Earnings Call: H2 2020

Mar 25, 2021

Investors and analysts, Good morning. Welcome to our annual results presentation of KOSO. I am the Board Secretary in Yan Yan. We are conducting the meeting today online and some of you are joining us through the chat online. So thank you very much for your coming. First of all, let me introduce our management to you first. And with us are Mr. Qingmei Sheng, Chairman of Board and CEO Mr. Zhang Sheng Tang, Executive Director and President and Mr. Zhengming, our CFO. So while we grow our business, we have received a great amount of attention and support from all of you. And we will have been shareholders and the control in should realize high quality of growth in cost The flow of the results presentation will be like this. Mr. Junping Gang, our CFO will walk you through our business performance. After that, we'll be open for Ping An A. We have already have some investors that have We have already collected some questions by way of public announcement before for some questions that are common concerns for our investors. Good morning, ladies and gentlemen. Thanks for attending COSO 2020 Annual Results Press Conference. Please take note our disclaimer. Today's presentation will be divided into 2 parts. First is the 2020 results overview. In 2020, under the impact of COVID-nineteen pandemic and the lower oil price, The global investment in oil and gas industry fell sharply. Multiple upstream exploration and development projects or suspended, postponed or canceled. The oilfield service market was impacted unchallenged Seriously. Facing challenge, KOSO insisted to implement the strategy of technological and international development, actively coordinates the pandemic prevention and control, specifies the implementation plan of improving efficiency with higher quantity and lower cost and speed up R and D and conversion into core technology. In 2020, Under severe industry environment and the service price pressure, KOSO's revenue was RMB28.9 and profit for the year was RMB 2,700,000,000, which achieved an increase of RMB190 1,000,000 year on year. Next, look at the specific performance of our 4 major segments. For drilling service, the overall drilling volume declined because the investments in upstream exploration and development decreased Globally, for well service, revenue had declined and the gross profit margin had increased year on year, Appearing advantage in compassion. For Marine Support Service, The operation days of self owned vessels remain stable. Operation capacity and the 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 increment segment, KOSO attracted the development trend of industry closing and strong 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, our target are reducing costs and increasing efficiency. So total variable cost was reduced by RMB2.1 billion. So reducing material consumption, repairing, subcontracting as well as leasing costs and others. For market exploration, the company made achievement in both domestic and overseas market signed 70 new overseas contracts. KOSO was also awarded The class of contractor of the year 2020 by Panalina due to the safe and efficient service Cost of confidence received praise from the Panex and the cost of Hunter received praise from the customer for its high quality and efficient operation. For overseas market, The KOSO made full efforts to promote the construction of our 6 main area and optimized layout of a global agreement To improve profitability of 2020, the company made a significant achievement in Asia Pacific, Middle East, America and other regions. KOSO adheres 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. KOSO insisted on the core position of innovation and improve capability of assuring energy security. As of 2020, The company had 805 sales of technical equipment, a net increase of 2.11 sales Compared to the beginning of 13th 5 year plan. So independently, Research and Development, D and W, equipment increased from 0 to 66 set. KOSO owned a large number of key technologies and equipment, which assures efficient implementation of 7 years action plan. In December 2020, KOSO completed the 1st offshore application with a self developed high speed poucer, poucer wire filling, Filling the gap of the application of high speed power technology in China, KOSO became the 3rd company this technology in the world. KOSO always adheres to the principle of safety first And carry out in this investigation to eliminate hidden dangers and major emergency. The annual OSAT index reached 0.065. The outstanding performance in quantity And the safety management was a crucial foundation to ensure the internationalization of KOSO. In addition, the company attach importance to the energy conservation and the environmental protection, actively participate in public welfare and organize activities of safety and culture with customers. Here are the owners of company obtained in capital market in 2020. The company won various awards such as excellent management Corporate Most Valuable Investment Award and the Top 100 Chinese Enterprise Award of 2020. Receiving honors under recognition from the capital market, the company has secured 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 IHSU report, the annual average price of branded crude oil will be $57 per barrel In 2021, our 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 companies' capital investment. The total KPAS of global upstream exploration and development will increase in 2021 compared to the 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 continued dominating China energy consumption structure. According to the latest Bloomberg data, Nearly 70% of the crude oil in China depending on importing. The 7 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 KPAS budget is around RMB 19,000,000,000 to RMB 100,000,000,000, which is expected to provide stable workload for KOSO in 2021. Under this background, KOSO will center on the 5 aspects innovation dreaming, 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 industrialization of technological products on the foundation of previous achievement and experience. To assure new layout of a mutual promotion of domestic and international due circulation, KOSO will aim at the development direction of the industry, Deeply understands the needs of customer and accelerate R and D of mainstream technology in the industry. At the same time, KOSO 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. KOSO 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 in equipment strength lays a solid foundation for the company's development. Next, let's look at the domestic market and present the China Offshore market is our core market And Cinox is our core customer, which are the obvious advantage different from other competitors. In the current industry environment, KOSO will explore new business and cooperation models, improve the competitiveness, Reduce operating costs firmly saves the strategic opportunities of National's energy development and try our best to meet domestic exploration and the development needs. Based on the domestic market situation, we prepare one slide to present contract Information about the 2 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, KOSO will build a dual circulation of domestic and international market. With the domestic market as the main body to promote internationalization effectively, Khoso will focus on the 6 main overseas area of Asia Pacific, Middle East, Far East, Europe, America and Africa to enlarge the international market. And 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 the 3 semi sub drilling rigs that we operate and manage overseas so far. As some of the contracts still in the process of on the negotiation, we will update the information if there are any change. As mentioned above, Oil field service markets still under fierce competition in 2021. KOSO will continue with the precise cost control, The capital expenditure in 2021 will stand around RMB 4,300,000,000. COVID-nineteen pandemic is a global serious crisis of public health over the past 100 years. In 2021, COSO 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 In 2021, KOSO will remain committed to the goals of technological and international development and further transforms our cost head 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, KOSO will create more valuable returns for our shareholders, Customers and all parties, thanks again to the all shareholders and investors. This is all for today's presentation. Now we are happy to take your questions. Thank you. Thank you very much, Mr. Zhang, for your presentation. As I said before, some investors are joining us via web and some via telephone lines. So for the sake of our greater communication, we would like to take questions from the telephone lines first. After that, we will take questions from the web. And for the interest of time, please remember that for each investor maximum two questions. We have an interpreter online. And if you use the question in English, our interpreter will be happy to help you with the translation. Thank you. The first question is from Charlie Wang from Zhoukai International. Two questions for the management. The first one is carbon emission and carbon peak are the heated world because it is fast 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 to mention now that being an upper stream 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 KaoXiao has already started acquiring resources In the upper stream in UAE, just want to understand what is the operations status quo right now? And do you see any new 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 the long term goal for the country and it is also the planning and the vision from the central government. Chinese companies have already started planning and dropping establishing their own system in order to hit these goals. As for COSO, we focus on 3 areas. Specifically, first, we actively participate and coordinate with our customers In their designs from the chapter on how to hit this target of carbon emission, non carbon peak. Secondly, for KOSO itself, we started our own internal top design in our own system and Also planning for the accounting measures. And number 3, from the social and industrial point of view, we also actively get engaged There are no specific examples regarding these 3 areas and for the sake of interest, I'm going to give you a very brief some 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 the offshore equipment, we provide our assistance and get involved into the tech design. And in terms of our cost of the internal system design, since several years ago till now, we have already launched a 12 Energy powered vessels for supply and engineering services to our rigs. And this has already started our leadership in guiding the whole industry into clean energy. After launching Phase 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 have raised conventional energy. Meanwhile, we are also working very actively with some European countries. For example, Norwegian government It's one of our partners in such a corporation in the areas of energy management, particularly for those large equipment for the offshore oil services. And the third area, as I mentioned before, just about the whole society or the whole industry. Currently, we have already invested a lot on the exploration and the development for the offshore wind power as well as onshore clean energy. So this is to your first question about carbon emission and the carbon tick. As we all know that carbon emission and the carbon tick are very important to the government and to the country. And this is the beginning of the 1st year of the 14th 5 year plan. For KOSHO, we have already started actively designing our own systems internally and preparing our own plans. Your second question about UAE, we had and we still have some business in UAE that are still under operation. And UAE is the operating center and headquarters for KOSO in the Middle East, which supports all the neighboring countries. In the past, we had over 10 years of cooperation with F Log in UAE in the area of onshore business. And in the future, we are going to introduce more high end technologies to not only UAE, but also the This is Jingjing from BOA, Two questions for you. The first question if I ask the question, congratulations on your very good performance in the Last quarter, last year, and if we put the impairment back, your net profit would be RMB1 1,000,000,000, which is a historical high. Just want to understand why, what are the factors that have to with such high level of profit, Net profit. And in my understanding, perhaps it has a lot to do with your price review business look. And I just want to understand How much of the performance is from the price review with Cinluc? The second question is about cost control. We understand that you did a very good job last year on the cost control, RMB2.1 billion last year. I just want to understand what do you think about the room for further cost control for this year, for example, in cost reduction? As we 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. Thank you for your questions. I'm going to take your first question. And the second question will be taken by Mr. Zhang, our President. So just may ask about our profit performance in Q4 last year. Actually, we didn't have any This is a model innovation with our customers in terms of the integration service integration as well as the EBS and so forth. The second factor that helped with the net profit performance is that we have a lot of contractors And we also innovated in how we operate with our contractors that is to sell business model innovation. We are going to share the risk together and we are going to share our profit together. So that's why we've innovated our business model with Now for the both model innovation, we follow our business principle As for how much room we have for this year in cost reduction, actually we're still discussing and exploring about it and we don't have any specific targets for this year. Thank you. Of course, we will definitely keep watching on them. I'd like to take your second question. So facing ways of the impact in 2020, we had already strengthened our actions and initiatives in negotiating with our contractors. I'm talking about cost reduction. It involves 3 areas: the cost of our materials, because of maintenance and repairings and the long term annual agreements. In 2020, we had Partly reviews away from our key material suppliers and in terms of our contractors, we also encouraged them to have a profit sharing business model together with KOSO. For the key raw material growth, we realized 5% to 10% accounts down. In terms of the maintenance and the recurring fees, we also realized the high degree of a price down. You know that we have also some of the heavy drilling rigs. But in the past, a rig may be repaired by different suppliers. And now we just put the rigs into 1 suppliers, 1 repairers, so that with higher volume, we can get a better price. Firstly, we started negotiating with our suppliers on annual basis or long term cooperation basis. And we also reached some agreements for such with some suppliers. And we also do wish to have this long term agreement with them to guarantee the future revenue. Of course, we understand that the room for further cost reduction is getting smaller and smaller. We have that through long term cooperative agreements and annual agreements as well as strategic partners. We can realize 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 have this expansion of this room for further cost reduction. Thank you. This is Mr. Liu Pei Siang from Zixin Securities. Good morning, management. On your good performance last year. I have two questions for you. The first question is about your technical improvement in terms of R and D. Just want to understand what new achievements have been made in terms of technical R and 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 just on your credibility, just want to understand what will be the impact and what about 2021? Thank you. Thank you for your questions. I can take your first question in terms of our technical advancement in our R and D. Actually, the benefits, you can see very, very obvious benefits that we got last year. Along with our technical R and D activities being promoted. You can see we have realized achievements in terms of the direction of They're done well as less other areas. Along with our investments in the oil sales as well as the chemical industry, We can see that there will be more benefits, positive benefits to our business performance. Besides, we have some chartered rigs and this number has been going up and these are also positive influence So let me take the second question about the impairment. So from 2015 to now, The major service providers, asset utility companies have already made impairments at different times. Of course, for KOSI, we have been following the international accounting standards. And each quarter, we just follow we just keep tracking the signs for possible impairment. So far, we haven't defined any signs of any but impacting assets and credibility. Along with the uprising oil price, as well as more and more trading activities being taken, We see that the pressure for further impairment actually is going down. This is the last question for the interest of time. This It's Mooley from JPMorgan. Two questions for you. The first question is about the CapEx. We saw that in 2020, your CapEx 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. So how should we understand the trend in the future of Okozha? The second question is that in 2021, Your major client, Sinhope, has increased its capacity, particularly for the domestic market great a lot In other cases, probably it's about 2,000,000 barrels per day. But can you please share with us your long term strategy, first of all, from 2022 to 2023, what will be your business development target? Thank you. Thank you for your questions. Very good questions and very professional. So if you ask about our CapEx, In 2021, it is true that the major part of our CapEx will go to the where our technical service sector And that is because that we're going to reduce the amount of outsourcing as well as in consulting self developed technologies. In July, one of the joint ventures between KOSO and the manufacturer will be ready for operations. After the operation system, Our production capacity will be enhanced. So when the production capacity reaches its level its normal level, then we'll be able to further reduce the outsourcing and make use of more self developed technologies. Thank you. Let me take your second question. We do have already seen that our major customer, Cinook, has increased its CapEx in 2021. As you said, you must have already know a lot about the mid to long term strategy for Simic and I would love to share with you some of my ideas. For Finlok, it has already established a strategy very clearly The first conversion or the first change is from the conventional to clean energy. The second one is from off shore to onshore. The third one is from shallow water areas to deep water areas. And the 4th one is from the domestic market to the overseas market, that is to say more investments in the overseas market. As you see that CapEx has prepared its CapEx for 2021 And the CapEx of the capital will be allocated into these four areas. So, therefore, we can see that there will be very Steady and stable amount of capital to be allocated into the conventional area and there can be a slightly increase from such capital allocation. Of course, for KOSA, we will definitely be ready to capture the opportunities in these 4 areas accordingly So for coastal in the conventional area, Offshore exploration and development, because we are a key contractor to Cinook, We will also allocate adequate amount of capital into this area and there also can be a slight increase in this area. The Singlet has started more efforts into the development in mainland China in the domestic market. And this is the 3rd year since the launching of the 7 year action plan. Benefited from this 7 year action plan as well as other players in the industry. Kanso has realized high quality of growth in our own business and one recommendation from the society. And we will be ready to capture the opportunities in the rest of the three areas Thank you very much, management. Thank you. The questions just now were from the telephone lines. And as I said before that we have collected some questions After the announcement and 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 and A just now already. So there's no further questions ending right now. I must thank you that all the questions are very good questions and are very good professional ones. And thank you for your consistent attention to our performance and for our growth of the business.