Earnings Call: Q3 2020

Oct 29, 2020

Quarterly report

Ladies and gentlemen, good afternoon. First of all, thanks for joining the 2023rd quarter results conference call of China Oilfield Service Limited. Now please allow me to introduce you to the management representatives, Mr. Zheng Yougang, Chief Financial Officer and Mrs. Wu Yan Yan, Board Secretary. At today's presentation, Mr. Zheng Yougang will walk you through the financial figures and operational review for the first 3 quarters of 2020. After that, we'll open the floor for questions. Now, let me pass the time to Mr. Zheng. Okay. Ladies and gentlemen, and good afternoon. I'm Simon, CFO of COSO. Welcome to the 2020 Q3 results conference call. COSOLD has just released 2020 Q3 results. Firstly, I would like to give you a brief introduction. As of the Q3 of 2020, due to the due impact of COVID-nineteen pandemic and the depressed global oil price, the international oil service market fell into the trough, benefited from the continuous implementation of the domestic 7 years action plan and multiple efforts such as cost reduction as well as quantity and efficiency improvements, reasonable allocation resources, increased investments in scientific research, KOSO achieved stable operating results as compared with the same period last year. In the 1st 3 quarters of 2020, operating income reached RMB 21 or RMB45 1,000,000,000 Net profit reached RMB2.17 billion. The operation volume of drilling service segment and the main lines in the well service segment has been increased. For the marine support service, stable operation was maintained. The number of operating days for the self owned fleet was basically flat, and the operation of the company's charter vessels increased as compared with the same period of last year. As for the Geophysical Acquisition and Survey Service segment, the workload for the 2 d and 3 d survey decreased due to the outbreak of the pandemic. The domestic market remains stable with recovery of the economy and the long term deployment of National Energy Security Strategy. However, the development under the prevention of pandemic overseas and the trend of oil price still face severe conditions. In response to the macro overall uncertainty such as dynamic and industry challenge, COSO will continue strict implementation of works, such as safe operation and cost control through multiple measures, driving for stable operation for the year. This is the operation of COSO for the 1st 3 quarters. Please feel free to read the question if you have any. Thank you very much. Thank you, Mr. Zhu. Now we will open the floor for questions. Please note that we will provide a comprehensive interpretation during the Q and A session. Thank you, management. Ladies and gentlemen, we are now going to the Q and A session. If you would like to ask any questions, please press down on the telephone keypad. Thank you. This is Leo from Daiwa Capital Markets and I have a basic A2 question. My first question is regarding the finance cost. We see that there's significant increase in finance cost in the Q3 of this year. And we assume partly it's due to the appreciation of renminbi against USD. So can you give us a brief breakdown about how large this is going to be coming from exchange losses and how large is this recurring finance cost? And we also see that there's declining utilization rates for the Drilling Services segment. So can we have a forecast or a guidance for the utilization rate going forward moving into Q4 this year as well as 2021? Thank you. I would like to answer your second question first. It is true that comparing with last year for our drilling services, the utilization rate has declined. This is because of the vessel chartering platform. Well, in fact, our workloads have increased. However, if you compare our workload with the vessel chartering platform, well, the growth for the external vessel chartering platform is faster than our own workload growth. But then there is no need to worry about this because for the external vessel chartering platform, the arrangement is that of a back to back arrangement in terms of cost and expenses. So when we utilize the platform, then only then will we incur cost. So if you look at Q4, Q4 is traditionally a slow season and utilization rate is believed to come down further from the current level. So for the whole year, we believe that utilization rate will be a low trend, will be a downward trend. But then when the economy begins to recover and when the pandemic is going to be alleviated, this year, we believe that utilization rate will come back up. And again, we hope that there will also be the opportunities of contracts in Now if you comment on finance cost, comparing with last year, there's really a decline in finance cost because at the beginning of the year, we successfully issued a bond in the amount of US800 million dollars and the interest rate was actually lower than that in the past. So our finance cost is smaller than last year. However, you mentioned very rightly that there is an exchange loss and it is estimated that the exchange loss is around CNY200 1,000,000. Thank you for your The next question is from Morgan Stanley. Please go ahead. In the Q3, in terms of your revenue, it is around RMB6.9 billion to RMB7 1,000,000,000. However, if you look at your gross profit margin, it has improved. In the 2nd quarter, gross profit margin was 16%. In the Q3, it improved to 18%. I would like to know why there is such an improvement in our gross margin. And is the reason because of a change in the split between your drilling services and your well services segment? Or is it because of your cost control assets? In the future, do you think that this increase this increasing trend of your gross profit margin will be There are a couple of reasons behind this. First of all, in the Q3, there is an increase in our overseas revenue, especially because there are a number of high daily rate contracts started in the 3rd quarter. So that's why gross profit increased. The second reason is that our company actually wants to transform ourselves from a drilling company into a drilling like well services company. So if you refer to our annual report, you can see that we have actually significantly stepped up our R and D effort. If you compare our R and D expenses between this year and last year, the expenses have increased by more than 50%. So now we are using more of our self owned technology and self owned equipment. And we have reduced outsourcing and contracting out our work. And so we have used more of our equipment. So that's the reason why you have seen this change. Let me supplement. If you look at our Well Services segment, well, in the future, it is going to be more significant. And the amount of manpower that we are going to use for this segment will decrease. And in terms of the share of use of equipment and human resources, well, the percentage is only 20% to 30%. However, for this particular service segment, our gross profit margin is going to be above 50%. In other words, we are able to use only 20% to 30% of the share of equipment and manpower to generate a gross profit margin of more than 50 percent. So you can see how efficient our Well Services segment is. Comparing the second and the third quarter, we can see that the number of days of utilization has decreased by around 9%. And if you look at your Drilling Services segment, revenue actually should have come down if there is no change to your daily rate. However, looking at the Q3, the total revenue has increased from the Q2. So is it because of growth of your well services segment? If you compare Q3 and Q2, how much is the growth of your Well Services segment? And also on a year on year basis, how much is the growth? And what about your EBIT margin? In the Q3, the utilization rate of the drilling services segment has come down. However, as mentioned just now, in the Q3, there was the beginning and start of some high daily rate contracts. So that's why revenue does not really come down. For our Well Services segment, it continues to develop and it is also making a high level of contribution overall speaking. In terms of margin, the margin rate of the Well Services segment, it is around 20%. And this year, because of some price fluctuations, there is a decrease. However, it is still the highest among all our business segments. The first question is about your Well Services segment. In terms of your total revenue and profit, well services segment accounts for a very big percentage, in fact, 60% of your profit. So I would like to know about future replacement potential of this segment. And what about the future, its future share of the total of your total business? Is there any kind of outlook or estimate or target? The second question is about oil price fluctuation. So this year, there was oil price crude oil price volatility. And what do you think will be your price adjustment trend? Now we are in the Q4 already. So do you have any estimate or expectation about price adjustment for next year? Let me answer your second question first. Concerning our price arrangement with party A, that is the single largest customer of our company, where pricing the pricing mechanism is based on a market oriented arrangement. And so, well, this year, it is true that there is no oil price and also the pandemic. So as a result, our price has come down for both our drilling services and well services. And this is also reflected in our contract with Party A. And this year, it is true that workload has increased, but then because price came down, so our profit was affected. Now, we can see that the oil price is more or less quite stable. It has stabilized at around US40 dollars And so far, we have not seen any trend or further decline in price. So we believe that we have already hit the trough in terms of price. Let me now comment on the Well Services business segment. If you refer to our financial statements, you can see that there is outsourcing or contracting out operations. There are 2 types. 1 is the contracting out of personnel, human resources. The other is the contracting out of business. And the contracting out of business is actually a source of our profitability. The second factor is about upstream companies, including Sinopec and Sinopecam. So actually, there is the use of external equipment and technology. And for our company, in fact, we also have some internal connected operations and business and enterprises. So if you make a comparison, you can see that our technology, our efficiency, our safety are all on very high level. So in other words, in the future, there will be the opportunity and potential for our products to be able to get into the operations of upstream companies like Sinopec and Sinochem. The first area or third source of some imagination on your heart is that in terms of our high end well services, while all along we have been developing our high end well services and our technology is already on a very unified standard and level. But then at the same time, we also enjoy cost and efficiency advantage. So for our drilling services segment, we are actually moving together into the international market. Originally, without the pandemic, actually this year, we planned to promote the expansion of our high end overseas operations and businesses. However, because of the pandemic, there is actually a suspension of the overseas operations. Thank you, everyone. Okay. Thanks for your questions and the management's patience answer. I'm pleased to announce that today's conference call is successfully ended. Thanks again for joining us. Goodbye.