Earnings Call: H2 2018

Mar 26, 2019

Good morning, ladies and gentlemen, friends of COSO. It's good to see you again. A very warm welcome to Annual Results Meeting of COSO. Allow me to introduce you management members today who are with us, Mr. Chi Meisheng, Chairman of the Company Mr. Zhao Shuo Jie, CEO and President of Company Mr. Zhengyong Gang, CFO of Company and Ms. Jiang Ping, Board Secretary of Company. Thank you. The first part of the meeting, Mr. Zheng Yonggang, CFO, he will share with us overall performance of COSO in 2018 and an outlook of the company for 2019 and beyond. The rest of the meeting will be for you to raise questions and for them to address them. Shall we start? Good morning, ladies and gentlemen. Thanks all for attending KOSO's Annual Results Price Conference 2018. Please take notes for our disclaimer. First is the 2018 results overview. 2nd is our future outlook. First, let's review the development of oil and gas industry. As we all know, the overall international crude oil price rebounded in 2018. Growth in the oil price drive oil and gas company to increase CapEx, and it had improved exploration and development from the second half of twenty eighteen in Chinese market. Global upstream E and P spending increased by approximately 7% over 2017. But the situation of oversupply still exists. KOSO has faced a serious challenge in the operating environment in 2018. Facing the opportunity and challenge of industry, COSO promotes our technological and international development steadily, seizing the rising demands of E and P, provide guarantee for customer to increase the reserve and the production through technological innovation and improving equipment efficiency. KOSO has successfully accomplished its business objective during the period. Revenue increased by 25.4 percent year to year to nearly 21,000,000,000 21,900,000,000. Overcoming the competition in the industry and the raw material costs rising, KOSO achieved profit for a consecutive year, and the profit for the year is nearly RMB89 1,000,000. In terms of revenue, we ranked 5th behind the big 3 and the weather forecast, but ahead of all of the equipment company, including the Transocean, including the Noble. And in terms of growth rate, we are the fastest one. We achieved a point 25.4 percent growth rate. At the end of the year, and we hold available cash, it's nearly $11,500,000,000 and our debt to ratio is around 53.6 percent compared to the last year, which is 53 point 1%, a little bit increase due to the workload increase. So our accounts payable increased 1 point I remember RMB 1,400,000,000. So just a tax ratio, a little bit increase. Our distribution policy for the 2018, we proposed $0.07 per share and the tax included. This is our 2018 financial results. With the expansion of domestic and overseas market, Koso's business capacity and profitability have been improved. The overall workload of our forest sector has all increased to varying degrees. Except for the geophysical and survey sector, the revenue of the other three sectors increased, among it. So while service sector grew the fastest one and contribute the most. This picture illustrates, I mean, our growth rate. From this picture, you can see our well service sector is a fastest one, and the growth rate is 40%. Our drilling sector grows 22%. Our marine support sector is around 10%, and geophysical and service service sector down 2%. So as far as this picture, you can say, and our well service sector and is a flattish one. And in 2018, country built around RMB2.8 billion. In terms of operating days and our drilling sector grows by 23.8%. Our self owned vessels of marine support increased by 6.4%. And our geophysical sector grew in volume of operation, but dropped in revenue due to the increase of multiple clients' projects, while revenue will be performed at the time of data sales. So our geophysical and survey service down 2% is due to the change of our business model. In the past, we provide service. We collect money, which we recognize the sales revenue. But now, so this model changed, we provide service, and we spend money, we treat it as asset and depreciate in next 4 years. So we recognize the sales revenue when we sell later. So the timing will be delayed, maybe 2 years later, maybe 3 years later. So the timing will be delayed compared to the past business model. This is a big change. This is called multiple clients, I mean, the sales model. So this is the explanation for our job in the geophysical and service service. Actually, in reality, it's increased. Okay. Let's move on to the performance of COSO in 2018. As global market recover, we increased number of tender and bidding activity. Utilization rates of equipment also improved gradually. However, oversupply of production capacity will exist in the medium and short term. Except for some special rigs, the day rate stay at the low levels. Although the equipment sector in the industry still face the challenge of oversupply, but as shown in the figures above, the utilization rate of coastal stream rig vessels and seismic vessels were better than the average level of international peers in 2018. In 2018, and this is an illustration of our the generic utilization rate. And from this picture, you can say utilization rates for COSO and both for the semi sub and the jack up, and that is around 65% to 65% is around 65%, 5% to 10% higher than international peers in 2018. And also, we project will be the utilization rate in the next year, which means 2019 will be a bit higher. So maybe you can touch maybe 75% maybe? And the KOSO has been profitable for consecutive years. As shown above, although the KOSO's profit scale is small, but it reflected the competitive environment in the certain extent. Apart from the factor of our raw industry, Koso's profit was limited by the price rising of raw materials, fuels and chemicals. In the meantime, the improvement of our E and P in the domestic made immediate request of equipment and technical capacity. And in order to seize the opportunity of E and P rising demand, KOSO made full use of its own resources and expand market shares by subcontracting and leasing. As a result, increase in workload lead to cost rising. Looking around the global industry, we are also pleased to find our equipment strength ranks in the 4th front of the industry. The scale of our drilling rig ranks 2nd in the world. The marine support market shares is the 4th largest in the world, and the workload of geophysical contract is the 1st largest in the world. The breakthrough in well service technology have achieved advanced level. The market shares of cementing ranks 4, so wireline lodging markets ranks 6 and drilling and completion fleet ranks 7th. Our equipment sector stays stable the share of global oilfield service market, and the well service sector keeps rising. From this picture, you can tell in our well service sector, just the green line this green line is our well service sector. In the past 10 years, increase is around 1% the market share globally, now to the nearly 0.6% market share globally. So increased a lot. And our equipment sector keeps nearly same. And our company in the future, the major driving profitable factor will come will be majorly from the well service sector in the future. As we have mentioned, the contribution of well service sector increased, reflecting our ability in technology development to continuously break through the bottleneck and the achievement transformation. KOSO achieved high quality development in 2018. Development mode was transforming from scale and speed to quantity and efficiency. Coso's research and technology progress focus on the improving customer operational efficiency, high temperature, high pressure, green environment friendly and low carbon. In 2018, Coso has provided significant support for customer of a new discovery in exploration, increased output of heavy oil and the marginal oilfield. I'd like to introduce our self development, IMRCP. It's an important method for obtaining information such as earth formation and oil and gas reserves. The self developed MRCT, coring, sample complete, strong adaptivity to earth formation suitable for compliance well condition. In 2018, 401 calls were collected and 51 calls record are created in 1 run of China Offshore. MRSAT has gained attention from a number of international oil company and will gain more market shares in domestic. So now we are very we are very proud to say and in this market area, we are the leading player in this service area. And among all of our international peers, including Big Sur, we are the leading player. In this area, we are the leading player. In this service area, we are the leading player. In 2018, KOSO records a revenue growth both at domestic and abroad. The latter of which hit 31%. This is international and increased 31% to JPY 5,600,000,000 and domestic increased 23.5% and hit JPY 16,000,000,000. This is domestic. And our well service this well service increased 40% and the heat, nearly RMB 9,800,000,000 and while equipment sector increased 15.6% and hit nearly more than KRW 12,000,000,000. So in terms of revenue, in terms of growth rate, and we achieved the significant increase in 2018. As we all know, it has improved E and P activity from the second half of twenty eighteen in Chinese market, closer in the development of domestic market, but also focus on the global strategic layout, having developing market through various business model to enhance the overall profitability. In 2018, Kozo gained 29 new customer and signed 133 new contract in overseas market. This is some illustration. And for example, Europe and our innovator platform launched the dream contract for the new client lending and Pioneer received the next dream contract. This is our strategic area. And also, Middle East is another one. And in Saudi Arabia, in Iraq, we already makes a breakthrough in some of the market, Saudi Arabia and Iraq. They are drilling, and we went to 21 wells, and we are now in the bidding next round. So in terms of strategic area, we make the breakthrough. With the workload increase, safety position is stable and gained an excellent safety management achievement. Safety is on KOSO's top priority. We kept inspecting hidden dangers and conducting emergency management. Our OSAT index recordable events rate remains low, which stood at 0.08. A premier QHCE record plays key role in realized KOSO's internationalization. Meanwhile, KOSO concerned about energy saving and environmental protection issues. We actively made charitable contribution and co host safety culture events with clients. The company still received award awards and gains recognition from the capital market and institution even though in face of severe industrial environment. Okay. Now we finished I mean, I finished 2018 and financial and operational, the performance overview, I will move to the 2019 outlook. In 2019, the oilfield service industry will keep recovering in general. With increased market activity and a further improvement in the overall operating environment as compared in 2018. According to the spare report, the workload in the oilfield service will build up. A growth rate of 8% is expected for 2019. Oil and Gas continue to make up large proportion of China Energy consumption structure, while the proportion of clean energy and the new energy will increase. For example, the wind power is our another one, additional one to our is our strategic, I mean, the target, the wind power. China will continue to accelerate exploration and production to ensure MG's security over the next 7 years. In 2019, KOSO will follow the strategy of technological and international development, increase the proportion of well service sector revenue and focus on the development of international market, while securing the domestic energy supplies. KOSO will strive to expand its business onshore and offshore, especially in the new engine industry such as wind power, so as to make COSO an internationally competitive integrated oilfield service provider, covering the broad range of energy. For the domestic market, pursuant to the national policy, Chinese oil and gas companies such as CNPC, Sinopec and CNOOC will increase oil and gas E and P activity in China, and more small and the media size oil and gas companies will do the same as well. This will be more project opportunity related to onshore business and wind power in the future. In this connection, KOSO will closely follow the need of our clients in China, seize the opportunity of industrial development, diversify the types of business in order to steadily increase the revenue generated from the domestic market. And this is an illustration and domestic, now we have 33, and international, we have 18 from each. And there will be 32 trading rates in domestic market. And also, I believe, we'll be more semi sub and the jackups our drilling also will add it to our fleet in domestic market in 2019. This slide shows some of the contracts in overseas market. In the background of fast growth in domestic market, KOSO will strive to the further revenue increase from overseas. Here, I want to share with you about Iraqi market. Due to the significant performance of Khoso, one of our Iraqi clients offer to cooperate with COSO to help to improve integrated service capability. According to this, Khoso will enjoy a good marketing prospect in Iraq for the next 2 years. This is just an illustration and including our overseas market, America, Africa, Middle East, New Zealand, others. And also here, the focus on the SPIRAK, including the service tab, we cover the broad range service type and also our output value and also our Khoso brand. We already built our Khoso brand, Khoso Trimming, Khoso Tech in the Iraqi market, and also we already received the recognition from the browser engine and the customer. This is our Iraqi market. As you know, we have prepared a slide of our contract status and the situation of 51 rigs operated and managed by COSO. In domestic market, it's expected that there will be more work load in 2019. This is just a trend one. So we believe it will be more the jackup semi fab we will add it to our fleet in 2019 due to the increase of workload. It may change in the future because some contracts are still in progress. We will keep you posted. In overseas markets, considering KOSO overall coordination of global resources, the impact of a traditional seasonal factor on workload will be effectively controlled in 2019. This is also the current one, and we believe some I mean, our overseas fleet will take the new contract, some yellow one, the yellow area will be replaced by the operation, which is in blue color. So we will be replaced. In 2019, COSO will adopt structural cost reduction measures to strictly control the cost increment caused by the increase of our workload. The CapEx budget of the company in 2019 is about RMB3 1,000,000,000. Reasonable investment and debt repayment structure can safeguard the healthy cash flow and a qualified debt rating. Therefore, this all enable us to adopt different modes of operation and apply the different business models. Among the higher investments in oil and gas, the emergence of new competitive framework, KOSO will keep following the industry trend closely, allocate resources guided by customer demand, do best at technical reserve and safety management, improving profitability through the structural cost reductions such as the reform. And the COSO is confident it could stand higher in the new opportunity and continuously promote the high quality development of the company. Thank you for your consistent support. Here comes the end of my presentation and a pleasant welcome. Thank you. Thank you, Mr. Chen. Before we start the Q and A section, I'm happy to tell you that we have a translator to help us with the questions and answers. So the first question would come from, yes, a gentleman in grade. Yes, please. This is Aditya from Macquarie. The first question I have was specifically on your Singapore subsidiary. You have Prospector and Strike in that subsidiary. There's a RMB 2,400,000,000 loss which you booked in your financials. With Perspecta and Stripe now coming back to work, can we expect that loss to meaningfully narrow and maybe even breakeven this year? Second question is on your rig rates. Second half of twenty eighteen was better than first half of twenty eighteen. Could you explain if that is a mix impact? Or were you actually able to see better pricing? Thank you for your questions. I would like to take your first question, and Mr. Cao, my colleague, is going to take your second one. Regarding the loss that happened in Singapore subsidiary, thank you for your careful days in studying our material. It is true that there was such a loss in Singapore in last year in 2018. It is mainly because of the business adjustment in our Asia Pacific region, particularly the organizational structure adjustment in Singapore. In 2018, we restructured our resources in Asia Pacific region, and particularly, we allocated more resources and assets from China to Asia Pacific region outside of the country. And Singapore was regarded as the center of our Asia Pacific region, while we also set up 2 subsidiaries, 1 in Indonesia, the other in Malaysia. The loss that occurred in Singapore was mainly because of the adjustment regarding resources and assets from China to the overseas market. So therefore, it is because of the depreciation and amortization of such assets, it is nonoperational activity. So you understand that there were adjustments and restructuring in the Asia Pacific Pacific region for the company. So based on the contract that we have already won in the market, we believe that the performance in Asia Pacific, particularly in Singapore, will definitely be better than last year. So just let me give you an example. In Indonesia, we have already become the biggest oil service provider in the local market. Also the training contract? Thank you. Let me answer your second question. Just now you asked about the prices. The second half is better than the first half. So there are a couple of reasons. The first reason is that we adopted different business model in the second half, and it is the integrated EPC model, which gave us better price than the first half. The second reason is because of the differences between different regions and the different customers. And therefore, the prices are also different. So that's why the price in the second half is also better than the first half. And the third reason is because of our motivation program or the incentives that we gave out in the second half that brought better performance in the second half. Regarding the price trend for 2019, as our CFO mentioned in his presentation just now, so far in the market, the supply is still bigger or greater than demand, and the prices are still at the lower level. So we don't think that there will be a major change regarding price in 2019. So actually, prices are determined by the competition in the market. So if the competition in the market changes, the market the price will also change. Neil Beveridge from Bernstein. Thank you for the presentation. Two questions. First of all, we saw strong revenue growth and utilizations in 20 18, but clearly lower margins on the strong cost growth that we had. What gives you the confidence that we're going to be able to see better cost control this year? And what are your expectations for margins? The second question is, your sister company, CNOOC, has come out and said that they expect to increase domestic E and P CapEx by 50% this year. We're already 3 months into 2019. And I wonder if you could just give us a little bit of a sense of how the year is going so far and whether or not you've seen a significant increase in activity for the last 3 months relative to where we were at the start of 2018. Thank you. Mr. CFO, we will take your first question, and I will answer your second question. Okay. Thank you for your question. Let me take your question about the gross margin and cost control. Your first part of the question is about the increased revenue in 2018 via lower margin. And the second part is about the cost control. First of all, about the cost structure in 2018. Actually, 2018 was a year of recovery not only for us, but also for the whole industry. So therefore, they occurred many one time for our costs, for example, in order to satisfy customers' needs and demands or for a particular project in terms of upgrading, maintenance, so on and so forth. Some parts in the cost structure in 2018 will extend to 2019, and those costs will be our major focus in cost control in this year. For example, the raw material price has been going up. And this may be because of some objective reasons in the market because the prices are going. And some are because of our increased workload in the company, because the workload is higher, the consumption is also higher. The labor cost in 2018 increased as well, so did the overall outsourcing cost. So these will be the major areas in cost control for us in 2019. For example, in the raw material consumption, the labor cost as well as outsourcing cost. Through this structural control, we hope that we can reduce cost in the externally higher labors and R and D investments so that we can use more of our own services instead of outsourcing them to other parties. Just as what you asked and what you have now that in China, Synod has already announced its plan for E and P activities for 2019. So in response to the E and P plan from Cinook, we have been running our resources at full capacity in China in Q1. So meanwhile, we are taking 2 measures in order to share the SynuX market better. The first measure is for us to relocate the overseas resources back to China. And the second measure for us is first to consolidate external resources and centralize the supplies. So benefited from the stronger demands in China as well as our own capacity. At the end of Q1, we are happy to see an upgrade in our workload, which has been running at full capacity. And we have confidence that we can continue with this momentum with such a good start compared with the same period last year. But regarding the specific business performance of Q1, we'll be able to disclose it to public at the end in April. Zhu Zeng from BOCI. My question is about VAT. We noticed that in your financial statements for 20172018, the VAT rates are pretty high. It was above 40% in 2017 and 88% in 2018. Just want to understand what are the reasons behind and what is your guidance regarding VAT rate for 2019? Thank you for your question. And the first point I want to make is that in China, COSO is regarded as a company of high technology and innovative high end innovative technology. And we enjoy 15% of VAT tax preferential treatment. And because of some policy support from the government on the R and D, on technology and in technology, the actual VAT rates are probably lower than that. So looking at the financial statements for 2017 and 2018, there are two reasons accounting for such higher tax rates. The number 1 is because of the deferred tax in China. And the second reason is because of the different taxes in China and in other countries. In China, we are making profit. We are paying taxes. But in overseas in the overseas markets, in a particular country or market, there has been a loss. So some overseas markets, we are making a profit. So anyway, we have to prepay the VAT tax in advance. However, we can Income tax. Income tax, sorry, the corporate income tax. However, we cannot get a rebate for such a loss in another country. Okay. Next question. Next question, please. Yes. Good Thank you for your presentation. It's Scott Darling here from JPMorgan. I've got three questions. First one is, do you think you can sustain the same growth in your well services? And do you think it's fair to forecast sort of a 17% to 19% operating profit margin for this year? And my second question is on geophysical operating profit. Do you think that could double this year? And then my third question, you talked a lot about clean energy, wind power. Tell us about that in the future. Do you have any revenue targets to meet in the long term? Thank you. Thank you for your questions. Your first question regarding the profit margin in 2019, I cannot tell you a specific percentage for 2019. What I can tell you is that we have confidence that we can improving we can keep improving and operating our profit margin in this year. The second question about the geophysical business. If you look at our resource utilization in the geophysical resources, we are currently running down at 80% to 90% of our capacity already in terms of acquisition and workload. Let me continue with your second question. For some particular markets or areas, for example, in China, we will cost more resources and adopt new methodology to continue with our geophysical business, for example, in the shallow water areas in the coastal regions and also to enhance our OBC business. However, this process may take some time. And you will see the effect, the results in the second half this year or next year. Your third question is about clean energy, particularly the wind energy. So far, what we are doing right now is to apply the existing technologies that we are holding and allocating the best resources to try the market first. In 2018, we already won recognition from the market through our trials. And currently, we are organizing more resources and trying to enter the market this year. So let me share with you some of the strengths that we have. The first strength is that we have a traditional capability, which is also our strongest area, is the onshore rigging onshore drilling rigs. So if it is 1 power in the deepwater, then we can give full play to our this strength. Our second strength is on the installation and the construction of onshore wind power facilities because we have our own vessels and we have got technologies and experience in engineering, construction and installation. In 2018 2019, according to my judgment, there will be a big upgrade in terms of output or revenue in this sector than 2018. Thank you. Okay. Any more from the back rows? Yes, gentlemen. Tom Hilbold from HSBC. Thank you. Just two very quick questions. Historically, you've talked a lot in the drilling segment about the importance of integrating the drilling in the well services business. I don't sort of hear that same messaging now. Can you talk about your expectations for the drilling segment this year? We've been waiting for a long time for the turn in profitability in that business. Do you think you can move to breakeven in drilling this year? That's question 1. Question 2, just, I'm wondering what sorts of targets either the Board or the management team internally has set for evaluating the performance of the business and of the management team? Do you have return targets, return on equity targets? Do you have profitability targets? What are the measures by which you're looking at your own performance over this calendar year? And how should the market look at those? Thank you. Thank you for your two questions. Mr. CEO, we'll take your first question, and I will take the second one. So thank you for your question. It's true that we talked a lot about integration in our different business sectors. Because you can see this is a chain of services from drilling to cementing to completing of wells. And actually, it is a kind of a comparative advantage we have. So how to execute this kind of integrated service really depends on what the market needs. If a customer has such a demand or such a need and since we have this capability, then we can make use of this capability. So actually, this integration is really depending on the market. As for breakeven or profitability, well, it really depends on what strategy you have for this particular service area. If your strategy goes like this, it's an early stage of a project and in the long run, you may make a profit, then you may try to realize breakeven first. So after all, the ultimate goal of our company is to realize profit. So currently, in China and in the overseas markets, we have some projects in mind that we have been following them for a long time. And there have been early stage involvements in those projects as well. And at the right time, we may work out our own strategy for those projects. Let me answer your second question. So either from the board level or the management level, there has been a performance evaluation system for all the managerial staff in the company. In terms of the performance evaluation, the Board of Directors will consider feedback from the all the directors, the customers, the employees as well as the public. Meanwhile, we also take reference of the performance evaluation mechanism in the Capital Market. For example, the areas that the Board of Directors would look into, to assess the performance of all the managerial staff would be as follows: The first area is how well the strategy has been implemented. So this includes a comparison with the international peer competitors in terms of our increase in competitiveness as well as our business growth. The second area that the Board of Directors will look into is on the technical development and internationalization of our business by the management team. We specifically will look at how quickly we are developing our product our technology, how good these technologies are and how effective these technologies will be. And in terms of internationalization, we can also look into areas such as how quickly we are entering the international market and how well we have done our job in those markets. Of course, one even more one area which is even more important in our evaluation of managerial performance is on the profit performance in 2018. Of course, we have also formulated specific evaluation mechanisms for the secondary affiliates of the company as well as the overseas market overseas subsidiaries. For example, in a particular country, we have formulated performance evaluation mechanisms for the local managerial staff. So in my opinion, in short, the current performance evaluation mechanism established by the Board of Directors on the management staff is very effective and has been very effective. And you can see that the devotion and the passion from the management to their work has been very high. Yes, in the back row, please. Gentlemen, yes. The first question is about the rigs in China and abroad. We noticed that the rigs in China are falling with full capacity and full workload, but there are still 2 to 3 jackup rigs in the overseas market, which are standing by or staying idle. So do you have any plan to relocate them back to China? So the or do you think that there's more potential in the overseas market and you will keep those rigs at their places, not waiting for opportunities? So the answer is, it's true that in China, our rigs are running with full capacity. And it is also true that 2 to 3 rigs are still standing by in the overseas market. So currently, just because of the confidentiality request from our customer, what I can tell you is that we have already signed agreements with our customers, and this customer our customers are seeking for his or their permits for these rigs. So we don't see any possibility to relocate relocate those rigs back to China and particularly in the near run. If the distance is short, there's such a possibility to relocate those idle rigs back to China. Talking about the domestic market. So currently, in terms of their drilling rigs, it is a kind of short demand. And but this is for the company only. But for the whole industry or for the global market, if you look at the equipment sector, this is still very serious oversupply. And in terms of the price, I don't think there is a ready condition for us to raise the equipment price. So because the domestic market and the global market share the same mechanism in pricing. Meanwhile, we also see new resources from our domestic peer competitors entering into this segment. If you look at the technical segment, what I can tell you is that currently, these are breakeven between demand or supply or a little bit short supply at this moment. And this is because the oil price dropped years ago, and some of the suppliers of these technical equipments had shifted their business to some other areas. That is to say, they are producing some other products. So basically, that is the situation for the technical and equipment segments. Great. We are running short of time. We are taking one last very short question, and it would come from the last question. Okay. I think we've heard high quality questions and answers today. So let me check with the management.