Earnings Call: H2 2013

Mar 19, 2014

Good morning. Welcome to the investor presentation of China Oilfield Services Limited for its 2013 Annual Resales Presentation. Now 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 Fei Long, Executive VP and CFO and Mr. Yan Hai Jiang, Company Secretary. Now I would like to pass the time to Mr. Li Fei Long to walk us through the company's results. Mr. Li Fu? Good morning, ladies and gentlemen. Thank you all for attending today's presentation on CorSo's Annual Result 2013. Today's presentation will be divided into 3 parts. Now let me walk through the latest updates of CorSo. As a unique integrated oilfield services provider, CorSo continues to actively expanded 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 operator China and expanding its scale in international market. Khoso delivered 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 highest pace seen in recent years. Capital structure was further optimized with gearing lower further and cash available for use stand at RMB12.5 million. ROCE rose to 11.6%. The Board of the Directors has recommend payment of yearly dividend of RMB0.43 per share, representing a payout ratio of 31%, in line with 2012, which is to be approved by AGM. The company's overall enhancement in operation and management have contributed to its outstanding financial performance. As a service provider company, KOSO 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. Koso successfully expanded its foothold 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 compactness saw improvement as well. In 2013, we continue to develop the 4 core regions and have further developed new business and reach out to new clients. In these regions, our equipment and technology services performed outstanding and earned 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 day, in the same way, we further expanded our services in the Mexican market. There's now 5 module rigs and 3 high end jackups working there. This commanding operations of deepwater drilling rigs such as Nanhai-eight, Nanhai-nine and Khoso Permoter, we achieved steady growth in revenue from South China Sea and Norwegian North Sea. I called deepwater markets, revenue from deepwater operations continue to grow to 18%. The outstanding performance could be attribute to the high efficiencies, high quality operations of our deepwater equipment portfolio. Of which, Haiyangxiao 981 saw its utilization rate reached 96.4%. And also Pioneer Asia First Ultra Deepwater Well Operations at a depth of 2,400 meters. Well service technologies have been applied in deepwater gradually. QHSE is an important safeguard for Khoso's substable development. During 2013, Khoso made further improvements in its protocol for management of emergencies, identify latent weakness and perform emergency drills. These enhanced skills and awareness of for safety of our staff and effectively prevented occurrence of accidents. Our overall performance on safe production remains stable with all size score at 0.18. Due to our outstanding performance, Khoso received numbers recognition from the capital market. During the year, Khoso was again included in the Hanson Asia Corporate Substability Index. Now let me walk you through the performance of our 4 business segments. As an integrated oilfield service provider, KOSA's 4 major segments cover the most crucial stage of E and P Industry Trend. There is through our review of our capability in the 4 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% 75%, respectively, of the company's total, followed by Well Services. The Well Services segment was the widest growth growing segment during the period and the 2nd largest contributor in terms of revenue. The drilling and well service segment show rapid growth. Thanks to the higher capacity of high spec equipment and higher working volume. The growth of profit was inferior to the 1 of revenue as the result of the rising capture fee for Well Services segment. For Marine Support segment, the revenue increased due to the increasing numbers of operating days achieved by vessels. However, the operation profit of this segment experienced declines due to vessels retire and rising vessel chapter fees. The revenue and operating profit of our geophysical and survey segment declining 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 hatched hot spec rigs, which not only brought about in higher working volumes, but also help lift average daily income. On the other hand, CorSo 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 deepwater, application of more self developed technologies as well as high value services in complex conditions. Revenue of this segment increased 33% year on year. The growth of operating profit was in theory to the one off revenue at this segment due to the higher charter fee. With 5 vessels retired in 2013, we purchased 2 more vessels into operations. The self owned fleet spend less time for maintenance and the utilization rates rose to 93 0.9%. In response to the strong demand in offshore China, Khoso purchased 2 support vessels and commissioned construction of more high spec equipment to further differential ourselves from the competitive. In 2013, despite have no new capacity for Geophysical and Surveying segment. Through reasonable schedule operations per production, coordinate allocate resources. The utilization rate of for equipment used in this segment at relative high level successfully. This segment maintained its dominant player position in domestic market and completed a number of international projects in Southeast Asia during a domestic recession in winter. Due to clients' project adjustment in operation, 2 d collection and processing volume increased significantly, while volume of 3 d collection volume saw a decline. Successfully explore new markets and enter into an exploration contract with SpectroChina. Now let me share with you our prospects. Khozos strives to achieve a revenue growth of no less than 10% year on year in 2014, despite foreseeing and increasing cost. Profit margin will remain stable and CapEx will be around RMB7000000000 to RMB8 1,000,000,000. As a friendly reminder, the above operation plan is based on Khoso's current operating condition and the market environment. We 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 depend on the market situation and other conditions. Please be alert of these risks when designing your investments. We are confident about achieving these targets with the foreign measures. The company has relatively better capacity to withstand risk based on its location in domestic and international markets. According to a secure working volume and contracts for CorSo in 2014 2015, we expect a clear growth. Specifically, almost overall contract for 2014 and 65% for 2015 have already been locked in. Our drilling rigs have been scheduled throughout 2014, Our high utilization rates will maintain and average daily income will remain stable. Those services see a rapid growth by leveraging synergies of acting 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. First for the growth by segment, trading and well services well services remain to be the key drivers. We are also developing our shallow and deepwater business, both will see growth. Looking ahead, we will continue to effectively adjust the equipment structure to in order to meet market demand by 3 approaches of chapter purchase and build. The confirmed equipment highlight in the in yellow contribute 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, Khoso is still considering chapter or acquire suitable rigs or vessels. While increasing our capacity rapidly, Khoso will also make structure adjustments to further optimize our equipment. In drilling segment, there will be more new capacities. Newly delivered equipment will mainly be 375 feet jackups and 5,000 feet semi sub. Meanwhile, we continue to add more high spec and deepwater high power vessels and further improve efficiencies in the geophysical and surveying segment. CorSo 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 and invest more in self developed technologies. In terms of deepwater and unconventional areas, apart from the providing high spec technical service for CBM and Thai sandstone gas. Khoso will continue to expand deepwater business. The overall working volume of these areas will grow rapidly. In summary, Khoso 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. Moreover, the company will also selectively expand on conventional business operations with an aim to achieve steady growth in 2014. 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 For the benefit of translating more accurately, please raise your questions 1 by 1 and answer slowly. Thank you very much. It's Scott Darling from JPMorgan. 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 sort of give the market some views about 2015? And sort of some general comments around sort of the higher spec day rate environment. Do you expect day rates for 2015 to increase next year? And any comments around what rigs are actually rolling off contract? Thank you very much. Sorry, Versa Long. JPMorgan You're correct in your views. The high spec equipment, especially as it relates to deepwater equipment, The pricing indeed has come down this year. But as we look at it, it probably does not affect CorSo a great deal, especially in 2014 2015 because our high spec equipment contracts already extend beyond 2015. The only impact that I can perhaps think of is by the end of this year, 2014, our Pro Spector vessel which is a 1500 meters deep vessel that may see a slight impact. Originally our intent, our goal was to set this at a 550,000 pricing range. However, the management team feels that given the current situation, it is rather a difficult goal to reach. Therefore, judging from this market changes, we are reasonably adjusting our targets downward slightly. However, the only impact that one would expect to be seen in 2015 year would be this one vessel that CorSo is about to deliver. From the long term perspective, we do think that the coming down of prices of the deepwater and the high spec equipment and rigs are indeed quite reasonable and it does fit it does answer to the market change and patterns because previously resources were in very significant shortage. That was the reason that has driven the prices up. And 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 of this gentleman, please. My name is Jing. I'm from Bank of America, Merrill Lynch. And I'd like to ask you questions about effective tax rate. The effective tax rate has been very, very low. And 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? And I'd like to know your views regarding this area for 2014. Thank you for your question. As for this matter, we already talked about this in our mid year results announcement back in August. Perhaps I have not been too clear. And I'd like to make use of this opportunity to clarify myself. But it ranges from 28% to 30%. As for our overseas market, where our main income is from, for Norway, with the 3 semi rigs there, we are now being impacted by the accumulated losses because of the acquisition that came with the acquisition. So the 28% of tax rate is in fact it does not matter because we do not have to pay taxes anyway. And for our Singapore rates, the jackup rates, because this is offshore income, so the So given these situations, the effective tax rate for our company would be in the range of 15%. However, because of the R and 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 1 yen on R and D, we would be able to offset 1.5 yen in our profits. So given that benefit, the effective tax rate is sometimes below 15%. However, 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. In 2013, when we reported our 2012 taxes, the tax authorities required us to equate to pull to put these different standards or different way of calculating depreciation to make them equal to Therefore, we have to adjust those differences that had already been caused and those that will come in the future. And for those deviations or those differences that has 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. As for those differences that incurred that were incurred in 20122013 beyond, these differences would be taken care of in the year of 2013 2014. Therefore, according to this principle, for those because of the differences that incurred that were incurred prior to 2011, it would mean an impact of about 30,000,000 dollars of effective taxes for us each year. As for those that were incurred in the year 2012 beyond 2013, that would be taken care of in our 2013 books And amount that would be impacted is RMB 116,000,000. In other words, the you see a decline in the effective tax rate in 2013, and that was in fact due to this RMB 160,000,000 differences. And going forward, the impact for each year would be relatively smaller that would be in the range of 30 The $160,000,000 when translated into effective tax rate, the impact for 2013 would be a decline of 2.6%. Therefore, coming in 2014 and beyond, our expectation is that basing on the current income level, the effective tax rate would be in the range of 13% to 15%. 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'd let the gentleman in the middle to ask the question first. Thank you for your very good explanation. Just now, I'm 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%, and majority of those comes from actually from the second half of the year, which we saw a 55% increase. Now based on the two reasons that I understand, first being the quantity of work that has that we have seen an increase in the second half of twenty twelve. However, I also see that the basis of the second half of twenty twelve was quite low, and I'd like to understand why was that the case. And also I'd 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 1 to 2 years? Answer this question first and then come to the other. The reason why you saw a better growth rate for our well services in 2013 was because we have added to the number of rigs in operation during the second half of the year. For CorSo, the correlation between our well services segment and the drilling segment is in fact very large. 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. Given the actions that we have already taken and given to secure resources and given the agreements that we have already been able to lock down, we believe that there will be 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 good growth. 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. The second question relates to the Marine MS and T segment. As far as I'm aware, the operating margin for this segment in 2013, the first half was 19%. However, it dropped to the end of the year to 10%. I like to understand the reason for that. And 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 a close to 20% growth. Now my question is, would that put any pressure on your gross profit margin because this indeed has added on to the supply side? You are correct in saying that the gross margin of our MS and T segment has declined in the second half of twenty thirteen and that's because we had 5 vessels that we own that are going that are exiting the fleet that are being abolished in the second half of that year. And these old fleets, these 5 vessels are those that have already been totally depreciated, and therefore, it meant to provide a higher margin. Now without 5 of these, we, of course, suffer some pressures on our GP. And also, in order to meet market demand and also to see small market share, we chartered some vessels from outside parties. And of course, chartering vessels would mean a lower GP. 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. So that has actually exerted some pressure, too. As for the other reasons, those included maintenances and other reasons that have taken place in the second half of last year. Perhaps we will take 2 more questions. Hi, I'm Tom Hobart 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? And 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. Maybe we answer this question first and then we come to the second one. Thank you for your question. The efforts that we are putting in the offshore exploration and development has remained the same and it will not change in the future. For CorSo, the offshore China business is a very important source of income for us. However, the international market is also very important too. Therefore, the business of both offshore China and international markets are something that CorSo has to work on. The reason why we saw more work being done in China offshore for the year 20142015. 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. If we compare the China Offshore exploration versus that of China inland, the mainland, then it is still rather low. Therefore, we still have a lot of work to do for the exploration of the China Offshore. And in addition, we have yet to see what is the potential of our deepwater business segment. Therefore we are quite we're 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 could do there or any long term market objective? It would seem to be a very attractive market for you long term? Thank you. I very much love to answer this question. Since 2007, CorSo has been entering into the Mexican market with 4 rigs. At that time, we worked with a local Mexican company. According to the Mexican law, and I'm talking about the law for the petroleum industry, It is only a company that has at least a 3 year track record in this industry that would be qualified to participate in tendering. If you would count the number of years since 2007, CorSo would now have more than 3 years of track record. So we already own the rights to participate in tender on our own. The scale, starting from last year until this year, the scale that we have in the Mexican market is you can equate that to 5 motor rigs and 3 jackup rigs. Judging at the current market situation in Mexico, CorSo already enjoys about 10% of the market. And also CorSo, considering all the drillers in Mexico, CorSo can become considered as very competitive. Of course, it might not be appropriate for me to say that. However, I can tell you that our customers has very good remark of ours, especially as it relates to Yesterday, 18th, originally, there was supposed to be a big news that everyone would know about from Mexico. However, because of the lately, the current strike that Mexico has experienced, the plan to operate our rate has been canceled. You may well be aware that since last year, the Mexican laws and regulations regarding the petroleum industry has seen great changes. This means a lot more opportunities for companies like CorSo. 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. Thank you. Thank you. Maybe we have time to take the last question. No? So leave the chance to the gentleman at the back. English? I'm sorry. My apology. Thank you very much, management. I am Clement Chen from the Barclays Bank. I do apologize. You talked about your deepwater business and the outlook in this particular segment. However, I'd like to ask about the international segment as well. As you are aware, the checkup rates in the next 2 to 3 years, there would be a 100 there would be north of 130 such high spec equipments entering into the market. Do you think that this would impact your day rate income? I think the high spec rigs is of a different nature issue with the deepwater market. The deepwater 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, and I think it is not a normal situation. However, with jackup rates, it's a different story. As you may be aware, in the market, there are in the jackup market, there are a lot of machines or equipment that were from the '80s. 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. 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. So 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. But as for vessels, we will see more and more new vessels and fewer and fewer older vessels.