Good morning. Welcome to the investor presentation of China Oilfield Services Limited for its 2013 annual results presentation. Let me introduce the company management on the panel today. Mr. Liu Jian, Chairman of the Company, Mr. Li Yong, CEO and President, Mr. Li Feilong, Executive VP and CFO, and Mr. Yang Haijiang, Company Secretary. I would like to pass the time to Mr. Li Feilong to walk us through the company's results. Mr. Li, please.
Thank you. Good morning, ladies and gentlemen. Thank you all for attending today's presentation on COSL's annual result 2013. Today's presentation will be divided into three parts. Let me walk you through the latest updates of COSL. As a unique integrated oilfield services provider, COSL continues to actively expand its markets, effectively utilize its resources, and enhancing its technical capabilities. Further achieving the goal of diversification of regions, clients, and services sectors, while maintaining leading position in offshore China and expanding its scale in international market. COSL deliver an outstanding results for 2013. Revenue reached a record high. Though spending more on subcontracting materials consumption, we successfully control costs. Both operating profits and Operating Margins record year-on-year growth. Net profit and earnings per share both grew substantially at year-on-year at a high pace seen in recent years.
Capital structure was further optimized with gearing lower further and cash available for use stand at RMB 12.5 billion. ROCE rose to 11.6%. The board of the directors has recommend payment of yearly dividend of RMB 0.43 per share, representing a payout ratio of 31%, in line with 2012, which is to be approved by AGM. The company overall enhancement in operation and management have contribute to its outstanding financial performance. As a service provider company, COSL proactively upgrade equipment, increase capacity, improve efficiencies. These are effective methods to enhance our intrinsic value and competitiveness, as well as gaining recognition from our customers so as to be able to achieve a win-win situation. COSL successfully expanded its footholds in both the domestic and international market, achieving rapid growth in revenue. During the year under review, revenue from both markets grew in excess of 20% on average.
Of these, the contribution from the international markets continue to rise with a strong momentum, reaching 33% of the company's total revenue. As revenue derived from the international market grew rapidly, profitability and competitiveness saw improvement as well. In 2013, we continue to develop the four core regions and have further developed new business and reach out to new clients. In these regions, our equipment and technology services perform outstanding, and earn recognition and trust from international clients. For example, in Southeastern Asia, driven by the company's strong edge in the drilling segment, we successfully add Well Services to this region. In the same way, we further expanded our services in the Mexican market. There's now five modular rigs and three high-end jackups working there.
With commencing operations of deepwater drilling rigs such as Nanhai VIII, Nanhai IX, and COSL Promoter, we achieved steady growth in revenue from South China Sea and Norwegian North Sea. I call deepwater markets. Revenue from deepwater operations continue to grow to 18%. The outstanding performance could be attributed to the high efficiencies, high-quality operations of our deepwater equipment portfolio, of which Haiyang Shiyou 981 saw its utilization rate reach 96.4%. Also pioneer Asia first ultra-deep water well operations at a depth of 2,400 meters. Well service technologies have been applied in deepwater gradually. QHSE is an important safeguard for COSL's sustainable development. During 2013, COSL made further improvements in its protocol for management of emergencies, identified latent weakness, and performed emergencies drills. These enhanced skills and awareness for safety of our staff and effectively prevented occurrence of accidents.
Our overall performance on safe production remained stable with outside score at 0.18. Due to our outstanding performance, COSL received numerous recognition from the capital market. During the year, COSL was again included in the Hang Seng Asia Corporate Sustainability Index. Let me walk you through the performance of our four business segments. As an integrated oilfield service provider, COSL's four major segments cover the most crucial stage of E&P industry chain. There is thorough review of our capability in the four segments as of 31 December 2013 on this slide. I should not go into details at this point. The Drilling segment remains to be the largest contributor in terms of both revenue and operating profit, accounted for 53% and 75%, respectively, of the company's total, followed by Well Services. The Well Services segment was the fastest-growing segment during the period and the second-largest contributor in terms of revenue.
The Drilling and Well Services segment saw rapid growth thanks to the higher capacity of high-spec equipment and higher working volume. The growth of profit was inferior to the one of revenue as the result of the rising charter fee for Well Services segment. For Marine Support segment, the revenue increased due to the increasing numbers of operating days achieved by vessels. The operating profit of this segment experienced declines due to vessels retired and rising vessel charter fees. The revenue and operating profit of our Geophysical and Surveying segment declined, mainly due to lack of new capacities, coupled with unstable weather, water conditions, and maintenance. The Drilling segment received boost from the enlarged equipment scale, efficient allocation of resources, and increased operating capacities and efficiencies.
The Drilling segment experienced rapid growth driven by the newly added high-spec rigs, which not only brought about in higher working volumes, but also helped lift average daily income. On the other hand, COSL has been actively exploring new markets, maintains utilization rates of existing equipment at high level. Calendar day utilization rate of the drilling fleet was up to 95.6%. Well Services enjoyed synergies with the growing drilling working volume, driven by increasing income from unconventional business and deep waters, application of more self-developed technologies as well as high-value services in complex conditions. Revenue of this segment increased 33% year-over-year. The growth of operating profit was inferior to the one of revenue at this segment due to the higher charter fee. With five vessels retired in 2013, we purchased two more vessels into operations.
The self-owned fleet spent less time for maintenance and the utilization rate rose to 93.9%. In response to the strong demand in offshore China, COSL purchased 2 support vessels and commissioned construction of more high-spec equipment to further differentiate ourselves from the competitive. In 2013, despite have add no new capacity for geophysical and surveying segment. Through reasonably schedule operation per production, coordinate allocate resources, the utilization rate for equipment used in this segment at relatively high levels successfully. This segment maintain its dominant player position in domestic market and completed numbers of international projects in Southeast Asia during the domestic recession season in winter. Due to clients' project adjustment in operation, 2D collection and processing volume increased significantly, while volume of 3D collection volume saw a decline. Successfully explore new markets and enter into an exploration contract with PetroChina. Now, let me share with you our prospects.
COSL strives to achieve a revenue growth of no less than 10% year-over-year in 2014. Despite foreseeing an increasing cost. Profit margin will remain stable, and CapEx will be around CNY 7 billion-CNY 8 billion. As a friendly reminder, the above operation plan is based on COSL's current operating conditions and the market environment. It will not constitute the company profit forecast and actual promise of the board. Whether the company can achieve the expected results or not in 2014 will mainly depending on the market situation and other conditions. Please be alert of this risk when deciding on your investments. We are confident about achieving these targets with the following measures. The company has relatively better capacity to withstand risk based on its locations in domestic and international markets. According to secured working volume and contracts for COSL in 2014 and 2015, we expect a clear growth.
Specifically, almost overall contract for 2014 and 65% for 2015 have already been locked in. All drilling rigs have been scheduled throughout 2014, of which high utilization rates will maintain and average daily income will remain stable. Well services see a rapid growth by leveraging synergies of adding rigs operating in China offshore. The company see growth in both domestic and overseas market in 2014 based on the current business plan and equipment scale, while the domestic market may grow more. As for the growth by segment, drilling and well services remain to be the key drivers. We are also developing our shallow and deep-water business. Both will see growth. Looking ahead, we will continue to effectively adjust the equipment structure in order to meet market demand by 3 approaches of charter, purchase, and build. The confirmed equipment highlighted in yellow contributes more working days in 2014 compared to 2013.
We are proactively developing some other projects, such as the 2 new 300-foot jackup rigs shown on this slide. As shown on this slide, we can clearly see updates of capacity expansion in the 4 major segments from 2014 and beyond. These newly added capacities will contribute to our future business growth. Due to the shortage of capacities, apart from these newly commissioned capacities shown on this slide, COSL is still considering charter or acquiring suitable rigs or vessels. While increasing our capacity rapidly, COSL will also make structure adjustments to further optimize our equipment. In the drilling segment, there will be more new capacities. Newly delivered equipment will mainly be 375-feet jackups and 5,000-foot semi-sub. Meanwhile, we continue to add more high-spec and deepwater higher power vessels, and further improve efficiencies in the geophysical and surveying segment.
COSL will continue to enhance its service capabilities in the Well Services segment as it enhances the fleet capacity for the other three segments. We will continue our efforts to developing output stabilization and optimization business. Invest more in self-developed technologies. In terms of deepwater and unconventional areas, apart from providing high-spec technical service for CBM and tight sandstone gas, COSL will continue to expand deepwater business. The overall working volume of these areas will grow rapidly. In summary, COSL will strive to achieve stable growth by focusing on the domestic market growth, scalable international and regional expansion, optimizing fleet structure, application of self-developed technologies, tapping growth opportunities in deepwater areas. The company will also selectively expand unconventional business operations with an aim to achieve steady growth in 2014. Here comes the end of today's presentation. We are now opening the floor for questions. Thank you.
Thank you, Mr. Li. We open the floor for questions. For the benefit of translating more accurately, please raise your questions one by one and answer slowly.
Thank you very much. It's Scott Darling from J.P. Morgan. As we've gone through the U.S. and European drilling results, I sense from management teams that certainly for high-spec vessels, day rates may have peaked in 2013. While a lot of your day rates are locked in this year, can you give the market some views about 2015, and some general comments around the higher spec day rate environment? Do you expect day rates for 2015 to increase next year? Any comments around what rigs are actually rolling off contract? Thank you very much. Sorry that was long.
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You are correct in your views. The high-spec equipment, especially as it relates to deepwater equipment, the pricing indeed has come down this year.
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As we look at it probably does not affect COSL a great deal, especially in 2014 and 2015, because our high spec equipment contracts already extend beyond 2015.
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The only impact that I can perhaps think of is by the end of this year, 2014, our Prospector vessel, which is a 1,500 meters deep vessel, that may see a slight impact. Originally, our intent, our goal was to set this at a CNY 550,000 pricing range. However, the management team feels that given the current situation, it is rather a difficult goal to reach.
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Therefore, judging from this market changes, we are reasonably adjusting our targets downwards slightly. However, the only impact that one would expect to be seen in 2015 year would be this one vessel that COSL is about to deliver.
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From the long-term perspective, we do think that the coming down of prices of the deep water and the high spec equipment and rates are indeed quite reasonable and it does answer to the market change and patterns. Previously resources were in very significant shortage. That was the reason that had driven the prices up.
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With the increase in supply, the price becoming more normal, coming back to a more normal standard, that is something to be expected from the market.
Thank you. Next question from this side. This gentleman, please.
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My name is Ding, I'm from Bank of America Merrill Lynch. I'd like to ask you questions about effective tax rate. The effective tax rate has been very low. I'd like to ask the reason why. Was it because of the same reasons that has caused such a situation in the past quarters? I'd like to know your views regarding this area for 2014.
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Thank you for your question. As for this matter, we have already talked about this in our mid-year result announcement back in August. Perhaps I have not been too clear.
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I'd like to make use of this opportunity to clarify myself.
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As you are aware, the income tax that we are now subject to for our businesses in China is in the range of 15%. For the overseas markets, each country is different, but it ranges from 28%-30%.
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For our overseas market, where our main income is from, for example, Norway, with the three semi-rigs there, we are now being impacted by the accumulated losses that came with the acquisition. The 28% of tax rate does not matter because we do not have to pay taxes anyway.
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For our Singapore jackup rigs, because this is offshore income, the tax rate is rather low.
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Given these situations, the effective tax rate for our company would be in the range of 15%.
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Because of the R&D expenses that we have spent in China, and also the benefit of offsetting that we do enjoy, and that being, for example, if we spend CNY 1 on R&D, we would be able to offset CNY 1.5 in our profits. Given that benefit, the effective tax rate is sometimes below 15%.
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For the past several years, the reason why we had a slightly higher than 15% of effective tax rate was because of the difference between the way that we calculate depreciation and the way that the tax authority stipulates.
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In 2013, when we reported our 2012 taxes, the tax authorities required us to equate, to put these different standards or different way of calculating depreciation, to make them equal, to align them.
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We have to adjust those differences that had already been caused and those that will come in the future.
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For those deviations or those differences that has already been caused prior to 2011, we have reached a consent with the tax authorities that such a difference would be averaged out on an annual basis over 13 years, starting 2012.
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As for those differences that were incurred in 2012 and 2013 and beyond, these differences would be taken care of in the year of 2013 and 2014.
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According to this principle, because of the differences that were incurred prior to 2011, it would mean an impact of about CNY 30 million of effective taxes for us each year.
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As for those that were incurred in the year 2012 and beyond 2013, that would be taken care of in our 2013 books. The amount that would be impacted is CNY 160 million.
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In other words, you see a decline in the effective tax rate in 2013, that was in fact due to those CNY 160 million differences.
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Going forward, the impact for each year would be relatively smaller, that will be in the range of CNY 30 million.
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The CNY 160 million when translated into effective tax rate, the impact for 2013 would be a decline of 2.6%.
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Counting 2014 and beyond, our expectation is that based on the current income level, the effective tax rate would be in the range of 13%-15%.
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We have spent-
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We have spent already a lot of time on this question, so why don't we go to another question, and if you have any further question relating to this, please come to me directly.
Maybe we let the gentleman in the middle to ask the question first.
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[Foreign language] Thank you for your very good explanation just now. I am from Morgan Stanley. My name is Meng. I have two questions relating to the Well Services sector. Last year, the operating profit have seen a good increase of 23%, a majority of those comes from actually from the second half of the year, which we saw a 55% increase. Based on the two reasons that I understand, first being the quantity of work that we have seen an increase in the second half of 2012. I also see that the basis of the second half of 2012 was quite low, I like to understand why was that the case? Also, I like to know for Well Services in 2013, the growth rate was actually quite good being in the range of 20%.
Do you expect this good growth rate to continue in the next one to two years?
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Perhaps you answer this question first and then come to the other.
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The reason why you saw a better growth rate for Well Services in 2013 was because we have added to the number of rigs in operation during the second half of the year.
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For COSL, the correlation between our Well Services segment and the drilling segment is in fact very large.
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With the increase in the number of rigs in operation, I mean drilling, the income and the business for the Well Services would also increase.
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Given the actions that we have already taken to secure resources and given the agreements that we have already been able to lock down, we believe that there will be a good growth for our Well Services segment in the coming year. I cannot provide you with a specific figure as of now. However, I can tell you that it's a good growth.
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Another reason would be that for the second half of last year, the measures or the actions that we have taken in the non-conventional markets were relatively bigger or more aggressive than the years before, and that has actually driven some growth as well.
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The second question relates to the MS&T segment. As far as I'm aware, the Operating Margin for this segment in 2013, the first half, was 19%. It dropped to the end of the year to 10%. I'd like to understand the reason for that. Also for 2015, I understand that there will be 15 new vessels that your company will be taking in. Now, putting that into context with the 70 plus fleet that you have now, that would be close to 20% growth. My question is, would that put any pressure on your gross profit margin? This indeed has added on to the supply side.
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You are correct in saying that the gross margin of our MS&T segment has declined in the second half of 2013. That's because we had five vessels that we own that are exiting the fleet, that are being abolished in the second half of that year. These old fleets, these five vessels are those that have already been totally depreciated, and therefore it meant to provide a higher margin. Now, without five of these, we of course suffer some pressures on our GP.
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Also in order to meet market demand and also to seize more market share, we chartered some vessels from outside parties. Of course, chartering vessels would mean a lower GP.
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That would be the first reason. The second reason is our human resources expense. We have been adjusting our human resources benefits upwards, especially for those workers who are working offshore. That has actually exerted some pressure too.
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As for the other reasons, those included maintenances and other reasons that have taken place in the second half of last year. [Foreign language] Perhaps we will take two more questions.
Hi, I'm Tom Hobold from HSBC. Firstly, because of the activity levels in offshore China, particularly with your sister company, your revenue growth is skewed towards offshore China for 2014 and probably actually for 2015 as well. Do you expect that to still be the case longer term for the business? If not, what strategic and operational changes do you need to make in order to skew your business more for the international side? Secondly.
Maybe we take the translation first. [Non-English content] ？Maybe we answer this question first, and then we come to the second one. 也是，我们先回答这个问题，再下来一个。
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Thank you for your question. The efforts that we are putting in the offshore exploration and development has remained the same, it will not change in the future.
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For COSL, the offshore China business is a very important source of income for us. However, the international market is also very important too.
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The business of both offshore China and international markets are something that COSL has to work on.
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The reason why we saw more work being done in China offshore for the year 2014 and 2015, that was because of an industry pattern. As you are well aware, the work that we will be able to secure in the future very much depends on the step-by-step exploration work that we do today.
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If we compare the China offshore exploration versus that of China inland, the mainland, then it is still rather low.
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We still have a lot of work to do for the exploration of the China offshore.
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In addition, we have yet to see what is the potential of our deep water business segment.
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Therefore, we are actually very confident regarding the business of China offshore in the future.
Thank you for that very well-thought answer. If I could just ask a quick follow on, in terms of Mexico, what is your approach to Mexico? Are you considering partnerships in Mexico? Do you have any limits on how much business you think you can do there or any long-term market objective? It would seem to be a very attractive market for you long term. Thank you.
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I very much love to answer this question. Since 2007, COSL has been entering into the Mexican market with four rigs.
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At that time, we worked with a local Mexican company.
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According to the Mexican law, I'm talking about the law for the petroleum industry, it is only a company that has at least a three-year track record in this industry that would be qualified to participate in tendering.
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If you would count the number of years since 2007, COSL would now have more than three years of track record. We already own the rights to participate in tender on our own.
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The scale, starting from last year until this year, the scale that we have in the Mexican market, you can equate that to five modular rigs and three jackup rigs.
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Judging the current market situation in Mexico, COSL already enjoys about 10% of the market.
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Also, considering all the drillers in Mexico, COSL can be considered as very competitive. Of course, it might not be appropriate for me to say that. However, I can tell you that our customers have very good remarks of ours, especially as it relates to pricing.
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Yesterday, the 18th, originally there was supposed to be big news that everyone would know about from Mexico. However, because of the current strike that Mexico has experienced, the plan to operate our rig has been canceled.
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You may well be aware that since last year, the Mexican laws and regulations regarding the petroleum industry have seen great changes.
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This means a lot more opportunities for companies like COSL.
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Based on the good brand name and the goodwill that we have been able to demonstrate in the Mexican market, we are fully confident about the future.
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Thank you.
Thank you. Maybe we have time to take the last question. No? Leave the chance to the gentleman at the back, please.
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Oh I'm sorry. My apology. Thank you very much, management. I am Clement Chen from Barclays. I do apologize. You talked about your deep water business and the outlook in this particular segment. I'd like to ask about the international segment as well. As you are aware, the jackup rigs in the next 2 to 3 years, there would be north of 130 such high spec equipment entering into the market. Do you think that this would impact your day rate income?
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I think the high spec rigs are of a different nature issue with the deep water market.
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The deep water business, being a new area, of course, with the increase in supply, prices would become reasonable again, of course. In the past, prices have been too high I think it is not a normal situation. With jackup rigs, it's a different story.
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As you may be aware, in the jackup market, there are a lot of machines or equipment that were from the '80s.
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With the coming up of new jackup equipment into the market, the older equipment, for safety reasons or for environmental protection reasons, it is only natural that these be abolished.
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As for the jackup rigs, I believe the prices now are already quite reasonable. If you would analyze the profitability of various companies engaging in this business, you can see this trend already.
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I just like to summarize using one word or one phrase. Prices, you can expect it to stabilize and perhaps climb up very slowly and stably. As for vessels, you will see more and more new vessels and fewer and fewer older vessels.
谢谢管理层的介绍。由于时间关系，我想今天的答问就到此为止了。Thank you again for coming.