Good morning, ladies and gentlemen. Thank you all for your attending today's investor presentation on COSL's interim report 2014. During the first half of 2014, COSL reaped full benefits from its integrated services and synergies and achieved outstanding performances. Please allow me to share with you the operating highlights of COSL during the first half. COSL delivered outstanding results for the first half of 2014. Most profitability indicators reached high records, while the capital structure was persistently optimized, with abundant cash available for deployment uses, as well as a lower gear ratio, of which revenue increased 28% year-on-year and hit a record high. Cost structure maintained competitive. Operating profit was up 38% year-on-year, with corresponding operating margin of 31.6%. The net profit increased by almost close to 40%. Shareholders were able to earn their full upside. Our dividend payout went up 47.2% year-on-year.
The China offshore and international markets recorded rapid growth in scale. As the company further increases its competitiveness and enhance the depth of internationalization, contribution from international markets reached 34% of the company's total revenue during the first half of 2014. COSL's outstanding results are largely attributable to our key growth drivers, including our efforts to flexible deploy domestic and international resources, which allow our utilization rates of outperforming our peers. Not only has these key drivers helped the company grow during the first half, they are guarantees to our sustainable growth in the future. As one of the leading oilfield services company in Asia Pacific, COSL has achieved multiple major breakthroughs in terms of conventional deep water and non-conventional operations, as well as in other business lines.
Apart from the key drivers of growth mentioned earlier, COSL also has an outstanding team of professionals from the management level to the frontline technical implementation team members to support the rapid expansion of the company. Meanwhile, COSL's sustainable and fast growth also established an important platform for our stock to develop and grow. With a world-class team, COSL's competitiveness in the international market excels. To begin with, the exceptional team provide services of exceptional value for money to our clients. For example, in the drilling segment only, we saved 555 operating days and lower almost CNY 1 billion cost for the customer by increasing our operational efficiencies. COSL's maintenance of its equipment is among the top of the industry-leading standards.
Taking Jackup Bohai 10 as an example, this rig has been operating for more than 30 years, and as you can see in the photo in the far right bottom corner, the facility is still in extremely good condition, like new. This achievement is unmatched in the industry. In addition, you can tell from the graph above, COSL's utilization rates of drilling, marine support, and geophysical segments tops all its peers in the industry. This is the result of highly effective management and operations, and also the reason why the company was able to out-perform its peer in profitability. Besides, the company's safety records have always been maintained at very good standards, securing our services quality as well. High-quality services further promote our regional and client diversification. During the first half, COSL promotes its development in four major regions.
In terms of the international market breakdown for our clients, 85% of the revenue was contributed by non-CNOOC clients, which fully showcase COSL's unique competitiveness in the international market. As a unique integrated offshore service company, our well services segment has been growing rapidly at a pace of 33%, same rate as that of the whole group, outperformed that of its peers for the same period since our listing in 2002. During the interim period, COSL provide more competitive services in the well service segment. Backed up by a sophisticated supporting system and self-developed products, the profitability of well service segment has been also improved significantly. As an offshore services provider with over 40 years of experience, COSL's well services experience significant market competition and many of our technologies have occupied 100% market share in China offshore market.
In order to maintain the leading position in the market, the company continuously expand its investment in technology and own several self-developed technologies with leading international standards. Apart from providing divided services, COSL's competitive edge is being able to provide a basket of solutions to help clients lower exploration and development costs. From the above slide, you can see we have completed two large-scale IEM projects, which showcase our global competitiveness. Whether onshore or offshore, conventional or high temperature, high pressure projects, COSL is fully equipped to take on such challenges and have received endorsements and praise from clients around the world. In the first half, COSL make a breakthrough in the deep waters, that is, we were able to provide IEM contract services for both equipment and technologies in deep waters.
Driven by Hai Yang Shi You 981 deep water project in South China Sea, COSL improved a number of self-development well service technologies in deep waters, which guarantee the good quality of the operation. The revenue from the deep water grew significantly by 64% year-on-year, accounting further for 34% to the total revenue. Due to our outstanding performances, COSL received numerous recognitions from the capital market. During this period, COSL was awarded Asia's Most Honored Company and the Best Investor Relations Company in the oil and gas sector by Institutional Investor magazine. Let me walk you through the performance of four segments. As an integrated offshore services provider, COSL has four major segments which cover the whole chain of oil and gas exploration, playing a critical role.
All the four major segments recorded rapid growth, especially the drilling and the well services segments, the latter of which recorded a 185% year-on-year increase in operating profit. The drilling segment received boosts from the enlarged equipment portfolio, efficient allocation of resources, and increased operating capacity and efficiency. In the second quarter, the three newly charter jackups and the utilization rates of the existing rigs were recovering, which both contribute to maintaining the group utilization rates at industry-leading levels. Well services enjoy increasing working volume in high difficulties and high complexity wells, and the group's integrated business with applications of self-developed technologies. Revenue of this segment increased 50% year-on-year. The growth in operating profit was much better than expected due to better economics of scale, synergies, and higher working volumes in deep waters. This segment saw growth in operating profit, sharp growth in revenue.
First of all, the marine support segment. The demand in offshore China was strong, and our fleet maintained its leading position in respect of operation and management. In response to market demand, COSL purchased vessels and increased in building high-spec fleet to upgrade and differentiate. The profitability of this segment were decreased due to limited new capacity and more days spent on maintenance. Despite having no new capacity for the geophysical and the survey segment, through better coordinate and allocate resources and reasonably schedule production, the utilization rates of equipment used in this segment stood at a relatively high level. COSL remained its dominant player position in domestic market. Work volumes, qualities, and efficiencies were all elevated to a high level and globalized standard. Let me share with you our prospects. Global investment in exploration and production is growing as compared to early 2014.
Investment in offshore activities sustained relatively high growth. Both clients growing capacity in offshore China and higher-than-average growth in COSL's international key markets, Asia-Pacific and the Middle East, contribute to the growth of COSL. Looking ahead, we will effectively access to more equipment resources adopting charter build purchase model, which can better meet market demand and more quickly meet client-specific needs. This charter build purchase model will not be effective on its own. It has to coexist with COSL's high-efficiency organization and management to achieve the best outcome to achieving attractive project return and a result that's been forecast for shareholders. New capacities contribute to the sustainable growth of our business in future. According to the latest data, almost all contracts for 2014 and 8% for 2015 have been already locked in. The revenue for well services segment will also enjoy synergies and achieve relative rapid growth.
As global oil companies increase their E&P investments while outward growth is slowing down, COSL stands out and taps more opportunities from its industry-leading efficient management and superior full-chain services help clients lower their production costs. The capacity and the demand for well services were expanding because of the increasing work volume and the increasing importance of maturing fields in the production contribution. Therefore, our well service segment has a very promising future. We will maintain a better-than-average growth rate in conventional business, deepwater business
becomes the new growth driver, and our conventional business will migrate to high-spec operations. Let's go into the conventional segment in more detail. The new era in shallow waters brings out more technical volumes. Maturing fields with decreasing recovery efficiency boosts demand for output enhancement technologies. COSL is well prepared in these areas of technology, experience, and capital to tap the opportunities. In summary, we have excellent performance in the first half. Looking ahead, COSL will leverage its integrated services model and expand its competitive segment business to achieve sustainable growth and create solid returns for shareholders. Here comes the end of today's presentation. We are now opening the floor for questions. Thank you.
Thank you, Li Yong. We open the floor for questions. Please ask your question one by one to allow some time for the interpreter. First question from Merrill Lynch.
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Good morning, management. Thank you for the excellent report. I am from Merrill Lynch. My name is Ding Haizhi. I have two questions. First is related to the Well Services sector. You have actually enjoyed very high gross profit margin in the first half of the year. I'd like to understand more about this Well Services sector. The second question relates to the Prospect rig. I'd like to understand what is the status of this, and when do you expect to be able to go into agreement and sign?
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Thank you for your questions. I'd like to explain a little bit more about the Well Services sector. The market may have found this sector to be not as clear as the other sectors. However, we have analyzed our data and found that since 2002, when the company became listed until now, the CAGR, the annual growth rate accumulated over the years has been around 23% for the company as a whole. For the Well Services segment, the CAGR happens to be the same. All that goes to say that the Well Services sector was growing as quickly as the company is. If we add on one extra drilling machine or one extra geophysical vessel, that is something very clear and understandable. However
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Through the 40 years of development, we have come to understand that either in drilling or in the geophysical sector or in the MS&T sectors, we have never been able to achieve 100% market share. With the Well Services sector, in some cases, we were able to achieve 100% market share.
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This is totally the result of market competition.
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[Foreign language]. You are correct in saying that in the first half of the year, our gross profit margin were quite high in this particular sector and that was mainly driven by several reasons. As you can understand, well services is not the same as the drilling sector. A drill can only work on one well at any single time. However, with the well services sector, when the work volume increases, we can apply more equipment and more manpower to work on three wells at the same time. Therefore, you have seen a great increase in volume in the first half of the year.
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When the volume becomes larger, I can apply the same amount of human resources and equipment to cater to the expanded volume. However, my profit margin and my profit as a whole would increase, which means that I can maintain the same level of cost. However, with greater volume, I would be enjoying greater profits.
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The second reason is that in the first half of the year, we have seen significant increase in business volume in the deep waters segment, particularly this one project in the South Sea. We were able to be the contractor for the entire project, meaning that we were able to supply both equipment and services.
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The price for the deep waters services would of course be higher than that of the near waters, the offshore pricing.
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The third reason is also very important. Previously, the products and the equipment that we use were actually brought from our competitors.
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However, at this moment, over 60% of the chemical related products and tools in our well services segment is actually developed by ourselves.
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Over 40% of our equipment, including the directional wells, were all produced by ourselves.
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That to a very large extent has been helpful with our profitability.
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As far as the COSLProspector contract is concerned, it is still being negotiated. Since this is somewhat sensitive matter, so I am afraid I cannot disclose at the moment. [Foreign language] The gentleman in the second row, please.
Good morning, gentlemen. It's Scott Darling from JP Morgan.
We didn't hear it clearly. We change another mic for you.
Good morning, Scott Darling from J.P. Morgan. Congratulations on an excellent set of results. To follow on from the margin comments, I mean, how sustainable do you think your operating margins are in all segments? What do you think the sort of second half outlook will be? My second question is, can you just tell the market your general feeling about Asian day rates for jackups and semi-subs? How are you feeling about when you are renegotiating some of your contracts which are rolling off for your senior rigs? Are you seeing day rates flat or slightly declining on those historical rigs? Thank you.
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As far as gross profit margin is concerned, my view is that in 2014 at least, the gross profit margin will remain stable and our anticipation, our guidelines for the entire year remains the same. As far as day rates is concerned, I think as far as this year, we do not see any major changes. Actually, our contracts has been locked down for this year as well as most part of next year. As far as the renewal of contract is concerned, we can look at this from two different angles. For our international contracts, we do expect the rate to climb slightly. As you can see from our reports, the day rates for our jackup drills has been rising, and that's mainly because of the increase in international rates.
For the Asian market, which is our traditional markets like Indonesia, as well as other countries, we expect the day rates to remain stable and flat.
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As far as day rate is concerned, we would maintain the view that we had been holding previously. That means that the deep water rates would return to normal. Previously I believe that it's just a bubble, that is not really sustainable. For the conventional day rates, we expect the rates to be somewhat similar and maintained stably. For the jackup vessels, we expect the rates to climb slightly, the older models would be obsolete and it would be taken out of the scene gradually.
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Thank you management. I am Meng Yu from Morgan Stanley. I have two questions. One relates to maintenance. For your drilling segment, there has been a higher number of maintenance day for the first half of the year. I'd like to understand what is your expectation for the second half? If the number of maintenance day would reduce during the second half, then does it mean that we will have a better utilization rate? How much improvement do you expect? For the second question, I would like to understand more about the well services sector. As you can see, in the first half of the year, there has been an improvement in revenue of CNY 1.3 billion. Li Yong, you have mentioned that this is probably due to the increase in business volume.
I also noticed that there are some new service content that has been made available I'd like to understand, what do you expect these new service content to have as far as impact to the revenue is concerned? How does the gross profit margin of these new service content compare to your existing other services? Thank you. You are correct in saying that for the first half of the year, we did have some good number of maintenance day for our drilling segment. The reason was very simple, because the maintenance of the drilling facilities is actually regulated by law. It's regulated by law saying that for every five years, there needs to be a large scale maintenance, and for every two years, there needs to be a special checkup. For the first half of the year, we did have a concentration of maintenance days.
We do expect that for the second half, definitely there would be some improvement, because whatever needs to be maintained would have already been maintained. Perhaps I can give you some specific numbers. As far as the maintenance that are already planned, two thirds have already been done during the first half of the year. As far as the well services sector is concerned, there are mainly 2 growth sectors. Number 1, for the first half of the year, as you can see that in the deep water segment, it used to be that we will operate these wells. It used to be that our customers were a bit worried that we had no overall experience. Therefore, the building of these wells would typically be done by our competitors.
However, during the first half of the year, we have successfully passed all the inspections, we have started to provide all the services and all the teams to operate the wells as well as the equipment. This goes to say that we are now totally capable of providing a full range of services and equipment for deep water operations. The profit from this particular sector is actually quite high. The second growth factor would be the non-conventional, the non-standard segments. As you can see, the business volume actually grew very quickly. It was above 1,000%, if I recall correctly. That's probably because of the investments that we have previously applied is now becoming fruitful. All the operations have now started in the first half of the year.
However, I still have to be very prudent and careful in saying anything about this particular segment because the margin here is actually not very high.
Thank you. Next question, please. Gentleman at this side first, and then the next one.
Thank you. James Hubbard from Macquarie. Just one question, please. You mentioned in the presentation that your core China customer, you expect their capital expenditure to continue rising. I'm just wondering, I know there's a thought out there that CNOOC will actually cut its CapEx next year and follow what Sinopec and PetroChina have done for various reasons. What gives you confidence that CNOOC will increase its China CapEx next year? What kind of percentage are you expecting? Should we be thinking in terms of 10% or some other number? Thank you.
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Well, I think.
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I think for this question relating to the CapEx for CNOOC in the coming several years, I believe tomorrow in the result announcement for 883 itself, you will have an answer. It's not very appropriate for me to provide an estimate here.
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Even if we have an estimation, it's not appropriate for me to disclose it here.
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I can tell you that we are fully confident for the results in the next five years.
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Thank you. We have many questions. Maybe the gentleman at the back first.
Good morning. Neil from . Congratulations on the results. Two questions. Personally regarding
Sorry, the microphone doesn't work very well. We have to change another one.
Running out batteries obviously. Regarding the breakthrough in terms of deepwater capability in the South China Sea, can you talk a little bit about how you plan to develop this business more internationally? This is an area where so far you've really restricted operations within the South China Sea. Is this an area where you expect COSL to expand more aggressively internationally to compete within the deepwater drilling market? The second question is really around the unconventional business. I mean, you mentioned very strong growth rates year-on-year in unconventionals. Can you give a little bit more detail in terms of what you're thinking longer term is the opportunity for COSL? Do you see onshore unconventional shale, both in China and maybe overseas as a big part of growth over the next five years?
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First of all, I'd like to say that as far as deepwater operations is concerned, we are not limited only to the South China Sea. We already have three vessels operating in Norway.
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To go international has always been a direction that we have held. We have to go step by step and build very strong foundations. We will work according to our plan and develop as the time is fit into the international market for our deepwater capabilities.
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For all our international business, it is our wish to see that when we go out, we would be at the best.
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As far as the direction of development for the next five years is concerned, we have always been focused on being professional and being strong and good at what we do. Our focus has always been in the waters for the non-traditional or non-standard on-land projects. Those to us would only be pilot projects and for testing purposes only. Those will not be part of our direction.
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The non-standard drilling technologies actually can help us improve our output efficiency in the marine drills. Those can be very helpful. Our aim is to, through these non-standard technologies, to try and help with our R&D researches and also to enhance our technologies for sea drilling.
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Good morning. My name is Lu Liang. I have two questions. The first one is about the day rate for the jackup drills. You have mentioned about the day income, the day rate. My question is, since you have a year-over-year 10% increase in the first half as far as day rate is concerned, is there any hidden revenue or hidden income that is contributing to this 10% increase? May I ask, that's for which vessels and in which area? Second question is also relating to the drilling sector. If I understand correctly, part of the income for this particular sector is contributed by non-drilling activities. Can you explain about this in more detail, please?
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First of all, thank you for your question. As for your question relating to the day rate for the jackup rigs, we have always been using the concept of day income. That's because under different circumstances, the day rate would be different. For example, when an operation has been seized, the rate it would not be 100% rate. Therefore, we have adopted the concept of day income in order to make it easier for analysts to make predictions and calculations.
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For the first half of the year, the average day rate of our jackup facilities actually have seen an improvement. That's mainly due to the international business sector. For our jackup drills, the rate has been increasing, and that includes the newly invested high-spec equipment also.
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For this part of the income, it is true that there is a small part that is contributed by certain facilities that is regulated by the contract. For example, drilling equipment.
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However, this ratio is very, very small.
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It has been amortized to the entire contract rate.
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That, for example, the mobilization fee would be amortized over the years. This explains the fact that there are some components of this income that are not from the drilling sector.
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Thank you for the mic. Just as a follow-up to that gentleman's question about moving fees or about refurbishment fees. Would COSL consider breaking those fees out for its analysts? That's the first question because I think that would be very helpful. Second question is the one-off payment that you received from the legal settlement with Statoil. Is that a taxable payment to COSL? And if you can, one number, how many MSV vessels are you chartering currently? Thank you.
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First of all, let me try to answer your questions relating to mobilization fees. I do understand the need of our fellow analysts for further details and breakdowns.
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Because the actual amount is actually very small, also it is not very frequent when such mobilization fees would be incurred. Considering these two factors as well as the confidentiality nature of the agreements that we have signed, I do apologize that we cannot provide any specific details.
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As for the one-off receipt that we obtained from Statoil, whether it is taxable, my answer is that considering the amount that we have spent in acquiring as well as the accumulated losses in all these when consolidated in our tax filing, these are deductible items. Therefore, as a whole, this receipt from Statoil is not taxable.
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This also mainly explains why the effective tax rate for the first half of the year is somewhat lower than before. Thank you. I think we now come through today's presentation. Thanks again for your participation. Thank you