Earnings Call: H1 2013

Aug 20, 2013

Good morning, ladies and gentlemen. Thanks for attending today's investor presentation for CorSo's Interim Results 2013. First of all, allow me to introduce the management representative on the stage, Mr. Liu Jian, Chairman of the Board Mr. Li Yong, CEO and President Mr. Li Zeilong, Executive VP and CFO Mr. Yan Hai Jiang, Company Secretary of the Board. Now let me pass the time to Mr. Li Bai Long to start today's presentation. Mr. Li, please? Thank you. Good morning, ladies and gentlemen. During the first half of twenty thirteen, the global landscape remained complex. Fortunately, investment by major oil companies in exploration and production activities continue to drive the rebound in the oilfield services industry. Under the market this market situation, KOSO grabs market opportunities and actively engage in market expansion. Through effective allocation of resources, we further strengthened our leading position in offshore China. Now let me walk through the latest update of Coso. Firstly, financial results for the first half of twenty thirteen. During the period and the review, KOSO achieved satisfactory results with all 4 business segments fully covered with workload. With the largest scale equipment operating at high utilization and driven by the newly added capacities. Revenue was up 24% year on year at RMB12.44 billion. Due to higher costs across the whole industry, operating costs was up 25% year on year. With the group costs under effective control, operating margin remained at the same level as the same period last year. Net profit was even up 32.6 percent at RMB3.18 billion. With our efforts in expanding our domestic and overseas markets, both markets achieved double digit growth. Chinese Water continued to be our core market and a key contributor to the growth to the group revenue. Revenue from the domestic market reached RMB8.30 billion, up 17% year on year. Percentage from the international markets continue to expand and maintain their growth momentum with revenue went up 39%, contributing to 35% of the group revenue. The increment in revenue from international market exceeded our national market for the first half. Coso continued to achieve balanced development of its equipment and the well service segment to reinforce our leading position leadership in and the market share in offshore China, while actively drive equipment management and improvements in technologies and stay close to the needs of its clients. Through our highly effective allocation of equipment resources, we strengthen management of operations, drive application of self developed technologies in production and strive to improve quality of our well services. We have gained recognitions and trust from international clients with our high quality and efficient services. Oscoso's brand awareness continue to grow in the international markets. We received invitations to participate in tenders for more than 200 contracts for oil services operations from around the world during the period. For example, in the European market, CDE, 1 our subsidiary in Europe, has won client recognition for its outstanding fleet management and operation capabilities. Coso Pioneer ranked rate of demand in the comprehensive performance evaluation of 31 rigs operating in the North Sea conducted by Stag Oil. In the Southeast Asia market, Kosovar has commenced operations for a 3 year contract with BP. The rig is in full compliance with the latest standards stipulated by BP in 2013. After a few years of development in deepwater equipment technologies, Terence acquisition, We achieved steady growth in revenue from China South Sea and North Sea. Our core deepwater markets, Revenue from deepwater operations now accounts for 17%. Our services scope will gradually expand from conventional to deepwater. Outstanding performance can be attributed to our deep learning curve for deepwater technologies and our ability to manage large scale equipment. Haiyangxiao 981 has completed operations for several wells in the first half of twenty thirteen. With excellent performance, Nanhai A operated at full capacity and has very high efficiency. Well services are expanding into deep waters along with our equipment, such as deepwater drilling flues has complete operations for 2 wells. QHSE is an important safe guide for Khoso stable development. CorSo make further improvements in management of emergencies and have enhanced skills and awareness for safety and efficiently prevented occurrence of accidents. Our overall performance on safe production remained stable with OSAT score at 0.14. COSO continued to increase its investment in R and D Research and Development and recruit more technology professionals, engage in in-depth collaborations and exchanges with world class oilfield services companies, fulfilling its future development. As a result, we have been able to complete more research and grow the numbers of its research patterns and apply more of the R and D results in our operations in our productions. Due to our outstanding performance, KOSO has received numbers recognitions from the capital markets such as being named as China's most promising companies and the top 100 listed corporation brand in the capital market in 2013 exchange. Now let me walk through the performance of each of our 4 business segments. As an integrated oilfield service company's provider service provider, KOSO's 4 major segments covers the most crucial part of the E and P industry trend. There is through our review of our capabilities in the 4 business segments on this slide. I should not go into details at this point. Drilling segment remains to be our largest segment in terms of both revenues and operating profit accounted for 56% 75% respectively of our total followed by Well Services. Revenues and operating profits of our 4 segments saw rapid growth. Thanks to higher working volume and larger capacities, operating profit of geophysical and surveying segment experience declined due to lack of new capacities and higher materials costs. Drilling segment showed rapid growth driven by the newly added high end rigs including new deepwater semis such as Coso Promoter, Coso Innovator, Nanhai 8 and the chapter Nanhai 7 and Kantan number 2 is our. This high new end high end deepwater equipment not only brought about it brought in higher working volumes, but also helped lift average daily income. On the other hand, KOSO has been actively exploring new markets with existing equipment maintain high utilization rates. These serve as another growth driver. Calendar day utilization rate of the drilling fleet was up 2.5 percentage points to 95.3% during this period. Well service enjoyed synergies with large scale drilling rigs driven by more application of self developed and high end technology technical services. Revenue of this segment increased 26% year on year. On the top of the conventional waters, KOSO has been selectively expanded into and made progress in deepwater and unconventional business. We have established a subsidiary in Canada to expand the technologies application in oil and business. Marine Support Transportation segment achieved fewer maintenance days for self owned vessels, up utilization rate by 3.3 percentage points to 94.2%. MS and T, marine support transportation business, despite strong demand in offshore China, so intensified domestic competition. With this situation, we invest in construction high end vessels to differential ourselves from their competition. Through reasonably scheduled fleet, we maintained a high utilization rate through no any new capacity coming and have successfully completed a number of international projects in Southeast Asia for the geophysical and survey segment. Due to clients' operation adjustment in operations, 2 d collection and processing volume increased significantly, while volume of 3 d collection volume saw a decline. Deepwater survey vessel, Haiyangxiao 708 complete a recall and installation operations of Christmas tree at a depth of 1500 meters pioneer a new model. Now let me share with you our prospects. Barclays recently raised its global oil and gas CapEx projection for 2013, subjecting the global CapEx to grow 10% to US678 billion dollars with Asia Pacific Oil and Gas E and P CapEx to increase approximately 19% year on year, while E and P activities in China and Southeast Asia waters remain active. Our major client, CNOC, will maintain a CAGR of 6% to 10% of its output during the 5 year plan. To achieve this target, Sino will further intensify its offshore exploration efforts in 2013. It is expected the CapEx of signal will reach US5 $1,000,000,000 to US14 $1,000,000,000 in 2013. I'm sure you can also feel the perspective of exploration in China Water as reflected in full capacity operation of our 4 segments. With oil companies continue to grow their investments, large scale equipment such as drilling rigs and seismic vessels maintain a booming momentum, providing valuable development opportunities for Khoso. Utilization rate of global jackups reached to 95% 94% in July, while semi ceased utilization rate reaching to 97%. With utilization rates remain high, the average day rate of drilling rigs around the world continue its modest growth gains. Working volume of seismic vessels is expected to further increase in the next 2 years. At the same time, oil companies have stipulated higher requirements for geophysical technologies and processions, which are in line with our strategic positioning of being competitive and professional. Earlier this year, we mentioned that we will face the opportunities to speed up constructions of new equipment, procure suitable aftermarket equipment, structure equipment according to market demand. 6 months later, we have proved that these three ways have been practical efforts and results. Not only have we only our commitments, but also ensure sustainable development for 2014 and beyond. More details I show in this slide. Couple this our big competitive and professional strategy. We will continue to selectively invest in deepwater and high end equipment. While expanding our equipment count, we will continue to enhance our capabilities in the Rail Services segment, including continued efforts to develop output stabilization and optimization business and invest more in self development technologies. Apart from providing high end technology technical services for CBM and shared gas, Koso will also develop high sandstone gas. In the second half of this year, we will proactively leverage existing technologies to provide services for all set production in Canada. In summary, CorSo will strive to achieve stable growth by focusing focus on meeting new domestic market demand, expanding the international operations, increasing equipment capacities, improving self owned technologies, saving growth opportunities in deepwater areas. Here comes to the end of my presentation. We are now opening to the floor for questions. Thank you. Thank you. There are many questions, but first of all, let me remind you to identify yourself and please ask the question 1 by 1 to allow some time for our interpreter to translate into Mandarin. So first question, gentlemen in the second row. Good morning, gentlemen. It's Scott Darling from JPMorgan. Thank you ever so much for your presentation. Do you think this year you will revise up your CapEx guidance? And my second question is for the new procured vessels, you expect these to be at higher day rates or margins in some of your existing fleet? Or if you could give some guidance around that, that would be very helpful. Thank you very much. For the question concerning CapEx for the year, we have indicated earlier that it will be about RMB4 1,000,000,000 to RMB5 1,000,000,000. But we have also added that should there be new equipment installed for the year, this may actually increase the CapEx. Given the present situation and the way it's progressing, it is likely that our CapEx for the year may be increased to RMB6 1,000,000,000 to RMB7 1,000,000,000. As for the new rigs, you asked whether there will be it will be they will be fetching higher day rates and margin. Well, actually for the new rigs, they're mostly deepwater operation rigs. And as such, the day rates would be relatively higher. But given that costs would also be higher, it cannot be logically drawn to the conclusion that the margin would actually be higher. Basically it will be consistent with our original risk. Thank you. So can we have the next question? Gentleman, Lawrence. This is Mr. Liu from BOCI. The first question, for the first half, the profit tax notice had come significantly down compared to the same period of last year. What about the second half of the year? What are the projections? Well, you've done your homework and I've also done mine. Last year, there was a new promulgation from the China Tax Bureau. And basically, there was an accounting clarification in terms of the discount time period and the accounting time period. They were made consistent. And for the asset depreciation and the account depreciation time period and the accounting time period, we have chosen for them to be completely consistent. But we already had in our books the liability arising from deferred profit tax. And so in 2013, we had to clear our liability arising from the 2012 profit tax. And because of this mechanism, we have enjoyed a 15% profit tax rate. That was because of our position as a high technology advanced technology company. And after 2012, we will have to apply to see whether we can still keep this status and therefore keep that particular tax rate. And before the status of high and advanced technology, our tax rate was 25%. And this results in the difference in the profit deferred profit tax rate. It is exactly because of the discrepancy between the 15% to 25% as arising from the deferred profit tax. This may seem complicated, but basically this will only take place as far as we know at this point in 2012. It's complicated. And for the next half, the rate will come back up and therefore the profit tax. Another question I have is I noticed that the day rates across the board for the rigs have increased. Is that because of fleet adjustment or because day rates itself have come up? The semi subs we have and the rigs basically they fetch pretty high day rates. And with the semi subset we have, the day rate logically should be higher. As for the jackups, they have been consistent. And in some cases, they have come down in terms of the day rate. And also but basically the day rates were stable. As of the end of June because of valuation of the currency's exchange rate and given that the contracts are settled in RMB for the international contracts, last year we had a 6.3 exchange rate with U. S. Dollars and it's come up to 6.1. And given that effect, it has also increased our day rates because of the exchange rate. And if I can supplement, we have more deepwater vessels and also deepwater rigs and also for the new contract, the international contracts. And therefore, they have also benefited from the 4th effect. I'd like to know from your PPT, it seems that there are some new rigs and vessels such as coastal hunter etcetera. Can you give us some color onto this? As for the 3 vessels that you've mentioned Hunter Gift and Nanhai, that's HN9, they are new vessels. As for HN9, it is now docked and probably in early October, it will commence service. It's already been contracted, its service and we continue. For deepwater vessel, that is 1500 meter operation, it is a 1st generation vessel. And after the maintenance this time, in fact the facilities are all there, but this time the maintenance at the dock is really for the body of the vessel. As for the 2,375 vessels, the in September October of the year, they were delivered and agreed and the contribution should come in probably early next year. With new rigs and new purchases, is the company considering any financing, equity or bank borrowing, new financing? As of the end of June, we have on hand RMB14 1,000,000,000 in terms of cash or cash facilities. But as mentioned, we will be increasing our CapEx. So in the short term, we do not have any pressure for financing, but we do not rule out the possibility that with new projects coming onto stream, we and if the CapEx is to be revised upwards, we may consider financing opportunities. But as of this moment in time, we do not have any definite new financing plans yet. This is a question from UBS. Congratulations to the company for great results. For the first half, I find that those drilling rigs revenue and EBITDA have gone up, but not so for the other segments of the company. Why is that? Let me go through the segments 1 by 1. First of all, for geophysical and survey, as you know, there's not been any new equipment commissioned within the year. And as you know for geophysical and survey service, it is very much very much depends on the weather as well as the area of operation. And in the first half, it was adversely affected by both weather as well as the fact that the vessel, if it is engaged in a particular area by a particular client, it cannot be servicing another one. So with these two factors, the revenue came down. However, for the first half, the revenue had still come up. And as you know, we will have new equipment commissioned in geophysicals and surveys perhaps early next year. As for well servicing, the it is led by new R and D for the latest technology and for the 2 types of equipment that is leading the world in terms of its advanced technology, they will be commissioned by our company soon. So that is to say in the future with our own self developed and self owned equipment, We will this will give a lot of impetus to this particular area of well servicing. At present, we have to charter the advanced equipment. As for MSNT, the policy the new policy is that fleet What's the new policy? The existing policy had been that for a fleet of 30 or vessels of 34 years or over, they will have to be written off. And this year, we will have 5 such vessels. And to make up for this gap, we will be chartering vessels. And of course, this will fetch lower margins than our self owned fleet. That is the reason why in the first half we have purchased 2 vessels and in the second half we will continue to do so especially for high end high technology vessels. So for these three segments, as I have explained, they have been affected. However, I assure you that the effects will be short lived. For MS and T, if I can just supplement, we have contracted for 15 new vessels, which we believe will be delivered in 2015. This is a question about the balance between the international market and the South Sea, China South Sea market, given the instability of the South Sea situation, how would the company balance between the two in terms of business development going into the future? We are bullish on both. As Mr. Li had mentioned just now for deepwater operations, we have already increased our margin to 17% revenue percentage, our revenue percentage to 17%. And there will be huge impetus for our performance given the NH9 and our new deepwater equipment and also some of the technology that we have self developed. And for the international market with the building up of the COSL name and also with our increased influence, we have been able to get more contracts compared to before. And we will not swerve from our determination to further develop our international market and especially given our accumulated experience and our plugging into the network internationally, we will continue to grow in this area. But as we grow our international business, we will continue to consolidate and develop in the China Seas, the nearshore as well as deepwater areas. South China Sea is more important than ever before. In fact, for the newly acquired NH8, NH9 and NH7, they are really focused on the South China Sea's operations. Thank you. My name is David Heard, and I'm with Deutsche Bank. I wanted to ask or discuss 2 things this morning, if I could. The first one is your drilling revenues, which has been discussed a little bit before. And the other is your CapEx, which also has been discussed. But on your drilling revenues, during the first half of twenty twelve, I believe you reported about US80 $1,000,000 in either towing fees or refurbishment fees, things of that nature. I was wondering my first question, how much of your revenue in the first half on the drilling side, how much of that revenue comes from these sort of items as opposed to just drilling? May I confirm your question, David? Say it again. Can you repeat your question? The question is last year you booked about $80,000,000 first half, so RMB 500, RMB 550. First half for towing and or refurbishment of your rigs. You changed your reporting from reporting your day rates on your rigs to reporting daily income on your rigs. And I'm questioning in the first half, your revenues seem to be about RMB 500,000,000 higher than consensus. And that would be another RMB 80,000,000 in sort of towing fees or refurbishment fees. And I was wondering in the first half how much of your revenue on the drilling side actually came from these one off items? Thank you. The other way of looking at it, and I think maybe you've already confirmed it, but you said organically, there were no changes to your day rates. So you can address it from either side. Thank you. Okay. There are 2 well, the drilling revenue that we book includes the day rate as well as the mobilization payment that is paid us. And these are distributed or allocated Well to confirm you, yes, the drilling revenue includes the day rate. But there is a particular situation with regard to NH7, which is a chartered vessel and that is maintenance work had to be carried out for NH7. The maintenance fee was paid by the other party. But on the other hand, we, COSL, was commissioned to supervise and handle the entire maintenance operation. And therefore, there was a fee that we have collected. So this there is about a US30 $1,000,000 revenue that partly comes from this particular source. But overall speaking, this kind of fee or revenue is very small relatively speaking. And was there a towing fee also in the first half? Towing fee. Towing fee? Thought of them as being one offs. But obviously, when you're getting new rigs, they're not going to be one offs. Well, actually, as you point out, actually it is a one off event. It is a one off event. For NH7, the vessel, which was chartered to the owners of the bank, but the bank has no experience on operation management or maintenance. And therefore the tolling fee that you mentioned and the maintenance revenue as mentioned just now by Mr. Li was a one off revenue stemming from this NH7 maintenance. Right. And in the first half of twenty thirteen, the totality of that one off was 30,000,000 30,000,000. The other question, which should be a lot quicker. In 2012, you also mentioned that your targeted CapEx between 2011 to 2015 was anywhere between $28,000,000,000 to $30,000,000,000 Is that a target you're still reaching for? Thank you very much. We have mentioned that we will keep at least the 11th, 5 year plan period CapEx for the 12 5 year plan period. However, given the present situation of operation, it is possible that we may revise upwards our CapEx guidance. This is a question about the margin between near water and deepwater. The analyst from Morgan Stanley noticed that for deepwater purchase of new equipment, it seems that the revenue will be increasing by 50% or nearly 60% and this may persist for the next 5 to 10 years that is a question. And would that affect the margin relative between deepwater and nearwater going forward? What is the company's take? You did mention 1, deepwater and 2, jackups. Well, I beg to differ on that point. Basically for our future planning it will very much depend on the market both for shallow and for deepwater. For deepwater, because of the technical requirement which is higher and the equipment more expensive, the margin should rightfully also be higher. But it depends also on the efficiency of our operation as well. We are very experienced in shallow waters and for deep waters we've had a very good beginning. But going forward we will definitely be wary of risks and we'll continue to move forward in deepwater cautiously but steadily. It's very difficult to give you a breakdown for deepwater and shallow water operations going forward. But we will be definitely keeping very close to the market and we'll be looking for suitable opportunities in both. Thank you. Thank you. This is a question about the second half new purchases of 2 jackups and a semi sub. The delivery time, the contribution of revenue and where will they be operating. For NH9, we'll be operational in South China Seas. As mentioned earlier, this is to plug a particular gap in that market. The 2 checkups they will be commissioned in September October. Contracts are being negotiated. I'm not in a position right now to give you the details, but suffice to say that they will be operational within the conventional or familiar areas that we operate in. You're talking about new capacity that are still under construction. The delivery time may be as late as 2015. There is a difference between purchases and self built vessels. For purchases, really they are it depends on the market demand and also the vessels that we can purchase. As for built vessels, they are purposely built. They are specifically targeted for particular markets. This is the first time I see that in your reports there is a collection segment for CBM, for shale and oil sands, etcetera, shale gas and also the Bohai Bay area. Can you give us more information concerning this? That's one question with a lot of content to it. This is a very important area, the collection segment. It is a big enhancement to our business. And in fact, going forward for the near shore business for especially around the China Seas area, this will be a major contribution. And for the Bohai Bay region, fracking will be one of the answers to increasing our collection and recovery rate. And we are in the process of purpose building a vessel for this. This is a major market that's going forward. This will be a major market for Kausal. And in particular for multiple thermal fluid technology system which is to be applied in the Bohai Bay area. This will point to a very important way forward for KOSO as a business sector. As for CBM, this is an area that we will be opening up more and more. First of all, we will have to establish our own strengths and also advance ourselves in terms of technology. So this is an important area of business development for us, CBM. And as you know, our revenue from this sector had increased by over 100% compared to the same period last year. The CBM market is highly competitive and also in pricing, but we will continue to move steadfast in this market, especially we will be moving into the high end market. But basically, we will be focusing on the well services and also in logging. As for Shale Gas, it is a new technology area. We will be continue we will continue to step up with our efforts in R and D. We will conduct tests. We will be focusing on the high end side of the market and in logging and in directional drilling. And as for equipment, we will be cautious. However, unlike the mass market, which is going feverish, we will be partially still very awake.