Earnings Call: H2 2012

Mar 24, 2013

Good morning, ladies and gentlemen. Welcome to the Investor Presentation of China Oilfield Services Limited. May I first introduce the company representative on the panel today, Mr. Liu Jian, Chairman of the company Mr. Li Yong, CEO and President Mr. Li Beilong, Executive Vice President and CFO and Mr. Yang Hai Jiang, Company Secretary. Now I would like to pass the time to Mr. Li Bai Long to walk us through the results and business highlights. Li Bai Long please. Good morning, ladies and gentlemen. 2025 is a challenging but encouraging year. Despite a complicated global economic environment and the slowdown in domestic economic in China, we have made good results in all aspects of our business. Here, I would like to share with you KOSO's annual results for 2012. Today's presentation will be divided into 3 parts: results overseas, followed by a review of our 4 major segments and finally, our company's prospects. Now let me look at our results, our view. First of all, let's look at our financial highlights for 2012. With effective market expansion and large scale equipment operating at full capacity, CorSo achieved significant growth, lifting our revenue to a new record level. Revenue increased by 20% year on year to rmb22.1 billion. Net profit increased by 13% year on year to RMB4.57 billion with EPS at RMB1.01. Operating results increased by 23% year on year, mainly due to expenditure associated with subcontracting of works, consumption of materials, rising employee causes. Operating margin a little bit narrowed to 25.4% from 27%. Total asset of the company further expanded to reach RMB74.6 billion. Total liabilities increased by 6.6 percent to RMB42.4 billion, mainly due to the successful completion of our US1 $1,000,000,000 bond issue in late August. Our net debt to equity ratio improved modestly 15% to 61%, Cash and cash equivalents increased significantly by 74%. That further improved our capital structure and put our financial risk under effective control. It is worth noting that in 2012, KOSO may enroll into exploring new markets, further improving its competitiveness. Business. The geographic breakdown of revenue on this slide shows that offshore China, our core market, is still the major source of our revenue. During the year, we closely watch our clients' exploration and production demand, efficiently allocating our equipment and resources and improve our quality of our service so as to reinforce our dominant and leading position and the market share in offshore China. Revenue from the domestic market reached RMB15. 1,000,000,000 in 2012, up 50% year on year. Meanwhile, we continue our relentless efforts in exploring international markets, while optimizing our foothold in international markets, leverage our safe and high quality operations, strengthen our management of operational risks. This underpinned a stable growth in our international market with revenue reaching RMB6.9 billion, up 33% year on year. Overseas revenue contributes to 31% of the company's total, up from 28% in 2011. During the year, KOSO developed continued KOSO actively expand its international markets. At present, the company has broadly complete its international market layout, comprising 4 core regions, namely Europe, Middle East and North America, Southeastern Asia and the Americas. The international expansion is not only about higher revenue and expansion of service offerings, but also to win customers' recognition and trust of more and more international oil companies by providing high quality and efficient services. KOSO demonstrate its outstanding capability when servicing clients contracts. For example, in our European market, Coso Pioneer received customers' recognition for its excellent operation quality and efficiencies. It also ranked number 1 in comprehensive performance assessment of over 30 rigs style used. The commencement of Haiyangxiao 981, the deepwater drilling rig marked the beginning of Chorus Deepwater business. Haiyangxiao 91 H2 for Xenon and Husky at operating depth up to 2,400 meters. Its outstanding performance has been recognized by customers. Other deepwater equipment and services of KOSO also achieved outstanding performances. Haiyangxia 708, a deepwater surveying vessel apart from commencing deepwater service, Also successfully complete a Christmas chip recovery and installation operation with a single vessel at a depth of up to 1500 meters, thereby establish a new model of oil and gas Christmas JX installation operation in offshore China, while creating value for our customers. On the other hand, Haiyangxiao 720, the seismic vessel, has broken many 3 d seismic collection records in China South Sea. We believe this the accumulation of experience in deepwater operations and mastering of deepwater equipment and technologies, our competitiveness in terms of deepwater services will gradually increase. QHSE is one of our most important missions. In 2012, our overall operation remains safe. We also continue to make progress in construction and improvement of our environmental protection system, while major risks were under effective control. Our OSAT score remain at low levels. In addition, the company has been promoting energy conservation with the mechanism regulating this area effectively implemented, resulting in effective control and improvement of relevant measurements. In 2025, CorSo continued to strengthen its investment in research as well as recruitment of talents. We also constantly improve our supporting infrastructure, fueling the sustainable development of the company. The successful rate of our research project is increasing. The number of patents grant is growing, while transforming transformation of scientific research is spinning off. We are granted once again a high technology enterprises status by the government, which is a bolster in promoting improvements in our technologies. COSO was rate A3 stable, A minus stable and A stable respectively by Moody's Stem and Poor and Fish in the second half of twenty twelve. Kozo, through a subsidiary, successfully completed a US1 $1,000,000,000 10 year bond issue at a common rate of 3.25%. The issue secured a source of low cost, long term funding that helps fuel our future development. Completion of the issue led our overall funding cost to around 2%. With outstanding performance in all respects, We received many awards and recognitions from the capital market. For example, KOSO has been included as a constituent stock in FTSE China A50 Index SSE, Corporate Governance Sector and Hanson China A Corporate Sustainability Benchmark Index. Now let's review performance of our segments 4 segments in 2012. First of all, let's have a look at their financial performance of the 4 segments during the year. The JV segment comprises the largest proportions of our revenue and operating profit at 51% 66%, respectively, followed by the contribution from the well service segment and the segment operating profit contribution remains stable. With increasing operation volume and larger capacities, revenues and profits from the 4 segments increased by 16% to 26% and 6% to 36% year on year respectively. Let's have a look of each segment performance in next few slides. Drilling, Despite fierce competition, Koso managed to achieve good performance through development of deepwater capacity capability and highly efficient allocation of resources. The full year segment revenue surpassed RMB10 1,000,000,000 level for the first half. The growth driver was the operation commencement of new deepwater equipment, including the ultra deepwater semi Haiyangxiao 91 and the deepwater semi Nanhai8, COSO Pioneer and COSO Innovator. This deepwater equipment not only increased our operation volume, but enhanced the average daily income of our rigs. We don't use the day rate here because we never disclose the day rates for individual rigs. Another growth driver is our effort to proactively maintain utilization rate of existing equipment at high levels, including Coso Seeker, Coso Competence and the 4 module rigs, which saw their working volume significantly increase from last year. Well Service segment. The working volume of this segment achieved a significant increase year on year. Both operational operation volumes and revenues for major business lines record growth. This segment has persistently been highly client demand oriented with significant applications of our R and D resource to increase the technology value add of the whole efforts. Kozo has also selectively expanded into unconventional areas and have made good progress in providing service for CBM and shared gas developments. Managed support transportation. By the end of 2020, the calendar year calendar utilization rate of our own fleet dropped to 91.7% and the number of operating days decreased 5.7% year on year due to the 4 vessels less. Despite the demand for balloon support transportation service in the offshore journey remains strong, We are to in reaction to the increased competition from domestic peers in offshore China, we gradually achieved differentiation through investments in construction of high spec utility vessels. Meanwhile, we had addressed our equipment shortage in serving loss back and conventional market by managing and operating 3rd party vessels. With these measures in place, KOSO managed to maintain its market share and achieve profit growth. Geophysical and survey. We operate at full capacity and achieved effective market expansion in 2012. The operation commencement of new and deepwater equipment enhance our capacities and efficiencies. 3 d seismic data collection and processing record significantly growth year on year. Besides, CorSo offer coordinated joint operations in adjacent areas to optimizing to optimize the operation efficiencies. This helps lower operating costs for clients and achieve win win situation. The deepwater survey vessel, Haiyangxiao 708 commenced operation in May further enhanced KOSO's deepwater surveying capability. Thanks to the increase in capacities and full capacity operation, Engineering Services record a revenue growth of 43.2% to RMB600 1,000,000. Now let me share with you our prospects for 2013. We will strive to achieve a year on year revenue growth of not less than 10% in 2013. The total operation expenses including asset impairment as well as significant costs are expected to increase. Operating profit margin will remain stable and the CapEx will be around RMB4 1,000,000,000 to RMB5 1,000,000,000. But if we can lock up new asset target and reach agreement, the number could be above the range. The above operation plan is based on KOSO's current operating condition and market environment. We will not constitute the company's positive forecast, actual promise of the Board, whether the company can achieve that the expected result or not in 2013 will mainly depend on the market and the economic situation. Please be alert that of the risks we decide on our investment. We never discussed the profit and revenue forecast. But to satisfy the new requirement by the Chinese security supervision requirement, we add the purpose here. We have been also disclosing annual the announcement also. Through the collaboration of the efforts as below, we are confident that we can meet these targets. 1st and foremost, we will continuously satisfy the growing needs for the China waters. Offshore China is CorSo's core market. We will stay abreast of the exploration and development needs of our clients to adjust our equipment and resources and to enhance our service quality to reinforce our leading position and market share in offshore China. We have a clear positioning and development guidelines for each business segments. We have different focuses between equipment and technology segments, while each business segment has its own focus. While ensuring the steady development of our domestic core market, CorSo will also continue to expand the scale of our international markets. In the past few years, Khoso has established an outstanding brand in match with our high quality service and unrelenting efforts when developing international business. Looking forward, Khoso will continue to actively identify suitable international business opportunities. With operation commencement of Coso Innovator and Coso Promoter, European market is expected to achieve substantial growth in 2013. The company will continue to increase its investment in deepwater and hot spec equipment in the next few years. As most items listed on this slide, we will commence construction meeting this year. KOSO will accelerate commissioning of equipment construction, continue to identify suitable equipment procurement targets, 1 chapter 3rd party resources when need. In this slide, next slide, please. Next slide, please. We can clearly see updates of capacity expansion in the 4 major segments from 2013 and beyond. Although part of the new equipment are expected to commence operation after or in or after 2015. The additional the addition of this capacity will contribute to our future business growth tremendously. Apart from the upcoming new capacities as shown in this slide, KOSO is considering to acquire other equipment to meet the demand of the market both domestically and overseas, which could further support the growth of 2014 or beyond. As for the drilling segment, which contributes the most to our revenue and profit, Over 80% of the drilling rigs have contract coverage until end of 2013, while 20 of the drilling rigs have received work being noticed and will sign contracts soon. Other segments also see steady growth in their business. In terms of the secured contracts of the 4 major sectors in 2013, 88% of our revenue is already logged in by contracts. Of which, over 60% will come from OptiChina. Which will provide a steady income stream for the company. Our clients include Pheno and Konark Bibs and Statoil. KOSO will continue to enhance capability of well services, including our efforts in output stabilization, enhancement in mature oil fields and increasing our standard of existing technologies. We will continue to expand our business in unconventional area apart from engaging in services related to exploration of share gas in 2013, CorSo will also increase our operation volume in CBM. Moreover, we will attempt to take part in exploration of oil sands on provision of our existing technologies. In summary, our future growth drivers are as follows: to meet the growing demand in the domestic market, to expand further into international markets, to boost our capacities, enhance our technologies, to grow our deepwater business and selectively expand our business in unconventional areas. We will strive to tackle the difficulties and achieve stable growth. Here comes to the end of today's presentation. We are now opening the floor for questions. Thank you. Thank you, Lizeng. We now open the floor for questions. You may feel free to ask in either Mandarin or English. First question please. This is a question from BOCI, Mr. Liu. The question is about the Norwegian tax implications. There is a reserve in notice of RMB190 1,000,000 as reserves for the tax implications. Can you please expand on that? Yes, indeed, I know you are concerned about this situation. The Norwegian tax authorities have given us a draft tax assessment for the income tax. In the annual report for 2012, the RMB190 1,000,000 that we have disclosed is significantly smaller than that disclosed earlier. There are 2 points I would and negotiations with the Norwegian Tax Authority and also is consistent with international GAAP. And this is at present with the present condition the best estimate that we can come out. In fact, through discussions and negotiations with the Norwegian Tax Authorities, I would say that we have counter consensus on the majority of the issues except for a minority of the issues outstanding. And this RMB190 1,000,000 actually includes both parts, the parts that we have already agreed on with the Norwegian authorities and the part that we have yet to confirm the results on. I hope I've answered your question. I would like to supplement that this is not the final results because this is a negotiated process. There may be certain changes yet. Because after all, both sides will have to come to an agreement and consensus. This figure is really the result of 2 things. First of all, the process and the result so far of the negotiation and our own internal analysis. This is a question on unconventionals. What was the revenue for last year? And for this year, what are the projections? In fact, we have just started this segment of our business, Unconventionals, so the numbers are really still small. Even though there will be If you really want to figure, it would be about 1 or just above 1 of the overall. That is the contribution to the overall revenue of the company about 1% to just over 1%. I have also noticed that the company's payout dividend payout ratio for this year has significantly increased. Is that a policy? Will it continue in the future? The recommended profit dividend payout ratio is 30% of our profit for this year as opposed to 20% last year and before. So this is an increase indeed. There are two reasons to this. 1, the CSRC has come up with a guideline for A share issuing companies in terms of their dividend payout ratio. One of which is the desired indication level of 30% of payout ratio for Asia Companies. The Board of Director has taken this into account and also we also take into account the very healthy cash flow that the company has. And therefore, we have recommended a 30% payout ratio. But this is not a commitment that we will adhere to this 30% in the future. The company will look at its cash flow, the profitability and also the development needs in order to determine the future payout ratio. Thank you. We have the following question from this one. Akhil, JPMorgan. It looks like your revenue growth for the drilling segment is faster than the operating profit growth. I'm aware part of it is because of the subcontract that you do. But are you also seeing margin pressure on the domestic operations or is it international operations? And if it is domestic operations while not able to pass on the cost to Sinonk? Is your questions asking, is it due to the subcontracting proportion so that the profit growth is lower than the revenue growth? Can you have the microphone first? Sorry. Are you seeing a margin drop on the drilling operations domestically or because I'm not able to work backwards and see where is the margin drop coming from. I'm aware there's a bit of subcontracting there, but I'm not able to work that out. Actually the margin drop for drilling is really because of the Norwegian situation last year. Both the launch and the commissioning of Innovator and Prospector have been delayed for 2 to 3 months. And of course there will be costs incurred in the delay. And in fact the 2 the both vessels had to be changed and modified according to the requirements of the oil company. So that was the reason why the margin dropped last year. That is a major issue. In fact, there were no subcontracting issues for drilling last year. Thank you. And for the domestic parts, the cost was relatively higher as you all know because 981 was leased from the parent company. Maybe we have the question from the back and then this gentleman. There are two questions from UBS, Mr. Li. First of all, I have heard from Mr. Li's presentation just now that there will be acquisition of secondhand vessels. But I thought in the previous presentations the company had mentioned that basically there is a policy of acquiring new vessels. Can you explain? There's another question which will follow. It is true that last year in this forum I have mentioned that we are not thinking about secondhand vessels acquisition as in the NH8 situation. However, in fact we have to look at a basket of things before we can make a decision on that. 1, the market and the vessels fleet, we cannot have, for example, the same age for the entire fleet of vessels. However, after that particular point I made last year, there were some misunderstandings in the market thinking that the company will no longer acquire new equipment, which is not true. And we have seen in the past period the market picking up and the economy also looking up. And we are as Mr. Li had pointed out just now looking into the acquisition of new equipment including new vessels. Concerning 981, it is in operation again. However, is it possible that there will be again maintenance works to be done on 981? 981 is indeed a normal operation right now. However, for such large scale equipment, there are statutory requirements maintenance and days, etcetera. I heard you saying that you said that there will be further maintenance. I'm not sure where you pick that up from. So I cannot really expand on that question of yours. Okay. Thank you. Question in this slide, gentlemen, please. Yes. Thank you. Neil Beveridge from Bernstein. Two questions. First of all, on the additional capacity that you're looking at either acquiring or potentially buying secondhand equipment for, Where is this demand coming from? Is this international demand or is it China demand? And if it's China, is it predominantly shallow water or is this new deepwater demand that you're seeing? Maybe shall we translate and answer the first one? Thank you. The demand actually comes from both international and domestic. For the international, it comes from the traditional business that is the business that we are already engaged in. And the other is from the domestic nearshore. And for the demand, it is mainly from conventional for basically for checkup, of 400 feet. And another part comes from deepwater demand. At about 1500 meters depth. Yes. My second question was the move into oil sands and you mentioned some exploration works around Oil Sands, some small development work. I mean this is new for the company. Do you think you will pursue to move into Oil Sands in an organic way? Or do you think you'll have to make acquisitions really to move into this new area for Kausal? Indeed this is a new area that movie the company is moving into. What we intend to do is to utilize the mature Chinese development technology to see how it can be applied into this new sector. We are at a testing stage. We are still discussing with our clients. We hope that in the first half we will be able to deploy this kind of technology into the sector. As for acquisitions, I cannot say at this point that there will be none in the future. Thank you. The gentleman at the back. Thank you very much for the presentation. Good results. How many people do you have on the ground in Canada right now? In Canada, Actually in Canada we have just registered our new company. We do not have a lot of staff on-site. Thank you. The other question I had has to do with or 2 more questions. Can you speak a little bit louder? Yes, sorry. Two other questions. One has to do with your deepwater rig. Other than Husky and Cenook, has it been contracted by independence for Deepwater South China Sea? Yes, indeed. Our rigs are engaged by Husky and Cenook. We are talking to others as well. Thank you. And then the final question has to do with your 4 jackups in Iran, which mature Q1 this year and Q2 this year. I was wondering if any of them have been re contracted and if so where are they headed? Thank you very much. In fact, the contract does not come to term for the 1st checkup until September of this year. We will be coming up with new contracts for the 4 jackups when all the terms are up. However, the situation is indeed complicated. The company will adopt a comprehensive analysis and we will be responsible and thorough in our deployment of the 4 rigs going checkups going forward. This is a question from Goldman. Very happy to note the profits the positive profits of the company. Last week's annual results have been rather depressing from the other companies. We note that the CapEx is increasing some 40% for the company, but the revenue is about 10% increase. Why is the company so conservative? Thank you for the encouragement. It is indeed true that the CapEx of Synok had increased but that would include the international part as well. As for Khoso our company there are increases in our revenue. Yes, indeed. We have mentioned no less than 10%, but of course the bigger the better. We would want to exceed that of course. One point of supplement, it is indeed true that when CNOOC increases investments, COSL would benefit or would be there would be raises. There will be this will be this will affect COSL as well. However, it is not a linear relationship. And also for the 10% figure, note that it is no less than 10%. It doesn't mean 10%. And in fact the company had never wanted to release that figure and it has never done that before. But because the company is an H and A share simultaneously listed company and according to Asia new requirements the company will have to disclose this and therefore the company has done so. But on the other hand, Mr. Liu also notes that the company would of course want to be transparent and the investors will have to know what they need to know. However, if it is as transparent as glass, would the securities market be as attractive? This is a question from HSBC concerning the cash flow. Note that the net debt to equity ratio stands about 60%. The company will also be making acquisitions of equipment going forward. Is there a target for the gearing ratio? Is it 60% will it come down? A couple of points here. First of all, the company has very healthy cash on hand situation and the cash from operating from operation is also healthy. As for CapEx for acquisition of equipment, for the short term, the company has sufficient cash for that purpose. As for the gearing ratio, we would want to lower the ratio. But given the present cash flow of the company and also the market situation, even it would be acceptable even if we should raise the gearing ratio some. Now comes to the end of today's presentation. Thanks again for coming.