Earnings Call: H1 2020

Aug 27, 2020

Good morning, everyone. I am Wie Yan, the Board Secretary. Welcome to our virtual interim results announcement for the year 2020. We have to skip the face to face meeting, but to move it online. The interim results was published last night. Due to the pandemic and low oil price in the market, the oil service sector has been facing with serious challenges. However, we have managed to deliver even better performance than before. We have received great attention and support from all of you while we grow our business. So the Board and the management will be happy to have more interactions with you today. So before we start, shall I introduce the management to you? They are Mr. Qingmei Sheng, the Chairman and Executive Director and CEO Mr. Zhao Shen Xiang, President and Mr. Zheng Yong Gang, our CFO and me, myself, the Board Secretary. So I would like to invite Mr. Zhengyong Gang, our CFO, to walk you through our business performance. Mr. Zheng, please. Good morning, ladies and gentlemen. Welcome you to attend the COSO 2020 Interim Results Announcement Conference. Before the formal introduction, I would like to remind you to pay attention to the disclaimer. Today's presentation will be divided into 2 parts. First is 2020 interim results review. 2nd is our future prospects. In the first half of twenty twenty, under the due impact of the epidemic and its drop in the oil price, I believe so many of us in our first time to see the negative number of oil price. Of course, we hope this is the last time. CapEx of global oil and gas companies reduced, and the global oilfield service market was seriously impacted and challenged. The competition in the oilfield service industry become intensified, leading to more or less decline in the equipment utilization rate and operating price. Coso has proactively responded to the industry challenge with our eye on media and long term strategic layout, starting from the 4 aspects: 1st, strengthen market development and customer maintenance second, continue to conduct R and D and result application. In the 2019, the contribution from our technical service already reached nearly 50%. In this year, we will be ranging from the 40% to 50%. 3rd, carryout flight management and strict cost control further, optimize our financial structure. Although affected by the macro industry, the company's profitability indicators, including revenue and profit, improved. In the first half of the year, it recorded operating revenue of RMB14.5 billion, an increase rate of 7%. Net profit of RMB1.72 billion, an increase of rmb736,000,000, with an increase rate of 74.6%. Revenue and the net profit show outperformance in large international Drilling and Oilfield Service Company. As shown in the above figure, the utilization rate of the company's drilling rigs, vessels and seismic vessels were above average levels of its international peers in the first half of twenty twenty. The company was ranked among the top international peers in terms both its equipment and the technical service. For example, our drilling ranking 2 our cementing, ranking 3 our wireline lodging, ranking 4 our directional drilling, ranking 4 our supply of ISO is globally, ranking 5 and Drilling and Company's Fluids ranking 7. At the same time, the COSO has achieved outstanding results in strength in market development and customer maintenance. First, COSO further consolidated its leading position in the core offshore China market in China, and the market shares of some business continue to grow. 2nd, after continuously and steadily promoting the development of the international market, the company's image as an international oilfield service contractor has become more obvious. In the past, for the most time, a global company, oil and gas company, Koso's image, just a dream company. Now I believe for the most oil and gas company, KOSO not just a dream company, but also the technical service company. The company's global market capabilities have been Forza's strength. The company has co honored the allocation of resources in the domestic and overseas market to make a positive contribution to the expansion of domestic exploration and development efforts. On the basis of consolidating the existing market, the Indonesian market has developed into the 2 new market to provide large scale equipment and the technical service. As you know, so due to the epidemic and the drop of oil price, the global market declined. But for our some core overseas market, due to the past outstanding operation performance and safety record, the market shares for some of our core overseas markets continue to grow. Indonesian market, just an illustration. For example, in the first half twenty twenty, in our Indonesian market, signed the large scale business contract October, budget support service. And also, we entered the new market. For example, entering 2 new markets for the first time, secured a 3 year service contract, drilling and completion flute service. We can go to the next page. After introducing the company's market development achievement, we will continue to demonstrate the profitability improvement brought by the technical upgrading. In recent years, the company has continuously increased investment in R and D, paid attention to strengthen the management of technical service. Accordingly, the company has made frequent breakthrough in R and D of its new technology service and further improved efficiency and profitability of and the technical service. The company fully enhanced the efficiency of the operation and improved the quality and efficiency by taking advantage of the integrated technology of the research, production and application. Technical upgrading not only improved the profitability of our company, but also effectively help our customer, our clients to increase reserve, to increase production and save cost. This page, just some illustration to show how close to help our clients to improve the efficiency in the different phase: exploration, development, production and how to help our clients to save cost in OPEX and CapEx. In the first half of twenty twenty, while strengthened market development, sustainable technology R and D and application of achievement, the company continued to well complete the refined cost management by focus on the goals of reducing costs and increasing efficiency. In the first half of twenty twenty, by reducing the material consumption, repair and maintenance cost, subcontracting fee and the leasing fee. The company reduced a total of RMB 844,000,000 in variable cost. Here, just some explanation. For example, if the workload, for example, maybe increased 3%, if the material consumption remains the same, which means the same maybe save the 3% in the material consumption. And in the past, for example, the subcontracting fee, if we have 100 and the subcontract maybe 22 hour subcontractor. And now we subcontract maybe just $15,000,000 which means save $5 So in the first half of twenty twenty, we totally saved RMB844 1,000,000 in cost. The epidemic is a world's worst public health crisis in the century. The company make every effort to prevent COVID-nineteen to maintain the safe and stable production and operation. So the impact of Aethemic is not shown in the company's production and operation. And no suspected or confirmed case confirmed by the medical institution has been found at home and Bart. COSO not just care our business, production and operation, but also we also care every our stakeholder including our employee in China and also in the overseas and also their family members. Go to the next page, our QHIC. KOSO continue to consolidate our QHIC management, persistently promoting the concept of green production and strengthened safety culture exchange. During the period, the company's safety production situation was generally stable. As always, the company paid close attention to the corporate governance, promote and maintain the interest of investor. During the period, the company was awarded with such honor. For example, the Best Investor Relationship Award by the New Media Operation, etcetera. Okay. Now we go to the second part. Let's look forward to the company's development prospect in the second half of twenty twenty and also the next few years. According to the latest forecast of IH3 report, the branch average oil price in 2020 is around $40 to $50 and is expected to rise slightly in 2021. In the future, international oil price may run at low levels. Global upstream capital expenditure in 2020 will remain stable or decrease slightly compared to 2020, the oilfield service industry will still face fierce market competition. Oil and Gas Energy continue to occupy an important position in China Energy consumption structure. In addition, the 7 years action plan under domestic oil and gas companies will provide prosperity for the oil and service industry for a certain period. CNOCC is our important customer. According to the latest data published, although its capital expenditure dropped to certain extent in 2020, the investments in the domestic core market remain unchanged basically unchanged. Benefit from this is expected the domestic workload of the company will be stable in the second half of twenty twenty. In 2020, the company will focus on the 5 aspects of innovation driven: overseas development, green and low carbon, market leadership and talented basic development of enterprise build capability respected by the industry in the following fields, such as operation performance operation team, the best technological innovation and equipment management, the most competitive operational cost advantage, the world class management and safety culture and realizes the strategy of technical development and international development with 4 segments. Thus, gradually developing itself into an integrated oilfield service provider covering multiple energy field and bring international competitive. Next, I will elaborate just on company's development ideas in several aspects. As we introduced above, the company's operational capability in the equipment segment or the development advantage of the technical segment has laid the foundation for achieving its strategic goals of technological development and international development. The company's current core market is offshore China market and CNOC. It's the company's core customer in the offshore China market. This is also one of the company's unique advantage compared to the other our competitor. For other oil companies, which are active in the offshore China market, we will continue to maintain a good cooperative relationship with them and of course consolidates the company's leading market shares in the upper China market. The company will build new growth momentum focused on the four major leaps from conventional to unconventional, for example, heavy oil from the traditional to new energy from offshore to onshore from traditional to modernization and digitalization. Based on the domestic market situation, we have prepared a slide to introduce the contract signed of 31 jackup drilling rigs and the 9 semi sub drilling rigs, currently operated and managed by the company. As some contracts are still in the bidding and negotiation process, it's likely the above information may change. In the future, the company will continue to implement international development strategy and continuously expand the market scale. We will also gradually bring into play the scale effect of the overseas market for the increased contribution ratio of the technological sector, accelerates serialization and industrialization of technology products, give play to the synergy and cost advantage between segments and increase the scale of key markets such as market in Asia Pacific, Africa, the Middle East, thus making the company enjoys more opportunity to obtain service contract in exploration, development and production the different space of oil and gas company. For the operation status of drilling rigs in the overseas market, there are the contracts signed 11 jackup drilling rigs and 5 semi sub rigs currently operated and managed by the company and some still in the bidding and the negotiation process. So as seen, it's likely to be changed. The company will actively responded to the national call and the green the developer green and environmental protection industry such as EPS waste treatment. Currently, with a year of service experience and an operation team of more than 100, the company has accumulated EPS environmental service experience for more than 2 30 wells, all of which has very good safety and environmental results. The scale of global drilling waste management market continue to improve with huge market potential in the future. The operation volume is expected to continue to increase. The company will further accelerate the development process of a modernization digitalization. In the second half of the year, the company will implement the digital transformation plan as soon as possible. From the digital transformation path for each professional segment, building a digital talent pool and the export pool, complete the construction of the industrial Internet infrastructure platform and build a global intelligent supply chain, the company will gradually build itself into a technology led global and digital oilfield service company. The comparative advantage of COSO is also reflected in the Health Financial structure. Abandoned cash flow and good liquidity enables company to have greater financial flexibility in the environment of low oil price. Based on the company's good operating performance and excellent financial indicator, the International Credit Rating Agency recently gave the company a better rating. In June 2020, the company successfully issued the senior bonds was up USD800 1,000,000. Wholesale insurance cost created the loss yield of USD bonds in the global oil service industry at that time. Thus, secured the long term funds with low cost, effectively protecting the cash flow in U. S. Dollars significantly optimizing and improving the comprehensive debt cost term structure and further enhance the company's financial flexibility. The recent international macroeconomic situation and the major change in the core commodity price have brought new challenge to the company's operations. Following the technical development and international development goals, the company will further transform cost advantage into core competitiveness. Based on its unit integrated advantage, stable financial structure and a team with rich management and operation experience, the company will create higher value return for our shareholders, customers and all parties in this society. Thanks again to all the stakeholders and investors for your continued support and understanding of the company. Okay. That's all for today's introduction presentation. Your questions are welcome. Thank you. Thank you very much, Mr. Zhang, for your presentation. Now I would like to open the floor for questions. We will invite questions from investors on the telephone line. For the interest of time, we will allow 2 questions from each person maximum. And please identify yourself before you raise the question. Please be reminded that we have a translator here with us and all questions and answers will be translated. Now I would like to pass the time to the operator and invite the first question. This is Mr. Liu from BOCI. Two questions. The first question is that in the report that you published last night, we noticed that you said you have price pressure in the drilling sector as well as the technology sector. Just want to understand why and do you see any signs of a pricing up in the near future? The second question is that in the drilling sector, the revenue declined. It has been a growing point in the last few years. I just want to understand why and do you think that it will come back again? Thank you. Thank you for your questions. I would like to take your first question about the service price pressure. It's true that in the first half, all the contracts that we were doing were basically extensions from some mid term to long term contracts from last year and some of the contracts will complete in the second half and after that we will kick off the explanation of the execution of new contracts, which were acquired based on new market price. So in the first half, because of the pandemic as well as the down going oil price in the market, we did see price pressure in the market and the price was going down. In the second half, in the implementation of existing contracts as well as new contracts, there will still be price pressure. As for your second question, in the technical sector, as you can see that in our financial report, the proportion for the technical sector did decline because in the first half, we resolved some disputes with our European clients and we received compensation for the contracts with that client. Therefore, we allocated more resources to the equipment sector. Therefore, the technical sector appears to be less. And there's another reason. In the technical sector, you also see that the revenue declined by RMB500 1,000,000 or so. And this is because that in the first half during the pandemic period, a lot of restrictions on either personnel or resources. In the second half, I believe the situation will improve. I hope I have answered your questions. So this is Fijun Qing from Merrill Lynch. Two questions. The first question about cost control. And we read in the report that there has been over 800,000,000 cost control in the first half. Just want to understand which costs are involved and which costs are sustainable and which costs will come back when the oil price and the daily rates go up again in the second half? The second question is about just like you mentioned that you've got the dispute resolved with the Norwegian client and you got compensation. I just want to understand, in the second half, the technical sector, what will be your plan for the technical sector? Thank you. So my question is actually regarding to the jackup and semi sub day rates. How much it declined on year on year basis if taking out the impact from the Norwegian settlement? Thank you. So first of all, thank you for your questions and thank you for your recognition of our performance in the first half. Regarding your first question about cost control, if you can refer to Slide 12, we talk about the RMB844 million cost reduction in the first half. That is the result of our great efforts in the first half. And this figure is quite outstanding in the report. Talking about the composition of such costs, they involve the material cost, the outsourcing cost, maintenance cost as well as the staff cost, in which the material cost and outsourcing cost are the 2 major contributors. All these control measures will continue in the second half. Some of the costs are oil price related, for example, the chemicals as consumption materials. The price may go up when the oil price goes up again. For other materials, they are not that oil price related and we will continue with our control measures. As for the outsourcing costs and leasing costs, we have been working together with our suppliers and partners in order to further reduce the cost. And we are also going to undertake the risks in the market together. So that is also part of our combined assets. Thank you. So as for your second question about the price about the different rigs, whether the daily price daily rate will continue to go and how much it will be. Putting aside the settlement of the disputes with our European client that we got the compensation for that settlement. If you look at the whole industry in China, horizontally in the first half, Tier 1, some of the contract being signed in the first half. The market was quite was very quiet because a lot of companies, a lot of our competitors either suspended or just stopped the exploration and development activities. So there weren't so many rates, new rates being signed in the first half. However, for KOSO, we were lucky because we were able to guarantee the some workload in the domestic market. And so therefore, we were able to deliver our performance. So domestically, when we talked about the price with our clients, we also adjusted about 10% to 15% of the daily rates depending on different rigs. So this price will continue to be in our execution for all our contracts in the second half. Thank you. One quick comment I want to add to what I said before regarding your second question. So for all the investors and analysts, you may have already seen very clearly that in the whole market, our peers, our competitors and our friends, they were actually suffering through all the hard market and some of them just went bankrupted and some of them just in insolvency or other in restructuring. And they tried everything to manage the operating cost. Some of them had to lay off people or selling part of their business. So it was very painful for them in their daily operations. So I have to say that we were lucky. We were able to maintain some workload in the domestic market and at least we delivered our profits. Thank you. This is Mu Li for two questions from him. The first question is about the workload. We noticed that there is an increase in the workload, for example, in the drilling sector in the first half. However, if you look at each quarter, in quarter 2, there is a very slight decrease in the workload. So I just want to understand why and do you think that this decline will continue or will it go up in the second half? So this is about their workload because as Sinon already said, they have got a goal, which is by 2025, they're going to provide 2,000,000 barrels of oil each day. So how do you think about that you can improve your service capability in order to match your clients' requirements? So besides you have 12 vessels now waiting to work. So this is about workload. The second question is about daily rate. As you mentioned before, your daily rates, because of the oil price, now it seems to be bouncing back and therefore the delay rate also starts to going up. For example, the semi subs, the daily rates already started to coming back. So how do you think about the daily rates in the second half this year, next year and the year after next year? Thank you. So thank you for your questions. The first question about the workload. As you can see that usually Q2 and Q3, these two quarters are the best ones out of the 4 quarters in the year in terms of our workload. And two reasons accounting for the slight drop in Q2. The first reason is that some of the contracts just come to the end with overseas customers and therefore we need new contracts. The second reason is because of the pandemic. The COVID-nineteen virus did spread and lots of overseas clients had to delay their operations plan. Therefore, our workload was also delayed accordingly. So Q3, if you look at this year, our workload will increase, but not in Q4. Usually Q4, that is the last quarter for our clients as well When they finish the annual budget, usually for all the oil service suppliers, their workload will also drop in Q4. So as for the second part to your first question, how to match with our key customer in terms of our own service capabilities. It really depends on which market segment you're talking about. For example, for the semi subs and the jack ups, we have the high end ones, we have the regular ones and besides we have the vessels. So at the peak season, usually we have over 10 vessels waiting. It is true and it is also normal because depending on the time, different clients, different markets and the different plan exploration plans. So all these are the external factors that may influence how we operate our own vessels and match our capabilities. So in different jails, different clients, they may need different periods of time to getting their license or the permits for environmental protection, for approvals and so forth. So there may be such window, a period of time for our vessels to keep waiting. It is also acceptable and normal. In the second half, in order to match our capabilities with our key clients to have them finish their plan, we have to keep some spare resources, including our vessels available because once there's opportunity, we must be able to catch up that opportunity. Otherwise, we will have to miss it. So this is also something that we do usually to keep always keep available resources for our clients. As for your second question about the delay rate, as you can see that recently the oil price began to go up. So we believe that there are two reasons accounting for this. The first reason is that this pricing up is not because of the demand and supply relationship, but rather it is because of the people or the human reason. There's still serious oversupply of crude oil. So as for how long this pricing going up situation will continue, we don't know. It really depends on organizations such as OPEC. The second reason is because of COVID-nineteen. So depending on how this pandemic will go, we don't know how well or how much the oil price will go up continuously. So overall, two reasons accounting for this price going up situation you can see in the market now. The oil price, how will the oil price will go in the future, we don't know. How will the pandemic will influence the exploration and development activities in the future, we don't know. So therefore, we are not so sure about this strong core relationship between oil price and the daily rate. As for how the leverage will go in the second half next year and the year after next year, it's really hard to give you a very precise forecast on that. But one thing we can say is that after 2 to 3 years, the past 2 to 3 years and the first half, we believe that the worst situation has already gone. And this situation in the future will not be worse than what we experienced in the past 2, 3 years or in the first half. So what I want to say is that no matter how the data rate will change next year or the year after next year, we will have confidence to maintain our operations. And because we are also confident about China's situation with the strong support from the domestic market. Thank you. So this is Andy from Morgan Stanley. Two questions, both are related to the technical oil service sector. So the first question is that, so in your report, you mentioned that you realized the breakthroughs in their technical services, for example, to replace some services from the overseas suppliers. What do you think about the market size will be in this regard? For example, for the Synuks, they have been using the overseas supplies for the oil services. So how much business that you will get or you will replace from those overseas suppliers? So this is about the market size of technical oil services. The second question is about your feature plan. So in the international market, how do you foresee the growth of your own competitiveness in the oil service sector? So you mentioned that the overall market environment, the potential for the suppliers, it was not a very promising market and the competition has been very fierce. So how do you foresee your own capabilities to compete with the international players? And for example, in the next 3, 5 or 10 years, do you think that it's possible for you to become a number 1 or number 2 in the international market in the technical oil service sector? Thank you. Thank you for your questions. The first question, it's true that some of the activities are still provided by overseas suppliers to, for example, Cinox, but the volume of such services is not very big. And in terms of the technical oil services, we have been providing services to our clients, a lot of them. For example, in the chemical suppliers and the drilling fluid suppliers, 100% from COSO already. So in terms of all the technologies, a lot of the technologies are already provided by us, for example, the underground drilling. And so depending on different segments, there are some partners or overseas suppliers involved in providing such services, but it is done through KOSO. So this is our business model. Any overseas supplier, they provide services, but have to go through us. So this is the way we how we outsource services. So along with more technologies, more breakthroughs as well as better supply chain, we were able to provide as many new services to our clients as possible. In this way, we can reduce the total volume of outsourcing and improve our profit performance in the future. Thank you. So please don't be pessimistic about it because along with more technical outbreaks, more technical product available and we will definitely take initiatives to go to enter into the onshore markets, both in China and outside of China. As for your second question about the international competition and our goals, So talking about our competitiveness and what we are going to achieve. It is true that in the first half, all the players in the market witnessed the hardest competition in the market for the whole industry. However, we managed to maintain some competitiveness through this period. For example, if you look at our overseas contracts, if you look at our operations quality and the implementation of these contracts, apparently, we do have our own advantages. So this is the first point. The second point is that our technical service capabilities have been improving and in different markets, we will provide more technical products, technical support and technical suppliers. So in this way, we can fully give the play to our own competitive base in the oil service sector. And in the first half, for example, in Indonesia, we were able to acquire some of the local markets there. And the second part to your second question, we our new President just came on board and now the management is drafting our plans for the future growth and our future prospects. It is also our dream that we turn the company into an outstanding company in this sector. If you look at our reports in the past 2 years, we realized the progress in different market segments. Equipment also progressed a great a lot. Drilling, it is number 2 in the world. And equipment sector is still moving forward in a very advanced in a very competitive manner. So it is our goal that we want to be a one of the best performers in the world, and it has always been. So while we keep progressing our technology each year, we are also getting closer and closer to this target. We are also fully aware that internationally, there are strong competitors and there is a gap between us. The most established competitors, the number 1 is 5 times of the size as us, the number 2 is 4x of the size and the number 3 is 3x of the size than us. So we are fully aware that these are the goals and these are also the direction that we will work hard to move on the business. So this is also where you can see the potential for further growth in the upcoming years. I hope I have answered your questions. Thank you. So thank you, management, for taking all the questions. We have had a very interactive discussion just now. We talked about the workload, the price, the seasonality as well as our future plan. Just one quick comment. In the first half, if you look at our business performance, the technical service is still the most important sector in all our business portfolio, which contributed 50.7% of the overall profit. This is over 50% already. So it is still the most important one in our business portfolio. So in the second half and in the future, we will continue with our stable operations, the safe capital positions as well as the tough technical plans in order to further strengthen our foundation to realize further growth in the future. Oil price is now going back, and I believe that KOSO will continue to be one of the most popular targets for our investors. Thank you. So before we end the results announcement, I would like to thank all our investors and analysts and friends who have been supporting us and giving great attention to the company. Once again, thank you very much.