan. For COSL, we have already started actively designing our own systems internally and preparing our own plans.
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Your second question about UAE. We had, and we still have some business in UAE that are still under operation. UAE is the operating center and headquarters for COSL in the Middle East, which supports all the neighboring countries.
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In the past, we had over 10 years of cooperation with ADNOC in UAE in the area of onshore business. In the future, we are going to introduce more high-end technologies to not only UAE, but also the neighboring countries in the Middle East.
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I hope I have answered your questions. Thank you.
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This is Tingting from BofA. Two questions for you. The first question, before I ask the question, congratulations on your very good performance in the last quarter, last year. If we put the impairment back, your net profit would be CNY 1 billion, which is historical high. Just want to understand why, what are the factors that helped with such a high level of net profit. In my understanding, perhaps it has a lot to do with your price review with Sinochem. I just want to understand how much of the performance is from the price review with Sinochem. The second question is about cost control. We understand that you did a very good job last year on the cost control, CNY 2.1 billion last year. I just want to understand, what do you think about the room of further cost control for this year?
For example, in cost reduction, I still understand that the raw material prices are getting up. For example, steel. How do you think that you can further reduce your cost? Thank you.
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Thank you for your questions. I'm going to take your first question, and the second question will be taken by Mr. Zhao, our president. Just now you asked about our profit performance in Q4 last year. Actually, we didn't have any big price review with our customer CNOOC. The good performance in our net profit is first of all, brought by our business model innovation with our customers in terms of the service integration, as well as the EPS and so forth. The second factor that helped with the net profit contributor performance is that, we have a lot of contractors and we also innovated in how we cooperate with our contractors. That is our business model innovation. We are going to share the risk together, and we are going to share our profit together.
That's why we innovated our business model with the contractors and made a final settlement in the fourth quarter of the year, before the year.
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For both model innovation, we follow our business principle. As for how much room we have for this year in cost reduction, actually we are still discussing and exploring about it, and we don't have any specific targets for this year. Thank you.
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Of course, we will definitely keep working on them. The second question will be taken by Mr. Zhao.
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I'd like to take your second question. Facing this, the impact in 2020, we had already strengthened our actions and efforts in negotiating with our contractors.
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I'm talking about cost reduction. It involves three areas: the cost of our materials, the cost of our maintenance and repairs, and the long term or annual agreement.
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In 2020, we had price reviews with our key material suppliers. In terms of our contractors, we also encouraged them to have a profit sharing business model together with COSL.
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That will be the key raw materials, we realized 5%-10% of cost down.
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That in terms of the maintenance and the repairing phase, we also realized the high degree of price down. You know that we have vessels and we have drilling rigs. Now we just put the rigs into nine suppliers, one repairer, so that with higher volume, we can get a better price.
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Last year, we started negotiating with our suppliers on annual basis or long-term cooperation basis. We also reached some agreements with some suppliers. They also do wish to have this long-term agreement with them to guarantee the future revenue.
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Of course, we understand that the room for further cost down, or cost reduction is getting smaller and smaller. We hope that through long-term cooperative agreements and annual agreements, as well as strategic partners, we can expand this room. In addition to this, we hope that through the point-to-point or end-to-end price adjustment, we can help with the expansion of this room for further cost reduction. Thank you.
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This is Mr. Liu Peixian from CITIC Securities. Good morning, management, congratulations on your good performance last year. I have two questions for you. The first question is about your technical improvement in terms of R&D. I just want to understand what new achievements have been made in terms of technical R&D that can help with your further business performance in the future. The second question is about the impairment. In 2020, you made impairments on the assets and your facility and on your credibility. I just want to understand what will be the impact and what about 2021? Thank you.
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Thank you for your questions. Let me take your first question. In terms of our technical advancement in our R&D. As for the benefits, you can see it is very obvious benefits that we got last year. Along with our technical R&D activities being promoted, you can see we have realized achievements in terms of the directional well, the down well as well as other areas.
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Along with our investments in the oil fields as well as the chemical industry, we can see that there will be more benefits, positive benefits to our business performance.
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We have some charter rigs and this number has been going up and these are also positive influence to our business performance.
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Thank you.
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Let me take the second question about the impairment. From 2015 till now, the major service providers as the drilling companies have already made impairments at different times.
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Of course. Of course. We have been following the international accounting standards and each quarter we just keep tracking the signs for possible impairment.
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Far, we haven't found any signs of any further impairments in our assets and credibility.
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Along with the uprising oil price, as well as more and more drilling activities being taken, we see that the pressure for further impairment actually is going down.
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Thank you.
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This is the last question for the interest of time. This is Mu Lei from JPMorgan. Two questions for you. The first question is about the CapEx. We saw that in 2020 your CapEx increased, particularly in terms of the oilfield technical service sector. However, according to your presentation, you are going to reduce the amount of outsourcing in your business as well as improve your self-developed technologies. How should we understand the trend in the future of COSL? The second question is that in 2021, your major client, CNOOC, has increased its capacity, particularly for the domestic market, a lot. In order to hit its target of 2 million barrels per day. Can you please share with us your long term strategy? For example, from 2022- 2023, what will be your business development target? Thank you.
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Thank you for your questions. Very good questions and very professional. You asked about our CapEx. In 2021, it is true that a major part of our CapEx will go to the oil technical service sector. That is because we are going to reduce the amount of outsourcing as well as encouraging self-developed technologies. In July, one of the joint ventures between COSL and the manufacturer will be ready for operations. After the operation is done, our production capacity will be enhanced. When the production capacity reaches its normal level, we will be able to further reduce the outsourcing and make use of more self-developed technologies. Thank you.
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Let me take your second question. We do have already seen that our major customer, CNOOC, has increased its CapEx in 2021.
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I think that you must have already known a lot about the mid to long term strategy for CNOOC, and I would love to share with you some of my ideas.
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For CNOOC, it has already established a strategy very clearly in their conversion of four specific business sectors.
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The first conversion, the first change, is from the conventional to clean energy. The second one is from offshore to onshore.
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The third one is from shallow water areas to deep water areas, and the fourth one is from the domestic market to the overseas market. That is to say, more investments in the overseas markets.
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As you see that CapEx has prepared its CapEx for 2021, and the CapEx, the capital, will be allocated into these four areas.
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Therefore, we can see that it will be a very steady and stable amount of capital to be allocated into the conventional area, and there can be a slight increase of such capital allocation.
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Of course, for COSL, we will definitely be ready to capture the opportunities in these four areas accordingly brought by CNOOC.
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For COSL in the conventional area offshore exploration and development, because we are a key contractor to CNOOC, we will also allocate adequate amount of capital into this area. There also can be a slight increase in this area.
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The CNOOC has averaged more efforts into the development in mainland China in the domestic market. This is the third year since the launching of the Seven-Year Action Plan. Benefited from this Seven-Year Action Plan, as well as other peers in the industry, COSL has realized high quality of growth in our own business and won recognition from the society.
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We will be ready to capture the opportunities in the rest of three areas in order to support our further growth in the upcoming two to three years.
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Thank you.
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Thank you very much, management.
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The questions just now were from the telephone lines. As I said before that we have collected some questions after the announcement. Basically all the questions are focused on the carbon emission and the carbon peak, which has already been addressed by the management just now. Other questions are basically covered during the Q&A just now already. So, there's no further questions pending right now. I must thank you that all the questions are very good questions and very good professional ones. Thank you for your consistent attention to our performance and for the growth of the business. Through this Q&A, I believe that you must have got a better understanding of the company. Once again, thank you very much for your time and for your participation. Thank you.
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This is the end of the presentation. Thank you very much. Thank you.