Earnings Call: H1 2014

Aug 26, 2014

Good morning, ladies and gentlemen. Thank you all for your attending today's investor presentation on KOSO's Interim Report 2014. During the first half of twenty fourteen, KOSO repurchased from its integrated services and synergies and achieved outstanding performances. Please allow me to share with you the operating highlights of KOSO during the first half. KOSO delivered outstanding results for the first bundled cash available for deployment usage as well as a lower gearing ratio, Our pitch revenue increased 28% year on year and hit a record high. Card structure maintained competitive. Operating profit was up 38% year on year with corresponding operating margin of 31.6%. And the net profit increased by almost close to 40%. Shareholders were able to earn the good upside. Our dividend payout went up 47.2 year on year. The China Offshore and International Markets record ReviCross in scale. But 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 twenty fourteen. Kogod's outstanding results are largely attributable to our key growth drivers, including our average to flexible deployed domestic and international resources, which allow our utilization rate of overperformance of our peers. Not only has these key drivers helped the company grow during the first time, there are guarantees to our sustainable growth in the future. As one of the leading automobile services company in Asia Pacific, KOLO has achieved multiple major purchase rules in terms of conventional deepwater and non conventional operations as well as in other business lines. Apart from the key drivers of growth mentioned earlier, Kogou also has an outstanding team of professionals from the management level to the frontline technical implementation team members to support the revenue expansion of the company. Meanwhile, KOSO's sustainable and fast growth also established an important platform for our staff to develop and grow. With a world class team, KOLOS competitiveness in the international market excel. To begin with, the exceptional team provides services of exceptional value for money to our clients. For example, in the drilling segment only, we saved RMB555 operating days and lowered almost RMB1 1,000,000,000 cost for the customer by increasing our operational efficiencies. Cost of maintaining all its equipment is among the top of the industry's leading standards. Taking JAKTABOR HIVE10 as an example, this rig has been operating for more than 30 years. And as you can see in the photo, in the five right bottom corner, the facility is still in extremely good condition like new. The achievement is a mess in the industry. In addition, you can tell from the graph about quarter utilization rates of Geely, management's top and pure fiscal segment topped all its peers in the industry. This is the result of highly effective management and operations and also the reason why company was able to outperform 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 time, cost of promotion is development in 4 major regions. In terms of the international market breakdown for our clients, 85% of those part of the revenue was contributed by non senior clients. We fully showcase cost of unique competitiveness in the international market. As a unique integrated oilfield service company, our well services segment has been growing rapidly at a pace of 23%. Same rate but that of the whole group outperformed that of these peers for the same period since our listing in 2,002. During the interim report, interim period, Kogou provide more competitive services in the rail service segment, Back up by a sophisticated supporting system and self developed products, the profitability of well service segment has been also improved significantly. As an overview of services provider with over 40 years of experience, Cosmos well service experienced 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 on several self developed technologies with leading international standing. Apart from providing divided services, KOSO's competitive edge is being able to provide a variety of solutions to help class lower exploration and development costs. From the above slide, you can see we have complete 2 large scale IBM projects. We showcase our global competitiveness. Where onshore conventional or high temperature and high pressure projects, KOSO is fully equipped to take on such challenges and have received endorsements and praise from clients around the world. In the first time, KOSO made a breakthrough in the deep waters that is we were able to provide IBM contract services for both equipment and technologies in deep waters, driven by Haiyangxiao 981 Deepwater Project in South China Sea. Kozo improved a number of self development well service technologies in deep waters, which guarantee the good quality of the operation. The revenue from the deepwater grew significantly by 64% year on year, accounting further for 24% to the total revenue. Due to our outstanding performances, CorSo received numerous repetitions from the capital markets. During this period, KOSO was a world. Asia's most owner company and the best investor relations company in the oil and gas sector by institutional investor management. Now let me walk you the performance of our 4 segments. As an integrated our new service provider, Kona's 4 major segments, which cover the whole chain of product and exploration playing a critical role. All of the 4 major segments recorded revenue growth, especially the Geating and the Well Services segments. Delivery of which recorded a 185% year on year increase in operating profit. The Gearing segment received bonuses from the enlarged equipment portfolio, efficient allocation of resources and increased operating capacity and efficiency. In the second quarter, the 3 newly structured jackpots and the utilization rates of the existing rigs were recovering, which both contribute to maintaining the group utilization rates at industry leading levels. Wealth businesses enjoy increasing working volume in high difficulties and high complexity grounds, and they grew 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 economic of scale, synergies and higher working volumes in deep waters. This segment saw growth in operating profit, ownership growth in revenue. 1st for 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, total purchased vessels and increase in building high back fleet to operate and differentiate. The profitability of this segment will decrease due to limit new capacity and more days spent on maintaining it. Despite having no new capacity for the Geophysical and the Survey segment. Through better coordinate and allocate resources and reasonably scheduled production. The utilization rate of equipment used in this segment stood at a relatively high level. KOSO remain its dominant player position in domestic market. Work volumes, qualities and efficiency will all elevate to a high level and globalized standard. Now let me share with you our perspective. Global investment in exploration and production is growing as compared to early 2014. Investment in offshore activities sustained relative to high growth. Both clients growing CapEx in the offshore China and higher than average growth in coastal international key markets, Asia Pacific and the Middle East, contributes to the growth of causal. Looking ahead, we will effectively access to more equipment resources adopting charter build purchase model, which can better meet cement market demand and more quickly meet client's spec in this. This chapter built purchase model will not be adequate on its own. It has to complete causal high efficiency organization and management to achieve the best outcome to achieving attractive project returns and the results that beat both 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 wealth services segment will also enjoyed synergies and achieved relative revenue growth. Our Global Oil Companies increased their E and P investment wise, while upward growth is slowing down. Kona stands out and has 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 service were expanding because of the increasing work volume and the increasing importance of maturing fields in the production contribution. Therefore, our service segment has a very promising future. We will maintain a better than average growth rate in conventional business. Deep water business becomes the new growth driver and our conventional business will migrate to high segment in more detail. The new era in Sherwood waters brings out more technical work volumes. Maturing fields with decreasing recovery efficiency was demand for all wood enhancement technologies. KOLO is well prepared in these areas of technology, experience and capital to tap the opportunities. In summary, we had excellent performance in the first half. Looking ahead, Koto will leverage its integrated services model and expand its competitive segment business to achieve sustainable growth and create solid return for shareholders. Here comes to the end of today's presentation. We are now opening the floor for questions. Thank you. Thank you, Mr. Li. Now we open the floor for questions. Please ask the question 1 by 1 to allow some time for the interpreter. First question from Merrill Lynch. Good morning, management. Thank you for the excellent report. I'm from Merrill Lynch. My name is. 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. So I'd like to understand more about this well services sector. And the second question relates to the prospect rate. I'd like to understand what is the status of this and when do you Thank you for your questions. I'd like to explain a little bit more about the well services sector. The market may have find this sector to be not as clear as the other sectors. But however, we have analyzed our data and found that since 2,002 when the company became listed until now, the CAGR, the growth rate, annual growth rate accumulated over the years has been around 23% for the company as a whole. And 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. Now if we add on one extra drilling machine or one extra geophysical vessel, that is something very clear and understandable. However, However, through the 40 years of development, we have come to understand that either have never been able to achieve 100% market share. However, with the well services sector, in some cases, we were able to achieve 100% market share. This is totally the result of market competition. You're 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 3 wells at the same time. Therefore, you have seen a great increase in volume in the first half of the year. So 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. The second reason is that in the first half of the year, we have seen significant increase in business volume in the deepwater segment, particularly this one project in the South Sea. We were able to contract to be the contractor for the entire project, meaning that we were able to supply both equipment and services. The price for the deepwater services would of course be higher than that of the near waters, the offshore pricing. The third reason was also is also very important. Previously, the products and the equipments that we use were actually brought from our competitors. However, for at this moment, over 60% of the chemical related products and tools in our well services segment is actually developed by ourselves. Over 40% of our equipment, including the directional wells were all produced by ourselves. And that to a very large extent has been helpful with our profitability. As far As far as the prospector contract is concerned, it is still being negotiated. And since this is somewhat a sensitive matter, so I'm afraid I cannot disclose at the moment. The gentleman in the second row, please. Good morning, gentlemen. It's Scott Darling from JPMorgan. We didn't hear clearly. Maybe we change another mic for you. Good morning. Scott Darling from JPMorgan. 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? And what do you think the sort of second half outlook would be? And then my second question is, can you just tell Mark your general feeling about Asian day rates for jackups and semi subs? And also how you're feeling about when you're 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. As far as gross profit margin is concerned, my view is that in 2014 at least, the gross profit margin remained stable. And our anticipation, our guidelines for the entire year remains the same. Now as far as day rate 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. Now as far as the renewal of contract is concerned, we can look at this from 2 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 mainly because of the increase in international rates. And also for the Asian market, which is our traditional markets like Indonesia as well as other countries, we expect the rates, the day rates to remain stable and flat. We would maintain the view that we had been holding previously. That means that the deepwater rates would return to normal because previously, I believe that it's just a bubble that is not really sustainable. And for the conventional day rates, we expect the rates to be somewhat similar and maintain stably. For the self for the jackup vessels, we expect the rates to climb slightly and also the older models would be obsolete and it would be taken out of the scene gradually. Thank you, management. I am Meng Yue from Morgan Stanley. I have two questions. One relates to maintenance. The 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 and if the number of maintenance day would reduce during the second half, then does it mean that we will have a better utilization rate? And 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 1,300,000,000 yen. Mr. Li, you have mentioned that this is probably due to the increase in business volume. Now 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 be to have as far as impact to the revenue is is concerned? And what and how does the gross profit margin of these new service content compare to your existing 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 5 years, there needs to be a large scale maintenance. And for every 2 years, there needs to be a special check up. So 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 should be 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, twothree have already been done during the first half of the year. Well, as far as the well services sector is concerned, there are mainly 2 growth factors. Sectors. Number 1, for the first half of the year, as you can see that in the deepwater it used to be that our customers were a bit worried that we had no experience, 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 and 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 services and equipment for the water operations. And the profit from this particular segment 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 percent 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. Thank you. James Hobbhead from Macquarie. Just one question, please. You mentioned in the presentation that your core China customer, you expect their capital expenditure to continue rising. So I'm just wondering, I know there's a thinking, a thought out there that Cenot will actually cut its CapEx next year and follow what Sinopec and PetroChina have done for various reasons. So what gives you confidence that CNOOP will increase its China FX next year? And what kind of percentage are you expecting? Should we be thinking in terms of 10% or some other number? Thank you. Well, I think for this question relating to the CapEx for CNOX in the coming several years, I believe tomorrow in the result announcement for 883 itself, you will have an answer. So it's not very appropriate for me to provide an estimate here. However, I can tell you that we are fully confident for the results in the next 5 years. Thank you. Then we have many questions. Maybe the gentleman at the back first. Sorry, the microphone doesn't work or well. We have to change another one. Okay. 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 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 coastal to expand more aggressively internationally to keep 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 console? As you see onshore unconventional shale both in China and maybe overseas is a big part of growth over the next 5 years. First of all, I'd like to say that as far as deepwater's operations is concerned, we are not limited only to the South China Sea. We already have 3 vessels operating in Norway. To go international has always been a direction that we have held. However, we have to go step by step and build very strong foundations. Now we will work according to our plan and develop as the time is fit into the international market for our deepwater capabilities. For all our international business, it is our wish to see that when we go out, we would be at the best. As far as the direction of development for the next 5 years is concerned, we have always been focused on being professional and being strong and good at what we do. And our focus has those to us would only be pilot projects and for testing purposes only. Those will not be part of our direction. The non standard drilling technologies actually can help us improve our output efficiency in the marine drills, and those can be very standard technologies to try and to help to standard technologies to try and to help with our R and D researchers and also to enhance our technologies for sea drilling. About the day income, the day rate. My question is, since you have a year on 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? Now you have also mentioned that when you renew or when you sign the overseas contract, you are expecting some improvement in day rates. Now may I ask that's for which vessels and in which area? 2nd question is also relating to the drilling sector. As far as if I understand correctly, part of the income for this particular sector is contributed by non drilling activities. Can I have can you explain about this in more detail, please? 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 would then be not 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. For the first half of the year, the average day rate of our jackup facilities actually have seen an improvement. And that's because 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. 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. However, this ratio is very, very small. And it has been amortized to the entire contract rate. And that's, for example, the mobilization fee would be amortized over the years. And this explains the fact that there are some components of this income that are not from the drilling sector. Of CZH. Thank you. For the mic. Just as a follow-up to that gentleman's question about moving fees or about referral fees. Would Coastal consider breaking those fees out for its analysts? That's the first question. Because I think that would be very helpful. And second question is the one off payment you received from the legal settlement with Statoil, is that a taxable payment to Coastal? And if you can, what number? How many M and T vessels are you chartering currently? Thank you. 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. However, because the actual amount is actually very small and also it is not very frequent when such mobilization fees would be incurred. And 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. As for the one time, the one off receipt that we obtained from Statoil, whether it is taxable, I can my answer is that considering the amount that we have spent in acquiring as well as the accumulated losses, all these when consolidated in our tax filing, these are deductible items. Therefore, as a whole, this receipt from Statoil is not taxable. This also mainly explains why the effective tax rate for the first half of the year is somewhat lower than before. Thank you. So I think we now conclude today's presentation. Thanks again for your participation. Thank you.