Earnings Call: H1 2019

Aug 22, 2019

Ladies and gentlemen, first of all, thanks for attending the interim results announcement 2019 of China Oilfield Services Limited today. Now please allow me to introduce management representatives on stage to you. Mr. Qi Mei Shen, Chairman Mr. Chao Zhu Jie, CEO and President Mr. Zhenglong Gang, CFO and Ms. Wei Yan, Board Secretary. In today's presentation, Mr. Zhengrong Gang will walk you through the financial figures and operational review for the first half year of twenty nineteen. Then he will share with you the Company's outlook in the latter half of the year and the future. After that, we will open the floor for questions. Now let me pass the time to Mr. Zheng. Good morning, ladies and gentlemen. Thank you for attending COSO's interim results price conference 2019. Please take a note of our disclaimer. Today's presentation will be divided into 2 parts: results overview, Results overview and the company outlook. In the first half of twenty nineteen, international crude oil price is around $60 per barrel. Oilfield service market has recovered, which was contributed by the increase in global expenditure. On upstream exploration and development and impact, the significant increase in demand for exploration and development in China Afro. In view of new challenge of industry, COSO has gradually turned loss into profit with improvement of profitability through adjustment to management philosophy and focus. Continuous reform and innovation for quality improvement and efficiency enhancement, as well as implementation of the technology and international development strategy. From this slide, you can see and continuous increase for global upstream Npk packs and also the continuous increase for domestic PK packs, especially the continuous increase for domestic exploration investment by our payment signal image control I mean, the dominate Chinese, the China control. From this page, you can see the both international market and the domestic market has a 2 digit growth. So imagine you need such current Chinese strong growth can continue for next few years. Now we turn to the most interesting part, financial performance. In terms of financial performance, in the first half of twenty nineteen, total achieved a revenue of RMB13.5 billion, representing 67% increase year over year. And due to the enhanced economic scale, operating costs only increased 42%. The result is we turn from the loss into profit. We achieved the net profit nearly RMB1.986 billion net profit. Such current remarkable financial performance contributed from the 2 factors, increased operational volume and utilization rate for our equipment, such as jackup, semi staff, marine support vessels, etcetera. The second factor is our well service technology segment. Operation volumes and revenue was greatly improved. From this page, you can see the contribution from our technology, the wealth service, from our technology segment. In the 2015, it's only 30%. 2016 is around 37% 2017, 38% 2018, 42% and the first half of twenty nineteen, we already achieved 49% of our total sales revenue generated from our technology segment, well service segment. And in the next year, in the 2020, we believe we can achieve more than 50% of our sales revenue generated from our wealth service. And the management's strength in 20 25, more than 70% of our sales revenue generated from our well service technology segment. This is our target. In terms of performance of a specific segment, the revenue for the 4th segment all increased to the different degree. Among streaming and wire service was the most significant with revenue of RMB4.49 billion and RMB6.62 billion respectively. The operating profit of wire service increased 129% year on year. The Dream segment and Geophysical Acquisition and Service segment have all achieved profit. As you remember, in the beginning of this year, our Chairman is a Chief in this conference room, said to you. And we try to make our drilling segment profitable. Now, we make it. In the first half of twenty nineteen, we make it profitable. This is the 4th segment. Our drilling segment, representing 49% increase our well service, 95% increase our marine support segment, nearly 16% increase. Our due fiscal survey and acquisitions nearly doubled. In terms of operating profit for our Dream segment, we achieved RMB250 1,000,000 operating profit. Of course, our well service contributes the most, more than RMB1 1,000,000,000, RMB1.19 billion operating profit. This is our 4th segment, the financial performance. Now we turn to the market development, domestic market and overseas market. KOSO's global market capability has been further enhanced, which is conducive to coordinating the allocation of resources in both domestic and overseas market, making positive contribution to the strengthening of domestic exploration and development and promoting high quality development of overseas business on ongoing basis, while assuring the absolute leading position in China offshore market. In the first half of twenty nineteen, KOSO made flexible allocation of resources to meet the domestic market demand, which was conducted to the increase of our overall utilization rate and the profit return of the Company. Although there was a year on year decrease in the number of overseas payments, our overseas revenue recorded year on year growth to RMB3 1,000,000,000, representing 50% increase last year, the first half twenty eighteen, we reported our overseas revenue is about RMB2 1,000,000,000. Now, we still make it RMB3 1,000,000,000. This fairly increase of utilization rate and bridge to make in the well service statement. For instance, KOSO had increased operation volume of high temperature, high pressure wells for difficult works, made successful first attempt of the planning and abandonment project and sold new equipment to overseas market. This is just a illustration for our domestic and overseas market. We make flexible allocation of domestic and overseas resources to meet increasing demand. We applied allocate 36 domestic drilling rigs increased by 8. Increase in the volume of both exploration well and adjustment well, substantial increase in operation volumes of 3 d Acquisition and submarine's cable business. In our overseas market, we acquired strategic new overseas contracts, 2 new markets and 5 new clients. Breakthrough in the wealth service segment, for example, increase in the volume of high temperature high pressure wells, successful force attempt of supplying and abandonment costs of projects and sales of new equipment. This is just the illustration for our domestic markets and overseas markets. Now, I finished the earnings of my presentation on financial review of first half of twenty nineteen. In summary, I want to emphasize 2 points. First, KOSO makes strong growth in terms of operation volumes, operating income and the net profit. Due to the 7 years' auction plan in domestic market and a gradual recovery in the international market, we believe that KOSO will continue to have strong growth for the next few years. So second, such kinds of strong growth mostly contributed from the well service segment. In the past few years, KOSO put heavy investments on technological research. Now, I will illustrate some of the new tech and the new business KOSO just achieved. For example, the new technology, launching capability screw system, high temporary screw loading system has been applied and the extremely high temporary dry screw loading system can achieve 232 degrees and 172 megawatts is conducting high temperature well operation in Our oil fields chemical and drilling, the upper temperature resistance image of the HDO drill high temperature, oil based drilling is 60 to 30 degrees. Line 32 to pinch drilling with over a major challenge such as a high temperature, high pressure for drilling ability of target expansion and overflow and a bridge market potential. In 2019, it is planned to drill and explore more than high, more than 40 wells in offshore China and the high temperature and the pressure areas in the onshore regions are in high demand. Another new technology is the Miu. The Miu is our payment to sell to the international market. With the transformation and the application of multiple technology achievements, KOSO has achieved the result in sales of oilfield technical equipment with the sales of a multifunctional ultrasonic imaging floating equipment, we name it MEO. Amounting to nearly RMB100 1,000,000 and has achieved back sales of China high end margin improvement to world class oilfield service company for the first time. Now I will illustrate to you some Amazon news business. In the first half of twenty nineteen, KOSO succeeded in the 4th overseas integrated lodging and abandonment project. KOSO has improved itself and accumulated valuable experience in the management, operation, logistics support for the integrated planning and abandonment project enhanced its reputation, which relates the foundation for the implementation of subsequent well fledging and abandoned project. From the public resource source, it is estimated the demand of well fledging and abandonment in Southeast Asia will see further increase in the upcoming years. Here just some of the numbers we saw the transfer of public resources, public sources here, 2019 2020 and here to the 2021. KOSO also puts much focus on our QHSE. KOSO maintains overall serviceability of production safety and continues to include quality management with satisfactory operation service and the product quality. The OSI ratio was 0.0.1.9. While making steady progress in the operating market, KOSO continues to attach great importance to the promotion of corporate governance and shares with capital markets. In the first half of twenty nineteen, KOSO made updates on compliance operation and strengthened communication with investor and the protection of shareholders' interest and rights. During this period, KOSO was included in the list of IR interactive activities of Asia's listed company and well recognized by Capital Markets. Now I turn to the company outlook, the second part. Before we look forward to the second half and the future, let's take a look at the overall performance of the international oilfield service company in the first half of 2019. Based on the comparison above, you may find that oilfield service industry still face different kinds of challenge and the cost of operating performance is in the upper range of the industry during the first half of twenty nineteen. For example, KOSO achieved nearly 67% of decrease in terms of sales revenue, which is at the top of the industry, all you feel service industry. This is just example. So the cost of the industry in terms of the sales revenue growth and the net profit growth. The market environment. Looking forward to the second half of twenty nineteen, the global political and economic situation will still be challenged by multiple risks, resulting in the uncertainty in the trend of global oil price. In addition, despite that the rebounded oil price and the increased capital investment by oil and gas company have driven the recovery of the global drilling rig market with frequent leading activity and increasing utilization rates. Overcapacity still be an issue in the short and medium, reflected by the certain idle stream rate and the potential idleness of stream rate under construction. And the rate are unlikely to report significant increase in the short term due to the intensified compression for the contract. Although the industry faced above challenge, KOSO is still facing development opportunities. 1st, oil and gas energy continue to play an important role in China energy consumption structure. And the 7 years' action plan in domestic market will provide boom period for the oil service industry. Just I mentioned before, due to the 7 years action plan in the domestic market and global gradually recovery in the international market, KOSO's growth story will continue. Hence, the recovery of Industry of China, increasing efforts in its region development will further bring the positive opportunity for KOSO's growth story. Currently, there are still idle resources in the market. KOSO can flexible allocate resources through leasing to meet the change of the market demand. Here's just our installment illustration. Oil and Gas continue to make have large proportion in China and the 7 years action plan drilling the audio service industry to a positive society. SINAAP APAC in China will increase substantially in 2019. And also, we will go into the new areas such as wind power. In line with the low carbon trend, KOSO actively supports development opportunity in renewable energy industry, such as offshore wind power. This is a new business for the KOSO. Not only in the domestic market but also in the international market, KOSO's traditional business has a new breakthrough. From this slide, you can see, according to the service contract obtained by KOSO, the technology and the equipment segment of the company will gradually exert scale effect in the 6 regional markets. This contract will be implemented in the second half of twenty nineteen and for the next few years, respectively. Compared with historic track record, KOSO will have more well serviced presence in international market. For example, in the Middle East, in Iraq. The 1st and second integrated service in Nissan Alt field and also in the study area, We have signed in the huge channel drilling program and improve it. We have offshore well drilling program. And for example, Asia Pacific in the Indonesia, drilling projects and workover, cementing, simulation and lodging projects. In Malaysia, just I mentioned, some drilling and the completion of cementing project and also the abandonment project. New Zealand, we have the drilling service project, Myanmar's demand in lodging and the performing projects. Although, start time is the new project including our strategic segment service and also includes our technology service. As you know, we have prepared a slide of our contract status and the situation of 52 rates operated under management by COSO as of June 30, 2019. As you may already see from our interim results, the volume in the first half of twenty nineteen has been increased. We expect it will extend to the second half of the year. And this is the latest information and for this one already being replaced by the operation. For our rig operation status in the overseas. This is the operation status in overseas market, more working volume in 2019 and we will still active in the bidding process for some idle rigs. It may change in the future because some contracts are still in the process. We'll keep you posted. This is not just the increase and the most in the yellow representing in the billion process. We will keep you posted if some yellow line replaced by the operation. Financial Management. Financial Management. In 2019, KOSO has and will further adopt structural cost reduction measures and strictly control the cost of increment caused by the increase of volume. We take prudent KPAS policy to optimize growth models to the intensive technology and the light asset. The key price target of COSL in 2019 is about RMB3 1,000,000,000. Reasonable investment and the debt repayment structure has safeguard a healthy cash flow and a 0.5 percent to debt rating. Therefore, this will enable us to adopt different models of operation and apply different business models. Environmental Protection, in line with our general trend of low carbon disposal of the global energy industry, KOSO strategy of the environmental friendly and low carbon development to the needs that clean, green and highly efficient transformation of China Offshore Marine Vessels. We have commenced the construction of 12 LNG powered oilfield supply vessels, resulting in effective cost reduction, which are expected to be put into use in 2020. So new business, new growth point. Here, I just want to illustrate some of the new business we will introduce in the second half. For example, in the EPS for well driven waste. So well drilling waste refers to the waste generated during the drilling operation, including drilling, cladding wires, drilling bed, wasted drilling and well commissioned flutes and drilling waste waters. This is a well drilling waste. In active response to the industry request, KOSO will develop environmental protection business such as EPS for waste disposal. KOSO has nearly 40 years of service experience in this field and a big operation team compromising nearly 100 experienced staff and a good experience in the provision of EPS service for over 230 wells, which contribute to the achievement of 0 safety and environmental solution excellence. At the scale of global drilling waste management market continues to expand, There will be huge market potential and it is expected that operation volume will continue to increase. This new business will be one of the important growth points of KOSO and the revenue contribution is expected to happen very soon. Here, just some information we bought from the public source. For example, the market potential. So from Bio Research scale of global drilling waste management market will reach USD7.13 billion, this is the market cap. Our domestic waste is estimated to exceed 500,000 tonnes a year just in China. So this is a huge potential. And to meet some in the garment and industry, 0 waste and 0 pollution is promising. So, the potential market potential is huge. Another new business under new growth points is our the multi class business model for our geophysical acquisition service. For Geophysical Acquisition Service segment, KOSO also clarifies the business development plan by determining the business focus and mid- to long term development path and continue to increase investment in R and D of technical products to gradually develop its multiple clients business operation capacity. Globally speaking, the multi clients business will continue to grow in the future. COSO has the business capability and the sales track record in Argentina, also in Brazil. In multi client business, we hope this client business will become another new growth for our geophysical segment. This is a multiple client business. This design means a business model. Just an illustration. And also, we are going through some wind power, the new engine, the new renewable engine. Adhering to the philosophy of green development, technological innovation, KOSO will further increase investment in the renewable energy, like wind power industry and strengthen market development to increase its shares in domestic wind power market. KOSO's streaming segment and the geophysical segment could benefit from this new field. Offshore wind power market. In 2018, totaling 4,450,000 KW Onshore Wind Power has installed and 6.7000000 KW was under construction in China. China has become the 3rd largest offshore wind power country up to the U. K. And Germany. So this is some I just want to show you and wind power also has a huge market potential. And we go in this market, and this market will benefit our drilling segment and also our geophysical Service segment. Looking to the future, with the growth of oil and gas investment and the recovery of industry, KOSO will firmly adhere to the goal of technology and international development. Focus on the technological innovation as the core driving force, strengthen the financial allocation of global resources and pay attention to the new patch of the green environmentally friendly and low carbon. The new model and the new market is developing. To realize its own service transformation, we hope to see the consoles upgrade successfully from a dream company to a service company. And finally, we want to become comprehensive solution provider. This company is the target from the dream company to a service company to be a comprehensive solution provider with new models, new market and a new trend. Thank you for your consistent support. Here comes the end of my presentation. Questions are welcome, please. Thank you for your support. You for Mr. Chen's wonderful presentation. Now we will open the floor for questions. Please note that we will provide consecutive interpretation during the Q and A session. Please raise your questions 1 by 1 and allow some time for the interpretation. If you have yet selected, please let us know your name and the firm you work for. Good morning and congratulations. This is Aditya Suresh from Macquarie. Two questions. First on Wealth Services. So revenue here is clearly beaten nearly the most bullish of expectations. A lot of it is been driven by a Tech 10 in house tool production. Are you able to provide us with any breakdown of what portion of your revenue within mobile services is because of your in house tools? And what portion of that was, say, 3 years ago? 2nd is, within that, what sort of growth visibility do you have over the next probably 6, 12 months for Well Services? That's the first question. The other one was in margins. 2nd quarter margins were clearly up versus the 1st quarter along with the higher activity that you that we see. Can we expect margins to further improve on what is a very strong second quarter? Thank you. Thank you for your questions. Your first question about the revenue as well as about tools and technologies. It's true that the company has been investing with a lot of resources in our R and D for new technologies, and we have also adopted a lot of new technologies compared with that of 3 years ago. And currently, it is actually our harvest season after so many years of investments in technologies. The company will continue to putting more resources in R and D to imperfect our technologies and enhance our technical capability. Currently, in terms of our R and D capability, we are among the 1st tier in the industry, and we will definitely work harder to industrialize all those technologies to improve our capability. Just as you may have heard from Mr. Zheng during his presentation, we through our investments in the technical technical segment, we believe that the new technologies will contribute more to our growth of the business in the upcoming years. As for your second question about the margin, let me talk about the equipment utilization rate. Currently, our utilization rate is among the high in the industry compared with our competitors as well as our own in the history. So by following the principle of safety in our management, we will prepare a schedule for maintenance for all our equipment in the second half of the year. Looking at our backlog, we have confidence that we can maintain the utilization rate at a high level in the second half of the year. Okay, next question. The gentlemen in Wai Chung, please. Thank you. Neil Bekkerberg, Bernstein. Two questions. The first question is, there seems to be a pickup in rig rates in the first half of the year versus a year ago, which seems slightly better than industry trends. Can you comment a little bit about what was driving that improvement in rig rates and whether or not you expect that to continue into the second half of the year? The second question is around your leasing business. Can you say how many rigs you've got under lease now? And what you think is the potential to lease further rigs in the second half of the year and into next year just given the sheer number of rigs coming onto the market in China? And just say a little bit about what the margins of those lease rigs are. Thank you. Thank you for your questions. Our CEO, Mr. Cao, will take the first question. In the first half, it's true that there's a pickup in the whole industry. And basically, it's because of the national plan. And if you look at for utilization of our vessels and the rigs and all our services, there has to be a pickup in all these areas, not only in China but also in our overseas markets. Of course, different operations areas may have different prices, and the pickup also varies from one place to another. But generally speaking, if you look at the overall market price, it is still basically the same. It's only the difference only occurs in different vessels and the different areas and the different operations. Let me take your second question about the drilling rigs leasing. Currently, we own 39 different types of drilling rigs, and we also leased 13 rigs from our traders. As I said just now, we may have to arrange maintenance to some of the drilling rigs in the second half. So therefore, based on our backlog, or the total number of contracts we have, we may continue looking for more drilling rigs to lease them. So according to our own adjustments, we may continue to look for more external resources for leasing, including rigging rigs as well as the 6 vessels. One more piece of information for your reference. Currently, we are leasing 12 land rigs that is onshore. Considering the low market it is definitely a good supplementation for our business growth by utilizing external resources. Thank you. [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] Thank you for the management. Any more questions? The lady in that, please. Thank you. Two questions from Citingtin. The first question is about cost control. We noticed that the growth of labor cost as well as raw material cost, both were below the increase of revenue. Just I want to understand will this trend maintain in the second half? The second question meanwhile, another question followed by the cost control is on the outsourcing cost. Outsourcing cost has been increasing very quickly. And how do you think about the demand for outsourcing in the future? Will it reduce because of more and more self developed technologies being put into operations? The second question is about investment yield or investment returns. We noticed that the returns from investment grew rapidly and a lot of such growth was from Wealth Management. Just want to understand whether this kind of growth will sustain in the future. Thank you. So Mr. Cao will take your first question and Mr. Zhang will take your second question. And thank you for your questions. Regarding your first question about cost control, actually, cost control has been our focus in our data operations all these years, and it is also a strategic task for us. So that's why we have been very stringent in controlling all the costs and expenditures. As for the material cost, we took active measures to control the procurement. And meanwhile, we also conducted dynamic controlling over our warehouses. And a lot of services were done by ourselves, for example, maintenance. Meanwhile, the cost utilization overseas were also strengthenedly controlled and monitored. So that's why we were able to reduce the material costs in the first half. As for the outsourcing cost and the demand, it's true that outsourcing costs increased because of more vessels were rented and there will be more releases in the future. So it's true that the outsourcing cost increased. However, through the implementation and adoption of more and more self developed technologies, particularly those high end technologies, we believe that a lot of work will be done by ourselves instead of looking for a 3rd party. So therefore, the in the high end technology sector, there will be less need for outsourcing in the future. As for the labor cost, what you said is also correct that there is an increase in labor cost in the first half. However, we have been trying very hard to control and even reduce the labor costs through different ways of our labor utilization models in the future. Thank you. So a quick comment on the cost control on raw material. Since last year, we started building up our own global supply chain. So if this supply chain network is put into place, we will be able to control our media cost even better in the future. Yes. Another quick comment on the outsourcing cost. It's true that the company is turning itself into a light asset company, so that's why there will be less need for equipment lease in the future. As for the returns of investments activities in the first half, you may have noticed in our financial report that our net profit is yen 986,000,000 and net profit attributable to the shareholders is yen 973,000,000 and the operating profit is JPY 795,000,000. If you look at the non operating profit, it's true that some of the revenues are from our investment activities and including our investment in some R and D activities. We have we think that these returns and these revenue is sustainable because of the recurring activities. So in terms of this kind of activities, they will continue in the second half, in next year and even in the upcoming years. So that's why we believe that all these are sustainable. Thank you for the management. Last question for today. So the So Mr. Hu from BOCI. Two questions. The first question is that we noticed that the revenue increased in different segments in the first half. And just I want to the management to share with you your guideline for the whole year revenue growth and what will be your target of growth for the whole year? The second question is about operating cash flow. We noticed that it is negative in the first half. I just want to understand the overall cash flow operating cash flow for the whole year and also for the second half. Thank you. Thank you for your questions. Let me take your first question. Regarding the target of growth for the whole year, in the first half, it is obvious that the equipment contributed greater lot to the revenue growth. And based on their backlog and all the contracts we are holding now, the management has confident that the equipment the technology will contribute more to the company in the second half, and we have confidence that we can maintain the growth in the second half. Thank you. Let me take your second question about the negative operating cash flow. It's true that in our financial report, the operating cash flow, there was a reduction. This is mainly because of the dramatic increase in terms of account receivables. Among the JPY 5,000,000,000 account receivables, JPY 4,700,000,000 were from our limited companies. And actually, all the collection of such account receivables are guaranteed. The second point I want to make is that KRW 4,700,000,000 of long term debt are now converted into short term debt, and the company has decided to repay such debts by using our own cash. So therefore, at the end of the year, the cash available will also reduce accordingly. So two questions from Mr. Lu. The first question is about the daily rate. And we understand that you have already got a very full schedule for the utilization of all equipment. So but particularly for those the jackups. So what will be the delay rate in next year, the 2020? The second question about the net asset returns. For some long term investors, your net asset returns has been below the capital cost of Omani. Yes, even though there was improvement in the first half, although it is still below the capital cost. So what do you think that what kind of improvement do you think that will happen in the second half of the year based on all your efforts? So Mr. Cai will take your first question and then Mr. Zheng will take your second question. Thank you for the question. About the delay rate, it's true that there is some slight increase in terms of a delay rate. However, you understand that the price is also different in different locations and the different vessels as well as with different depths of our wells because there are 250, 350, 300, 400, so on and so forth. So actually, for those high end vessels, the rate increased by average. The overall, the rate increased. But actually, all in all, all the rates are dependent on the demand supply in the market. As for next year, it's all up to the market. And depending on the market situation as well as what kind of vessels will be needed by our clients. So then we will decide the price. Domestic market and overseas markets are quite transparent to each other, and the market factor will be the decisive factors in terms of our price. Your second question about net asset returns, even though we delivered very good business performance in the first half and there was improvement in our net asset returns, however, we are still slow behind the industrial average. The management has confidence that in the upcoming years, we can take our net asset returns back to the right normal in the industry. Thank you. So one more comment about the specific measures. Actually, there are 2 things that we can do in terms of our technical side. We will continue investing in technology in order to improve the contribution from our technology to our net asset returns. And secondly, from the equipment side, we will lease more equipment instead of building or buying. And by large scale of leasing, we hope that it can also contribute to a better net asset returns. So I want to make 2 comments regarding this question. The first comment is that what you have seen from our financial report is only for the half year. And if you look at the whole year, if we maintain this growth, definitely, our net asset returns will be very close to the industrial level. And secondly, if you compare our performance with our with Dongwa, actually, all the players in the market, if you look at their ROEs, they're all low because of their low market. And we believe that they will improve when the markets turns better. Thanks for the management again. Is there anything to add from the management? Thank you very much, Yi, for your time. Thank you. I'm pleased to announce that today's presentation is successfully ended. Thanks again for joining us. Goodbye, and have a nice day.