Earnings Call: H2 2014

Mar 30, 2015

Good morning, ladies and gentlemen. Welcome to the investor presentation of China Oilfield Services Limited to announce its annual result of 2014. Now let me introduce the representative on the panel today, Mr. Liu Jian, Chairman of the company Mr. Liu, CEO and President of the company Mr. Li Bai Long, CFO of the company and Mr. Yang Hai Jiang, Company Secretary. Now let me pass the time to Mr. Li Bai Long to walk us through the annual results first. Good morning again. I guess you guys worked very late yesterday. And my today's presentation will be divided into 3 parts. First of all, I'm going to start from the overview of CorSo's results in year 2014. At the beginning of 2014, we had made a comprehensive and prudent judgment on the industry landscape for the company's business plan and strategies. Adhering to the principle of focus on the competitive business and quality development since 2010. We implemented specific measures to enhance competitiveness and flexibility. As a result, we met all the operating targets of 2014 and laid a solid foundation for better response to the subsequent changes in the industrial landscape. Next, I will walk you through COSR's operating review for 2014. For Koso's 2014 financial performance, it fully showcased the good foundation of Koso, of which revenue increased 20.6% year on year and hit a record high since our listing. Operating profit and net profit both achieved a double digit growth. As leasing and subcontracting expenses increased, operating margin slightly decreased. Besides, Koto's cargo structure improved continuously during the year. Gearing ratio further dropped and cash available for use stood up RMB11.6 billion. These results lay a good foundation for the company faced with short term industrial challenges and achieving subsequent long term healthy development. The auto China and international markets both recorded a double EBIT growth during 2014. In terms of business segment, the equipment segment and the well services segment saw different levels of growth, while the growth for the well service segment outperformed significantly the equipment segment. Facing intensive competition in both the international and domestic markets, Our operational efficiency and international competitiveness were subject to real life taxes. This include the more familiar case of Haiyao Naijiguan, which completed the deepwater IBM operations in South China Sea ahead of schedule. All of these achievements showcase Kota's high quality management bringing some stable results, as well as offering customers value added services. In 2014, we offer an array of high quality services, which foster regionalization of KOSO's international business and diversification of our customers. In order to strengthen and improve our international business in 4 regions, we built logistic basis in Singapore and Mexico during the year. These phases are necessary in bringing our international business development to a large scale as well as further enhance cost of internalization for both equipment and well services segments. The protection of equipment and technology for deepwater business and perform high quality deepwater operations showcased an oilfield service company integrated competence. In year 2014, KOSO achieved a breakthrough from providing single order deepwater services to deepwater IPM services. This operation received recognition from customers while revenue from deepwater operations, but as a percentage of total revenue climbed to 20%. Safety operations and environmental protection secure sustainable development of the company. In 2014, COSO scored the OSA of 0.08 for year 2014, representing a stable and safe condition with significant risk under control. Besides, our heavy savings efforts achieved more than 100% annual target. Kogou achieved breakthrough in R and D during 2014, which is one of the important drivers to our services performance. These R and D achievements demonstrate our ability in fulfilling customers' demand for hardware and technologies as well as providing solutions to technical problems of oilfield surveying, exploration and development. Meanwhile, Sikolo also received recognitions from the capital market. Next, we will look into the segment results. In 2014, international oil price experienced volatility and declines. Although our business segments were affected to different extent after the Q3, we still achieved satisfactory overall results for the whole year. Revenue and profit of the drilling segment recorded a high double digit growth, while margins slightly decreased due to the increase in the number of charter rigs. Both revenue and profit growth of the wealth services segment are superior than the other 3 segments further accounting for 29% of the total revenue. Revenue of the management support segment increased while profit remained flat. Excluding the impairment loss of fixed assets due to one off the divestiture of chemical carriers. During the fiscal and surveying segment faced a worse market condition environment and results were relatively weaker. In particular, Q3 maintained a relatively active development momentum through equipment expansion, reasonable resources allocation, enhancement of operation efficiencies. The new heavy and lease rigs operating at high efficiency and drove revenue growth. At the same time, contribution from higher value equipment increased and helped raise the average day income of the drilling fleet. Nevertheless, the calendar day utilization rate of the fleet decreased gradually, particularly in the 4th quarter due to the lower ore prices and the more repair and maintenance seasonally. Well services achieved a 40 7% growth in revenue through enhancement of technology competitiveness. The growth in operating margin of this segment significantly exceeded the growth in revenue. Since marine support services are necessary for each stage of E and P process. Demand in offshore China market was relatively stable. During the year, we complete the divestiture and disposal of chemical carriers business in this segment to stay more focused. The correction in oil prices and reduction in E and P direct impact on geophysical segment. Decline in different magnitude in work volumes and services rates since the beginning of Q3. Although we took a series of adjustment measurements and lower cost by optimizing working procedures and enhance operating efficiencies. Revenue and profits of this segment decreased. In the last section, let me walk through the outlook of CorSo. The market landscape of the automobile services industry is set to deteriorate further since 2015. The outlook is invisible with more uncertainties. With reference to the overall condition of oilfield service industry, The overcapacity of equipment to be worse. Valuation decline in contract coverage and service rates are seen. Market competition is intensifying. KOLOS encounters the same downward pressure as our international peers. This can be seen in the significantly increased difficulty in implementing operating activities. Nevertheless, KOSO enjoy a more advantageous position than our peers as we can have as we have better fundamentals and concrete advantage that peers don't have. At this moment, survival is not a concern of Bekausa, rather we are thinking about how to make use of the industry challenge to explore new developments. Under the current market condition, we will be able to flexibly enjoy our business model and closely work with our long term strategic partners. Meanwhile, the synergies generated from equipment and technology segment enable us to have more lessons in cognitively fluctuation in the industry. In addition, our strong cash flow and good liquidity allow us to competitively and flexibly adopt different operating matters given our capital strength in the meters of sluggish in oil prices. During the strategic guidance held in the early February, we prepared this line for your easy tracking of the risk status. Changes in contract coverage occur for some risks and their market risk and asterisk. Additions or reductions in contract periods are seen. But generally speaking, the market condition has worsened since early February. In particular, 30 days are covered by domestic and overseas full year contract. Breaking down our geography, 83% of them in the domestic market have contract coverage in 20 15, while 7% of the rigs in international markets have contract coverage in 2015. Condos react to the dampened market demand by which draws of some charter rigs or bring down the cost of leasing equipment. Kogou is also proactively identifying market for risk pending contracts confirmations for the year. We will update this with the market every now and then. Recently, different levels within our company had intensive discussions on questions such as how to proactively and effectively react to changes in the industry as well as which market strategy should be adopted in different business segments. And we have reached a high degree of consensus internally. Besides adjusting strategies, Kohlberg has also set a competitive target for lowering causes for different levels and make all our efforts to achieve the goal of improved operations in 2015. And in the meantime, laid a solid foundation for million to long term development. With regard to the business model, we will endeavor to carry forward the integrated services, flexibly decided a public business model according to the actual circumstances that our clients face. And we also seen some new promising opportunities in international market, and we are trying our best to win now. Catering to the short short term, mid term and the long term, we are we still need to maintain CapEx at a considerable scale during the downward in oil prices. However, we will be more stringent and prudent in screening and evaluating projects. In 2015, most of the budget CapEx will be expanded on the continuation of the existing projects in progress. Selectively, operating equipment, investing more in self development high end technology, so as to enhance CorSo's overall competitive advantage. Taking all things into consideration as well as uphold our continuous and consistent principles, the Board of Directors proposed to distribute the final dividend equivalent to RMB0.48 per share. The final dividend is subject to the approval by Kaohsiu's upcoming AGM in May. As a summary, 2015 will be a very challenging year for the whole industry as well as for KOLO. There will be a survival of the Finnish scenario where only the best companies stay afloat due to the current downward trend of oil prices. That said, it is a great opportunity for COSO to enhance our capability and raise the quality of management Experience in the market cause of your complete hand the skills to proactively react to different trends and pursue new corporate development. Here comes to the end of my presentation. We are now opening the floor for questions. Thank you. Thank you, Mr. Li. Now we open the floor for questions. Please raise your hand if you have questions and identify the company you are representing. And I'll ask the question 1 by 1 to allow some time for translation. Gentleman in the front. Good morning, gentlemen. Thank you very much for the presentation. It's Scott Darling from JPMorgan. Your drilling contracts in that page in your presentation have changed quite a bit. I mean, would it be possible to give sort of us guidance on sort of total fleet utilization this year? And where are you thinking day rates will end up? How could they be 30% down or so? And then second quick question is Maybe let's translate the first one and answer the first one. Let's translate this to others. This year, honestly, we have been facing significant challenges and we anticipate this to continue into the next year. Looking at the contract that we currently have on hand as far as drilling is concerned, the offshore utilization rate is around 80%, whereas the outer seas utilization rate of the vessels is around 70%. And that and this part, the further waters part has been subject to quite big changes. As for the day rates, we have finished our negotiation with CNN OC. And for the nearshore day rates, indeed it will be reduced. However, the rate of reduction would not be as big as the rate of dropping for oil prices. However, for CorSo and I believe also for the industry too, this drop would be a historic high as far as the ratio is concerned. And also regarding the international market, subject judging from the contracts that we already have on hand, and I mean long term contracts, at the moment, we have not received any request for price reduction as yet. However, for those contracts that we are bidding now, newly bidded contracts, meaning there would be some significant drop as far as prices versus before. And then just a quick follow-up. Geophysical weakness, could you talk about that and sort of your outlook for the Geophysical segment? Could that actually lose money this year? What's your sort of views on sort of managing that? Thank you. Well, yes, indeed, since quarter 4 last year, this segment has seen some significant difficulties. And actually for the industry as a whole, globally, the leasing rate as of this moment is around 50% and that applies to CorSo too. And also this segment indeed went through very cruel competition last year and we have seen significant drop in prices. So in 2015, the geophysical and surveying segment would be the segment of CorSo that would face the hardest time. However, we will try our very best to try to safeguard that this segment does not lose money. Good morning. Thank you. And I am from BOC International. I have two questions related to the financial data. Last year, there has been some provision regarding fixed assets. Now I'd like to know which asset were these provisions specifically done to? And the second question is relating to the cutting of cost because last year we have indeed cut a lot of cost. So I would like to ask whether you have any specific targets for cost cutting this year? Thank you for your question. We have all along been assessing our impairment needs according to market situation as well as the asset quality and assets status of our company. The provision that we have done last year was actually targeted towards a new vessel in our drilling segment and that's a new vessel in Hania and that has stopped that will be stopping operation until later on this year. And also we will continue to monitor the asset valuation of our company as well as new market changes and market situation. And this is actually a requirement of behalf. As for cost control, this has always been a work and a target that we have persisted in doing. And especially given the drastic decline in the industry and the market since the last part of last year, we have taken the responsibility of cost control and cost cutting to be an even more important goal of ours. And we have also set very specific cost control targets and put in very comprehensive cost control measures. And we would consider the measures that we would consider is to further reduce any waste of resources and also to reduce any unnecessary costs. Regardless of what measures we would put in place, safety and service quality would still be the pivotal considerations. Thank you. Next question please. Well, let me supplement a bit more on the cost control measures that we have taken effect. Mr. Li just now covered the overall situation, but I'd like to give you just several examples so that you know what do we mean by being comprehensive. Since the end of last year, the entire management has started to ride on economy class when we fly to other cities and taking using our service as an example. And secondly, previously, we used to lease some rigs. Now that the market is no longer good, we may stop leasing those rigs. And thirdly, there are some older vessels that we had been able to use or charter out during good market times. However, now that the market has turned down, we may we actually have plans to hasten up the digesting of these older vessels. We actually have a comprehensive plan in place for cost control that covers various aspects of our management. We'll take the questions from middle of the gentlemen. Thanks very much. Just a follow-up to the initial question from my colleague to the right of me on day rates. Can you speak a little bit louder? Sure. Just a follow-up on the question that came from my colleague regarding day rates. I realized, I guess, things have changed. You're not going to give us actual what the rates are. But I note in your results announcement to the Hong Kong Stock Exchange, a statement here about prices in the China offshore oil and gas market will be similar to the global market. So can we confirm that CNOOC and KOSOL have decided to use international global day rates for setting of day rates in offshore China? As a matter of fact, the price that have been used in China has never been the same as the one used in international markets. For the last decade or so, this is something that we have always been saying. The relationship between CNOOC and us indeed is a very special one. CNOOC is our biggest customer whereas we are the most important service provider to CNOOC. So the price that CNOOC and CorSo has always been working on is a price that has been discounted based on international pricing. And therefore, one cannot simply say that the offshore prices would be the same as international prices. And in fact, I would think that for drilling as well as well services, there is no such thing as one international price because each market would have their own unique pricing. Therefore, we can only say that the trend would be aligned with international pricing trend. However, the specific number would not be the same. I had one other question on that, if I can. I just wanted to know on your graph with respect to operational rig operational status 2015 And in particular, the international semi subs and jackups, you show 6 and 3 respectively contracted throughout the year. I was wondering on those 6 and 3 that are contracted throughout the year, are there any potential price renegotiation clauses in those contracts? Point number 1. And point number 2, are there any layup possibilities in any of those contracts like we saw in 2014 with 1 year semis in Norway? Thank you very much. I'd like to clarify your question. You were referring to a slide, Slide 15 sorry, Slide 21 in our presentation saying that we have 6 contracts for the jackups and 3 contracts for the semi submersive rigs. And you were also asking whether in 2015, we should have your question, sir? No, the question was whether you have pre negotiation clauses in any of those international semis or jackups? And the second point was whether you have any layup clauses like we saw in 2014 on your semi subs? Can you clarify from what laid out? Layup means they just reduce the Just now I have said that the current international market and for those contracts that we have already signed, at this point of time, we do not see any changes occurring. However, the market changes so quickly. And if the international oil prices continues to drop, it is really very hard to anticipate or to say what type of measures would be put in place. However, I would think that something like the Parnier situation would be very unlikely to occur again because as per contract arrangements, the despite the rate is not operational, the oil companies still have to pay us a very hefty suspension fee. And this is something that they would really try not to do, paying us over US100000 dollars per day while we do nothing, this is really something that they don't like to see happening. Thank you. Maybe we take the 3 more questions. Jackson at that side. Good morning. I am Li Guo Nang from UBS. I have several questions. The first one is about revenue and profitability. As you know, CNOOC has cut down on its capital expenditure for 30%. And the same is happening to North American companies as well as international companies. So can we safely assume that for CorSo 2015 revenue would drop by 30% and profitability would also slow down versus that of 2014. I don't think this is entirely the relationship that one would be looking into. Yes, indeed, CNOC has announced some significant drops in their reports. However, for CorSo, all alone, our market has not been or our business has not been limited only to the offshore Chinese market. And indeed, the offshore Chinese market is as fast as it can be right now. So our focus is entirely into developing our international business. In fact, there are several negotiations there are several projects which the negotiations are coming to a close And these are very important projects. And if nothing goes wrong, then we anticipate that there would be breakthrough in such negotiation in the next month or so. Now indeed, the oil prices downward trend has been causing a lot of pain for oil service providers. However, we actually it actually took us by surprise in the sense that all along, we have been emphasizing on our integrated project management ability. And we have been asking the oil companies to give us IPM projects and all along, they have not been willing to do so. And when the oil prices are good, this IPM choice would not be a natural for the oil companies. However, when the oil prices comes down, there are many more companies now that are showing interest in such model because this IPM approach could save them a lot of management cost and other costs. And I also know that our international peers either have only well services offerings and no drilling offerings or they can only drill and they cannot provide any well services. However, we are a total solution provider. And now that we have observed that there may be an opportunity and because many of the oil companies are coming to us saying that why don't you take this project over and do it all for us and provide us with a comprehensive quote. And when in the course of trying to do this, we discover that we actually have a very big edge over our competitors, our peers, And we are highly competitive in this IPM capability. Now the oil prices changing so greatly actually does mean a lot of challenges for the rest of the industry. However, for CorSo, it might just mean that we would discover a brave new world. Maybe we have been thinking through this opportunity, our IPM business could become really strong and big. Well, therefore to answer your question, yes, CNOOC has dropped their CapEx by 30%. For CorSo, when compared to 2014, 14, ours would definitely go down, no doubt. However, whether it would go down by such a large percentage, that may not necessarily be the case. And also, we noticed that some other companies in the Chinese market itself are actually buying marine equipment and wanting to use these equipment to develop businesses in China, companies such as Sinopec. So facing this challenge, what would be our strategy? Would we focus more on to our land operation? Or what is it that we have in place? Well, for the Chinese offshore business competition has always been there. At the beginning, we compete with international players and then later on we compete with Chinese companies like PetroChina and Sinopec. While competition is only something very natural, it is something that one should come to expect. However, for CorSo, our development strategy has always been to focus on areas where we have strength. And we have always been focusing on marine operations. And I don't think that if to say that when there are competitions for the nearshore waters then we go on land, if this is a strategy that we would go after, then it would indeed be very chaotic jumping from land to sea and back to land again whenever there are competitions. So we focus very much in all of our resources on marine operations and developing our marine business. And we in this area, we think that it's good to have competition because competition only makes us stronger. Stronger. Simon Simon Powell from CLSA. I just want to follow-up on what you said in terms of potential divestiture. If I look at your NAN high fleet of semi subs, they're very old and they may never work again. Would you consider simply just scrapping them? I have already indicated that we are systematically assessing the asset quality of our older and the larger pieces of equipment. And we will according we will adjust our policies and measures according to market changes, and we will do whatever we should. Thank you. One last question, please. Gentleman in the middle. Good morning, gentlemen. I am Daniel from Uredion Capital. Just one question. Well, for Wealth Services, the segment indeed you will know, you have already known that CNOCC's offshore business jobs are coming down. They're reducing in quantity. And therefore, the demand for well services in this particular area would, of course, come down. However, I have also explained just now that we are in the process of negotiating fruition, then because and all these negotiations are for IPM integrated project management models. And if we are successful in doing this, then while on the one hand, I dare not say that we can perform better than last year, but I feel quite confident to tell you that the Well Services segment would be the best performing segment of all 4 causal segments.