Ladies and gentlemen, good morning. It's a great pleasure to see you and welcome you to China Oilfield Services Limited's 2019 strategic guidance meeting. Let me introduce the company team who will be spending the next hour with us today. Mr. Qi Meisheng, Chairman of Company. Mr. Zheng Yonggang , CFO of Company. We will start the meeting with a presentation by the CFO. Mr. Zheng will give you an overview of the industry outlook and company's prospects in 2019. This will be followed by a Q&A section. Zhao Shunqiang.
Okay.
Thank you.
Good morning, everyone, and welcome to COSL 2019 strategic guidance. Before we start, please take a note of our disclaimer for the material included in this presentation. Go back. First, let's take a look at the overall development of oil and gas industry. International oil price, which has experienced turbulence in 2018, have gradually recovered, resulting in huge cost reduction for the oil and gas exploration and the development globally. According to the IHS report, upstream E&P CapEx is expected to increase continuously by 16% in 2019 as compared to the 2018. Growth in the oil price and the reduction in cost per barrel of oil will continue to drive oil and gas companies to increase CapEx. According to the latest statistic from Bloomberg, CapEx of large oil and gas companies will rise year-on-year. Second, let's take a look at the domestic E&P environment.
As we can see, oil and gas continue to make up a large proportion of China energy consumption structure, while the proportion of clean energy and the new energy will increase. According to the National Bureau of Statistics, China's dependence on imported crude oil is nearly 70%. In 2019, China will increase E&P activities to ensure energy security. Three major oil companies in China have decided to accord to priority to E&P in China, increase investment in E&P of oil and gas, and also increase oil and gas reserve and boost production. We all know that CNOOC is an important client to us. According to the release data, the estimated CNOOC CapEx budget is more than that of 2018. The domestic market will continue to set up investment in E&P in the future, which will drive the demand for the traditional operation to boost production and increase reserve.
Benefit from this, COSL domestic workload in 2019 will show different degree of increase. As you know, yesterday, our affiliated company, which is CNOOC Limited, announced the 2019 CapEx budget, higher than that of 2018. According to the last two years' CapEx performance of CNOOC Limited. I believe that COSL will benefit from that increase of the 2019 CapEx increase. Let's move on the performance of COSL industry transformation. With increased number of tender and the bidding activities, utilization rate of drilling rig also improved gradually. However, oversupply of the production capacity still exist. In the medium and the short term, day rates are unlikely to see rise in the near term.
As the above graphs show, the utilization rate of the COSL streaming rig vessels and seismic vessels for the first three quarters of 2018 were better than those of international rivals. According to the current domestic and international orders on hand, workload of drilling segment and well services segment will increase significantly. Workload of the geophysical and surveying services segment will increase steadily, while that of marine support services segment will be basically the same as that of last year. This slide shows how the industry was consolidated. In terms of market competition, despite the rebound of oil price in 2018, M&A or restructuring, still a common thing, overall competition landscape also underwent some change. As said, the competition landscape of the industry is changing. According to the first three quarter financial data of 2018, COSL delivered better operational performance than its peers around the globe.
COSL, as an integrated company, its financial performance better than that of the most drilling companies. We admit, there is still a big gap between COSL and the big names in the well services industry. For COSL, I think it still is a long way to go. Okay. COSL will continue to adhere the major 2 strategy of technological and international development. The revenue contribution of the technology segment is expected to further increase. COSL will strengthen the provision of traditional offshore oil and gas service through technological research and development, improving the application of its own technology in offshore oil and gas and unconventional energy exploration, and exploring the opportunity for clean and renewable energy. According to the current domestic and international orders on hand, the workloads in 2019 will increase year on year. I will explain the company's development direction from the different dimension.
In the medium and the long term, the operation ability of the equipment segment and the development advantage of the technology segment will help lay a foundation for the company to pursue technological development and international development. First, the developmental prospect of the equipment segment to meet the China's policy requirement and market demand, which specifies a need to increase in E&P. COSL will increase the production capacity of the equipment in the 2019. Marine support services segment will be basically the same as that of the last year. Workloads of geophysical and surveying services segment remains stable year on year. Among which, the workloads of submarine cable operation will increase. Okay. For the development of technology segment, technological development is particularly important if the company strive to achieve sustainable development in the long term.
We have extensive experience and a good track record in the provision of wireline logging and directional drilling service. Our cementing and the LWD technology enjoy a higher market share. With the increase in the demand for integrated oilfield service, equipment and the technological solution, COSL is capable of providing clients with oilfield service at different stage. COSL technology and equipment segment are on rise in their shares of global oilfield service market. For example, our cementing, ranking number 3, takes 5% globally, our wireline logging, ranking number 6, takes about 2% of global share. Directional drilling, ranked number 6, takes 3% international market shares. Our drilling and completion fluid is ranked number 8 and takes 3% of global market shares. This line represents our well service. This is our equipment. You can see in the market share, gradually the growth. Okay.
To achieve technological development, COSL will develop a new business model to address the needs of clients. By providing our clients with a complete set of solution that covers entire industry chain and integrated oilfield development solution, we have not only strengthened our capability to offer traditional oil and gas service, but also improved the application of our self-developed technology in offshore oil and gas, as well as unconventional energy exploration, thereby gradually expanding our market share. For the domestic market, pursuant to the national policies, Chinese oil and gas companies such as CNPC, Sinopec, and CNOOC will increase oil and gas E&P activities in China, and more medium and small-sized oil and gas companies will do the same as well. There will be more project opportunity related to the onshore business and the wind power in the future.
In this connection, COSL will closely follow the needs of our clients in China, seize the opportunities of industrial development, diversify the types of service in order to steadily increase the revenue generated from the domestic market. As you see, in 2019, we put more resources to domestic market, both in the drilling segment and the well service segment. This slide illustrates the domestic contract status and the situation of 26 jackup rigs and 8 semi-sub operated and managed by COSL as of today. It may change in the future because some contracts are still in the process. We will keep you posted. For the overseas market, to effectively push ahead with its international development, COSL formulates target measures according to the needs of clients in each region.
We will also achieve economical scale in overseas market, increase revenue contribution from this market, speed up serialization and commercialization of technological products, give full play to the synergy and cost advantage of segment to enhance the scale of European, African, and Middle East market so as to provide some more opportunity for the company to acquire exploration, development, and production service contract. We will take a look the key market in 2019, Africa, Middle East, and Europe. In the Middle East, Iraq will be one of our key markets in the 2019. COSL will closely follow the market opportunity in Iraq and other project. COSL will also step up market expansion and strive to introduce more rigs into this market. In Africa, COSL will establish foothold in both East Africa and West Africa through Uganda project and the Cameroon project, and increase revenue from Africa.
In Europe, COSL will identify business opportunities and increase the leasing rate of semi-sub. COSL will also focus on general service project, enhance COSL's competence in the provision of integrated service, and bring Well Services segment to the high-end market. Here is the operation status of our rigs in the overseas market and the situation of 10 jackup rigs and the seven semi-sub operated and managed by COSL. It may change in the future because some contracts are still in the process. Low oil price has driven COSL to create more commercial value through the application and promotion of its self-development technological achievement. The adoption of serious measures has effectively lowered the cost of clients and encouraged the development of technology. In 2019, the overall competition in the oilfield service market is still fierce. The increased workload also pose challenge to our cost management.
During the period, COSL will focus on and control the cost increase caused by the increased workload and will strive to improve COSL's profitability through systematic cost reduction measures such as institution reform, management process optimization, and boosting labor productivity. In 2019, the cash flow position of COSL is, in general, secured. It will continue strictly follow the practice of prudent capital investment, pay more attention to return to shareholders. It is estimated that CapEx for 2019 will be approximately RMB3 billion. Along with higher investment in oil and gas and the emergence of new competitive framework, COSL will expand market shares through adaptation of new business models and development of overseas market. COSL will further accelerate the pace of internationalization, technology industrialization, and serialization. We will continually materialize self-transformation to boost market shares. Thank you for your consistent support.
On behalf of COSL management, I wish you a happy Chinese New Year. Here comes the end of my presentation. Questions are welcome. Thank you.
Thank you, Mr. Zheng. We shall open the floor to questions. To facilitate the answer and question part, we provide consecutive translations. Please raise your questions one by one and allow time for our translation part. Yes, gentlemen. Yes, please. Sorry.
Hi. Thank you, management. It is Lawrence Lau from BOCI. Two questions. First of all, I noticed on page 10 of the slide, it was mentioned that you actually add or plan to add five rigs in 2019. One of them, actually, you will purchase. Can you give us more details as to which kind of rig you're going to purchase? The other four rigs you're going to lease, can you give some guidance as to the additional cost from leasing those rigs? Secondly, can you give us some ideas to the day rates you have agreed with CNOOC for this year? Thank you.
我有两个问题，第一个问题就是在你们投影片第10页，就说到有计划在2019年多加五个平台，其中一个就会购买的。那我想了解多一点细节，就是你们会购买的是哪一种的平台？那么另外有四台将会是租的，那么租金的成本会是多少呢？第二个问题就是关于你们跟中海油同意的这个费用，日费用率是多少呢？
谢谢你的提问。第一个问题，公司在去年底与相关方达成了租和，包括公司已经完成购置的一条半潜平台。这个平台正在国内某船厂进行投产前的一些修理，会在第一季度就投产。其他四条平台是从一些投资公司的手中租过来的。这个平台的租金由于对方，这个船东要求保密，不便公布。但是可以告诉大家，我们所租用的这个租金一定是低于我们自己投资建造的折旧摊销。这是第一个问题。第二个问题就是与中海油的关键客户的日费还在谈判过程中。因为在其中日费是包括两大块，一个是装备板块，一个是技术板块。这些日费率我们都会根据全球的市场来进行一个标定，然后进行这一年度的谈判。可以跟大家分享的一个全球的市场的信息就是，装备板块在全球这个市场，这个费率基本上在目前看不到大的增长的机会。但是技术板块的费率，大家也可以看到，从全球已经发布的纯技术板块公司的业绩来看，技术板块目前相关的服务费率会有所增长。
Let me answer the first question about the purchase and also leasing of rigs. Well, at the end of last year, in fact, we had completed the procurement or purchase of one rig. It is now in the stage of repair before production commencement. It is believed that in the first quarter it will be commissioned in production. For the other four rigs, we're going to lease them from some investment companies. However, as regards the rent. In accordance with the agreement with the owner of the vessels, we have to keep the information confidential. I can tell you that the rent is definitely lower than the amount of cost in the case if we have to build and invest in the rigs, in terms of depreciation and amortization. Regarding the second question, we are still in the negotiation process with CNOOC.
Concerning day rates, it actually comprises two elements: one equipment and the other technology. If you look at the global market in terms of equipment, well, there is not any chance of a big increase in relation to the day rates for the equipment part. For the technology part, based on statistics and information from pure technology segment companies in the world, the cost is going up. Now we are still in the process of negotiation. In negotiation of the day rate, we will take into consideration the global market information and price benchmarks.
Okay, second question, please.
Aditya Suresh from Macquarie. Just two questions. First is, your fleet utilization for both jackups and semis, it looks like it will be about 80%-85% this year, which is a big step up from last year. As you bring these rigs back online, could you speak about the potential for margin dilution as we saw in 2018? The second question is, while the market day rate may be subdued, is there further pressure from a COSL side to go and discount those day rates to win incremental work? Thank you.
好，第一个问题就是，目前我们的钻井平台的使用率确实在提升。这得益于两方面，一方面是咱们在国际市场上这几年的市场努力的结果；第二方面得益于中国市场上，特别是中国政府对中国境内的油气勘探开发的这个需求，加大了这两个市场的需求。因此，作为一个中国，母公司在中国的公司，我们目前使用率确实是比较高于我们的同行。先请翻译。
First of all, in relation to our drilling rigs, it is true that the utilization has gone up. First of all, this is because of additional efforts made in the international market and also for the Chinese government, they have bigger demand concerning exploration. We are a Chinese company, so as a result, our utilization is better and higher than the other peers.
可以明确地告诉您，随着使用率的提高，尽管相应的成本也会提高，但是总体来讲，得益于使用率的提高，公司的盈利水平也会提高。
Even though our utilization rate has gone up and as a result, cost will also go up. Still, our company can benefit from increase in profitability because of this increase in utilization rate.
关于第二个问题，大家知道，由于中国已经是个开放的市场，而且会进一步加大开放的步伐。尽管在CNOOC，给了我们巨大的工作量，但它的市场也是完全开放的，对于所有竞争对手都是开放的。因此在这个时期，你说再跟他有什么优惠和打折，我们是完全遵从于市场规则之下的。
Now China is already an open market, and China is also going to open up the market further. For CNOOC, well, we are getting quite big workload from CNOOC, but still for CNOOC, the market is also open. In other words, we will face competition from other competitors as well. In relation to pricing or discounting, we will obey and adhere to market pattern or market order.
我也相信，COSL会得益于这个市场越来越开放。由于市场的开放，很多国际的一些对手会进入到中国市场。
We believe that COSL will benefit from an opening up market, because actually there are other international companies or competitors who will also enter the market.
由于国际同行，他们的操作成本一定是比在中国境内的我们公司的成本会高，因此它的进来一定会拉高这个市场的标定的标准，是非标定的标准。
International counterparts and players have higher operating costs than us in China. Definitely with the entrance of international companies, the standard of pricing will be put up.
Okay, next question. Yes, please.
Thank you very much. This is Andy from Morgan Stanley. I have two questions. The first one is regarding your rig status. If we look at the domestic rig, especially we have two jackup, the Superior and the Force, currently still showing in standby. At the same time, we see the company adding new rigs. Does it suggest the management is expecting a much better new order momentum in the next several months? In that case, we need to pre-order or add the rigs. Can you share more about these kinds of new business perspective? The second question is regarding the overseas business. I think in 2018, the company said that as one of the key areas for growth. Can you share with us some of these achievements or the development in 2018?
Also in 2019, what will be the key target for the overseas market strategy? Thank you.
第一个问题，就是关于你们的自身钻井平台。你们在国内有两台这样的平台，都是在一个备用的模式，但是你们还是将会多加新的这样的平台。那是不是你们估计将会在订单方面，在未来的几个月，会有越来越多越来越好的订单的情况。第二点，就是关于你们的海外业务。在2018年，你说到你们海外业务是主要的增长的范围，那么我想多了解一下，你们在2018年有什么的发展和成绩在这一块？另外，2019年海外业务的目标是什么呢？
行。第一个问题先回答。非常感谢Andy对咱们这个材料的研阅的仔细。确实是公司目前在钻机的全球的安排上有些调整。这些调整，尽管国内现有一些平台，目前在等待合同当中，咱们也调整一些国外平台回来。主要是因为不同平台它的类型是不一样的，有375英尺水深的，有400英尺水深的，有钻井能力达1000吨的，也有钻井能力在750吨的。因为这种类型的分布，所以公司需要把不同类型的不同能力的平台在全球做一个调整，是这么一个原因。
Thank you very much, Andy, for your being so detail-minded in analyzing and reading our materials. It is true that we have to make adjustment to our overall deployment of the rigs. In mainland China, there are still rigs that are on a standby mode because we are waiting for orders and contracts for utilizing these rigs. At the same time, we are also deploying some rigs and bringing them back from overseas to China. This is because different kinds of rigs have different features and are for different uses. For example, there are rigs for a water depth of 375 feet and 400 feet, and there are also rigs for weight of 1,000 tons and 750 tons, and so on. That is why we are making global adjustment to the deployment of rigs.
关于第二个问题，公司对2019年海外的发展的前景比较看好的几个，或者是比较有信心的几个地区是这样：基本上全球六个区的发展都在2019年都有幅度不同的发展机会。目前从我们已经在手的合约来看，我们将在欧洲、中东、墨西哥湾，包括东南亚，都有大的增长。2019年从海外业务一定会比2018年有一个较好的发展结果。
For our overseas business in 2019, well, actually, we are confident and also we are positive in relation to the prospect. In the six different regions, there will be different development and chances in 2019. Based on the orders that we have in hand, there are opportunities in Europe, Middle East, Gulf of Mexico, and Southeast Asia. Overall speaking, we believe that our overseas business in 2019 will be better than those in 2018.
Okay, next question, please. Yes.
Good morning, everyone. It's Scott Darling from J.P. Morgan. Just a few quick questions. For your geophysical, are you planning this year to be profitable? For drilling, I mean, could you give us a year in your plan, which sort of drilling profitability could mirror if you had to go back in the past? I guess what I'm trying to ask is how much more of an improvement in drilling could you surprise the market? My last question is, you put on page 7 about M&A, or consolidation within the drilling sector. Why haven't you contributed in some of this? Are you looking at sort of a corporate changing acquisition that you did many years ago with Awilco? Probably more biased to technology, because I think that would probably re-rate the shares if it was within a sort of technological field which you're trying to drive for. [Foreign language] you understand.
我第一个问题就是关于你们物探方面的服务板块，就是在今年是有一个盈利吧。然后我想了解一下你们钻探方面全年的计划，盈利的改善方面，究竟可以有多大的盈利改善，可以让市场觉得有惊喜的呢？然后第七页PPT里面，你们就谈到并购，还有在钻探板块里面的整固。我想了解更多一点关于你们企业收购方面的情况，会不会更偏向于技术方面，然后这个也会不会导致股价股份方面有所影响呢？
关于钻机在19年的盈利的展望。我想是这样，其实这个市场的，特别是中国境内市场的迅猛的增长，公司在钻机的服务的板块，盈利一定会改变18年，由于在钻机的一些批量的待机，这方面的成本会抵消。因此钻机板块一定会在19年，由于待机时间的减少，一定会对公司的盈利增长提供较大的帮助。
First of all, concerning profit outlook of drilling segment in 2019. Well in China, we can see very rapid growth in the segment and it is going to be better than in 2018. The main reason is that in 2019, the duration of standby time will be lower than that in 2018. In this case, the cost will then be offset by this reduced amount of standby time and reduction in standby cost.
关于收购方面，从我们提供的材料大家可以看到，确实在过去一段时间，这个装备板块，特别是钻井成套上的并购整合，出现了大量的事件。为什么导致？是因为全球的钻机的制造产能，由于在14年以前的红利影响，导致大量的投机投资，导致了全球的产能增长比较快，因而导致了钻机市场的产能的严重过剩，因此出现了好多钻机公司倒闭、出售等并购活动。公司得益于咱们中国境内的基本市场的保障，因此公司在钻机板块到目前为止还是盈利，营运比咱们同行要好，这是一个整体判断。
Next, I would like to comment on M&A and consolidation of equipment. Well, actually, if you look at the global scene in relation to drilling rigs, before 2014, there was huge amount of investment, and as a result, there was a sharp increase in global production capacity. In fact, there was excess capacity back then. As a result, there were some companies, equipment companies that had closed down, and there was also divestment and M&A as well in that particular segment. Well for our company, if you look at operation of equipment and also all these M&A activities, we believe that our company is in a better position than our other peers and competitors.
并购也是公司发展过程中一种方式，公司也不会排斥这种发展方式。公司未来在这方面也一直在寻求较好的并购目标，当然这些都集中在技术板块，有合适的点、合适的目标，我们不会排除这个。
M&A is one possible option or channel for development. We do not rule out the possibility of M&A. We have been identifying good targets for M&A, and we'll continue to do so in the future. This will be concentrated on the technology segment. If there are good targets and potential options, we will consider them.
Next question, please.
Hi, it's Thomas Hilboldt from HSBC. Thank you. I'm wondering if you can guide us at all about the potential revenue growth in the offshore business versus the onshore business. Also talk to us about whether the onshore business is margin accretive, i.e. does it generate higher margins or is it margin dilutive? That's question one. Question two, you mentioned that competitive conditions in the China market might be changing because the market is opening up, I think. Can you talk about new entrants into the offshore China market? Thank you.
第一个问题就是关于收入增长的，可不可以提供资料比较一下你们在海上和在陆上收入增长方面的资料？在陆上的是不是利润率更高还是比较低一点？第二个问题是关于中国市场，现在比以前更开放了，那么可不可以告诉我们在海上的部分，一些新来者，新加入的有哪一些呢？
好，关于公司的海上和陆上的收入的占比，我们在发布公告的年报的时候，我们会一并发布。当然，无论是陆地市场还是海上市场，我们都是通过市场竞争进入的这些市场，因此它的盈利能力一定是符合于这两块市场的整体的盈利规律的。
Concerning our growth for the offshore and onshore segments, the information will be released together with the issue of our annual report. For our growth and business of onshore and offshore operations, in fact, we entered these markets by means of market competition. So our profitability in these two segments will also be in line with the market trends and patterns in these two segments.
关于新进中国市场的是何方，目前我只知道中国市场在公开招标，我知道国际一些同行都在纷纷投标，具体结果我现在还不知道。
I understand that in the China market now there is open tendering, many international players will also participate in this open tendering in the Chinese market. Who will get into the market, who will get the award of contract is not known yet at this moment in time.
Okay. Next question, please.
Hi management, this is Toby Shek from Citi. I have a question regarding the cost. In terms of your cost in 2018, you're facing quite a big pressure in terms of the cost increase. How do we expect the cost increase in 2019? In particular that you just mentioned you have some adjustment in your rates from overseas and China. Should we expect some relocations of rigs? That's what we actually saw in first quarter last year that which increased some of the cost. Should we expect this to happen? Overall, how do we see the cost? As I saw from your PPT that you have measures to control costs in 2019. Overall, how should we look at this if you compare to 2018?
我的问题是关于你们成本的。在2018年，你们面对挺大的成本上升的压力，在19年将会怎么样呢？刚才你提到在这个平台方面的调配和调整，在海外和中国之间，那么在去年第一季，因为你们有这些重新的调配等等，可能是导致一个成本的上升，这个在2019年会不会同样也发生？我知道从你的投影片提到，19年会用一些成本控制的措施，那么总体成本方面比起2018年会是怎么样的呢？
这个问题从两方面来回答。第一个，在片子中介绍中也提到了，我们会有一些海外的mobilize到国内，确实如你所言，会有一些mobilization这种费用。
As you said just now, and also as stated in the PPT, in the materials, there will be rigs being redeployed from overseas back to Mainland China. This will lead to some additional cost.
从2019年全年来看，随着收入的不断上升，我们的成本也面临着很大的压力，包括我们的2019年，相对来说对于我们设备而言是一个比较大的维修年，所以会有很大量的这种维修成本支出。同时，我们也能看到，从2018年来看，原材料成本在2018年实际上是大幅增长的。原材料价格在大幅增长，原材料成本对于我们来说也形成了很大的压力。这个在2018年存在，在2019年我相信仍然存在。
For the whole year of 2019, our revenue is going to go up and we also will anticipate pressure in our cost. 2019 will be a year of repair of our equipment, and as a result, repair cost of equipment will also be a factor. It will also go up. In 2018, we saw a rise in raw material price, and so of course our raw material cost also went up, and this put quite a big pressure on us. In 2019, we believe that there will still be this pressure from rising raw material cost.
对于技术板块而言，大家也都知道，我们技术板块还有很多的分包费用。在19年，随着我们自身的这种技术实力的提高，我们自有技术的产品的比重在不断上升。我们希望在19年，在成本控制方面能够也减少我们的分包费用，提高我们技术板块的整体的盈利能力。
For the technology segment, there was quite a big cost in relation to subcontracting. In 2019, we have increased the share of our self-owned technology products. This part has risen, and this is also a good way of cost control because in this way we hope to be able to reduce the amount of expenses in costs involved in subcontracting.
对于物探板块而言，我们希望能够在利润更加丰厚的，比如说OBN、OBC这种，我们有更多的市场的份额，更多的市场空间。
For Geophysical and Surveying Services segment with more profitability in, for example, OBN, OBC, we hope that we will be able to capture bigger market share and better market potential.
好，谢谢。
Next question, please. I saw more hands up. We are running at number 7. Okay. Seventh question will come from Should we invite the last question?
好，谢谢大家今天的到会。这次中国的传统的年关，感谢各位在过去，包括在过去的一年乃至更长时间，对COSL的关注支持。COSL在即将到来的中国春节，对新的这个一年里，COSL管理层对19年的发展是充满了信心的，充满了信心，比18年发展更好的信心。也借此祝福我们各位，在中国的新年里身体健康，万事如意，工作愉快。
The Chinese New Year is coming. First of all, I would like to take this opportunity to thank you for all the support and interest in COSL in the past year, as well as in all the years in our past history. For 2019, the management is full of confidence that our development will be better than in 2018. Here I would like to wish you all good health and prosperity in 2019.
Thank you, ladies and gentlemen. That concludes this meeting. Thank you.