Strategy Update

Jan 22, 2019

Slides

Ladies and gentlemen, good morning. It's a great pleasure to see you and welcome you to China Oil and Fuel Services Limited's 2019 Strategic Guidance Meeting. Let me introduce the company team who will be spending the next hour with us today, Mr. Chi Min Chen, Chairman of Company. Mr. Zhengyong Gang, 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 and A section. So thank you. Good morning, everyone, and welcome to the COSO 2019 strategic guidance. And before we start, please take a note of our disclaimer for the material included in this presentation. 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 a huge cost reduction for the oil and gas exploration and development globally. According to the IHS report, upstream NPK packs 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. 2nd, let's take a look at the domestic E and 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 NG and the new NG 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 and P activities to ensure energy safety. 3 major oil companies in China have decided to accord to priority to E and P in China, increase investments in E and P of oil and gas and also increase oil and gas reserve and boost production. We all know that Cenox is an important client to us. According to the release data, the estimated Cenog KPAS budget is more than that of 20 18. Domestic markets will continue to stand up investment in E and P in the future, which will drive to the demand for the traditional operation to boost production and increase reserve. Benefit from this, causal domestic workload in 2019 will show different degree of increase. As you know, yesterday, our Affinity company and which is Cenon Limited announced the 2019 KPAS budget, which is 2019 budget, higher than that of 2018. According to the latest according to the last 2 years KPAS performance of Send On Impept. And now this is where it's a big challenge, but I believe the Khoso will benefit from that increase of the 2019 CapEx increase. Let's move on to performance of COSO Industry Transformation. With increased number of tender and bidding activities, utilization rates of drilling rig also improved gradually. However, oversupply of the production capacity still exists. In the medium and short term, day rates are unlikely to see rise in the near term. As the above graphs show, the utilization rate of the coastal stream rig vessels and seismic vessels for the 1st 3 quarters of 2018 were better than those of international rivals. According to the current domestic and international orders on hand, workloads of drilling segment and well service segment will increase significantly. Workload of the geophysical and service segment will increase steadily, while that of Marine Support Service segment will be basically the same as that of last year. This slide shows how industry was consolidated. In terms of market competition, despite the rebound of oil price in 2018, M and A or restructuring still a common thing and overall competition landscape also underwent some change. As said, the competitive landscape of the industry is changing. According to the 1st 3 quarter financial data of 2018, COSO delivered better operational performance than it appears around the globe. COSO, as an integrated company is a financial performance better than that of the drilling some other drilling companies. But we admit, this is still the big gap between the Coso and the big name in the well service industry. So for the COSO, I believe still is a long way to go. Okay. Khoso will continue to adhere the major two strategy of technological and international development. And the revenue contribution of the technology segment is expected to further increase. COSO 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 media and the long term, the operational 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. 1st, the development prospect of the equipment segment to meet the China's policy requirement and the market demand, which specifies the need to increase E and P. Kosol will increase the production capacity of the equipment in the 2019. Marine Support Service segment will be basically the same as that of the last year. Workloads of Geophysical and Service segment remains stable year on year, among which the workloads of submarine's cable operation will increase. For the development of technology segment, technological development is particularly important. If the company strives to achieve sustainable development in the long term. We have extensive experience and a good track record in the provision of wireline lodging and directional drilling service, and our cementing and the LWD technology enjoyed 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. Coso Technology and Equipment segment are on rise in their shares of global oilfield service market. For example, our cementing and ranking number 3 takes 5% globally, and our wireline lodging and ranking number 6 takes about 2% of global share. Directional Drilling are ranked number 6 and takes 3% international market shares. Our drink and competition fleet is ranked number 8 and takes 3% of global market shares. And this line represents our the well service. This is our equipment. So you can see in the market share, so gradually the growth. To achieve technological development, Khoso 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 oil fields development solution. We have not only strengthened our capability to offer traditional oil and gas service, but also improved the application of our own 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 partners, Chinese oil and gas companies such as CNPC, Cenopec and CNOC will increase oil and gas E and P activities in China, and more media and small size 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, Coso will closely follow the needs of our clients in China, seizing 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 semisub operated and managed by COSO 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 effective push ahead with its international development, COSO formulate target measures according to the needs of clients in each region. We will also achieve economic scale in overseas market. Increased revenue contribution from this market, speed up serialization and commercialization of technological products give full play to the synergy between 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 We will take a look at the key markets in 2019, Africa, Middle East and Europe. In the Middle East, Iraq will be one of our key markets in 2019. Khoso will closely follow the market opportunity in Iraq and other projects. Khoso will also step up market expansion and strive to introduce more rigs into this market. In Africa, Khoso will establish foothold in both East Africa and West Africa through Uganda project and the Cameroon project and increased revenue from Africa. In Europe, Coso will identify business opportunities and increase the leasing rate of semi sub. COSO will also focus on general service project, enhance COSO's competence in the provision of integrated service and bring well service 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 7 semi sub operated and managed by Khoso. It may change in the future because some contracts are still in the process. Low oil price has driven coastal 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 transaction in the oilfield service market is still fierce. The increased workload also posed challenge to our cost management. During the period, CorSo will focus on and control the cost increase caused by the increased workload, and we'll strive to improve COSO'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 COSO is, in general, secured. It will continue strictly follow the practice of prudent capital investment, pay more attention to return to shareholders. And it is estimated that capital expenditure for 2019 will be approximately RMB3 1,000,000,000. Along with higher investment in oil and gas and the emergence of new competitive framework, COSO will expand market shares through application of new business models and development of overseas market. COSO 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 Khoso management, I wish you a happy Chinese New Year. Here comes to the answer 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 translation. So please raise your questions 1 by 1 and allow time for our translation part. Yes, gentlemen, yes, please. Thank you, management. It is Laurence Lau from BOCI. Two questions. First of all, I noticed on Page 10 of the slide, you mentioned that you actually add or plans to add 5 rigs in 2019. One of them actually you will going to purchase. Can you give us more details as to which kind of rig you're going to purchase? And the other 4 rigs you're going to lease, can you give some guidance as to additional costs from the leasing those rigs? And secondly, can you give us some ideas to the rig the day rates you have agreed with Xindo for this year? Thank you. 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 1 rig, and then it is now in the stage of repair before production commencement. And it is believed that in the Q1, it will be commissioned in production. And then for the other 4 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. But then I can tell you that the rent is definitely lower than the amount of cost that we in the case if we have to build and invest in the RICs in terms of depreciation and amortization. And then regarding the second question, we are still in the negotiation process with CNOOC. Concerning day rates, it actually comprises 2 elements: 1, equipment and the other, technology. And 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. But then for the technology part, based on statistics and information from pure technology segment companies in the world, the rate, we will take into consideration the global market information and price benchmarks. Okay. 2nd question, please. Aditya Suresh from Macquarie. I have just two questions. So 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? And second question is, while the market day rate may be subdued, is there further pressure from a costal side to go and discount those day rates to win incremental work? Thank you. 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. So we are a Chinese company. So as a result, our utilization is better and higher than the other peers. Even though our utilization rate has gone up and as a result, cost will also go up, Still, our company can benefit from an increase in profitability because of this increase in utilization So now China is already an open market, and China is also going to open up the market further. And 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. So in relation to pricing or discounting, we will obey and We believe that CorSo will benefit from an opening up market because well, actually, there are other international companies or competitors who will also enter the market. International counterparts and players have higher operating costs than us in China. So definitely, with the entrance of international companies, the standard of pricing will be pulled up. Okay. Next question? Yes, please. Thank you very much. This is Andy from Morgan Stanley. I have two questions. So the first one is regarding your rig status. If we look at the domestic rig, especially we have 2 jackups, the Superion and the Force currently still showing standby. And at the same time, we see the company adding new rigs. So does it suggest like management is expecting a much better new order momentum in the next several months? In that case, we need to preorder or adding the rigs. So can you share more about these kinds of new business perspective? The second question is regarding the overseas business. So I think in 2018, the company said that as one of the key area for growth. Can you share with us some of these like achievement or the development in 2018? And also in 2019, what will be the key target for the overseas market strategy? Thank you. 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. But then 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 3 75 feet 400 feet, and there are also rigs for weight of 1,000 tons 7.50 tons and so on. So that is why we are making global adjustment to the deployment of RICs. For our overseas business in 2019, well, actually, we are confident and also we are positive in relation to the prospects. In the 6 different regions, there will be different development and chances in 2019. And based on the orders that we have in hand, well, there are opportunities in Euro, Middle East, Mexican Gulf and Southeast Asia. So overall speaking, we believe that our overseas business in 2019 will be better than those in 2018. Okay. Next question, please. Yes, gentlemen. Hi morning, everyone. It's Scott Darling from JPMorgan. Just a few quick questions. For your geophysical, are you planning this year to be profitable? And then for drilling, I mean, could you give us a year in your plan which sort of drilling profitability could mirror if you were to go back in the past? I mean, I guess what I'm trying to ask is how much more of an improvement in drilling could you surprise the market? And then my last question is you put on Page 7 about M and 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 Alwillco, probably more biased to technology? Because I think that would probably rerate the shares if it was within a sort of technological field which you're trying to drive for, if you understood that. So 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. And the main reason is that in 2019, the duration of standby time will be lower than that in 20 18. So in this case, then the cost will then be offset by this reduced amount of standby time and reduction in standby cost. Next, I would like to comment on M and 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. And in fact, there was excess capacity back then. And as a result, there were some companies equipment companies that had closed down, and there was also a divestment and M and A as well in that particular segment. Well, for our company, if you look at operation of equipment and also all these M and A activities, we believe that our company is in a better position than our other peers and competitors. M and A is one possible option or channel for development. So we do not rule out the possibility of M and A. We have been identifying good targets for M and A, and we'll continue to do so in the future. But then this will be concentrated on the technology segment. So if there are good targets and potential options, we will consider them. Next question please. Hi, it's Tom Hillebult 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. And then 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 1. Question 2, 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. Concerning our growth for the offshore and onshore segments, well, the information will be released together with the issue of our annual report for our growth and business of onshore and offshore operations, well, in fact, we entered these markets by means of market competition. And so our profitability in these two segments will also be in line with the market trends and patterns in these two segments. I understand that in the China market, now there is open tendering, and many international players also participate in this open tendering in the Chinese market. But 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. So I have a question regarding the cost. So in terms of your cost in 2018, you're facing quite a big pressure in terms of the cost increase. So how do we expect the cost increase in 2019? In particular that you just mentioned you have some adjustment in your rates from overseas in China. Should we expect some relocations of rates? That's what we actually saw in Q1 last year that which increased some of the cost. Should we expect this to happen? And overall, how do we see the cost? As I saw from your PPT that you have measures to control costs in 2019, but like overall, how should we like look at this if you compare to 2018? So 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. And so this will lead to some additional cost. 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 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. For the technology segment, there was quite a big cost in relation to subcontracting. But then in 2019, we have increased the share of our self owned technology products. So 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 cost involved in subcontracting. And then for Geophysical and Surveying Service segment, with more profitability in, for example, OBE and OBC, we hope that we will be able to saw I saw more hands. We are running at number 7. Okay. 7th question will come from 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 COSO 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. And so here, I would like to wish you all good health and prosperity in 2019. Thank you, ladies and gentlemen. That concludes today's meeting. Thank you.