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 Feilong, Executive Vice President and CFO. Mr. Yang Haijiang, Company Secretary. I would like to pass the time to Mr. Li Feilong to walk us through the result and business highlight. Li Feilong, please.
Good morning, ladies and gentlemen. 2012 is a challenging but encouraging year. Despite a complicated global economic environment and the slowdown in domestic economy in China, we have made good results in all aspects of our business. Here, I would like to share with you COSL's annual result for 2012. Today's presentation will be divided into three parts: Results Overview, followed by a review of our four major segments, and finally, our company's prospects. Let me look at our Results Overview. Let's look at our financial highlights for 2012. With effective market expansion and large-scale equipment operating at full capacity, COSL achieved significant growth, lifting our revenue to a new record level. Revenue increased by 20% year-on-year to CNY 22.1 billion. Net profit increased by 13% year-on-year to CNY 4.57 billion, with EPS at CNY 1.01.
Operating results increased by 23% year-on-year, mainly due to expenditure associated with subcontracting of works, consumption of materials, rising employee costs. Operating margin a little bit narrow to 25.4% from 27%. Total asset of the company further expanded to reach CNY 74.6 billion. Total liabilities increased by 6.6% to CNY 42.4 billion, mainly due to the successful completion of our $1 billion bond issue in late August. Our net debt to equity ratio improved modestly with 15% fall to 61%. Cash and cash equivalents increased significantly by 74%, thus further improved our capital structure and put our financial risk under effective control. It is worth noting that in 2012, COSL made inroads into exploring new markets, further improving its competitiveness. 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 watched our clients' exploration and production demand, efficiently allocating our equipment and resources, improved our quality of service so as to reinforce our dominant and leading position and the market share in offshore China. Revenue from the domestic market reached CNY 15.2 billion in 2012, up 50% year-on-year. 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 underpin the stable growth in our international market, with revenue reaching CNY 6.9 billion, up 33% year-on-year. Overseas revenue contributes to 31% of the company's total, up from 28% in 2011. During the year, COSL actively expanded its international markets.
At present, the company has broadly completed its international market layout comprising four core regions, namely Europe, Middle East and North America, Southeast 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. COSL demonstrates its outstanding capability when servicing clients' contracts. For example, in our European market, COSLPioneer received customers' recognition for its excellent operation quality and efficiencies. It also ranked number one in comprehensive performance assessment of over 30 rigs Shell used. The commencement of Haiyang Shiyou 981, the deepwater drilling rig, marked the beginning of COSL's deepwater business. Haiyang Shiyou 981 had drilled for CNOOC and Husky at operating depths up to 2,400 meters. Its outstanding performance has been recognized by customers.
Other deepwater equipment and services of COSL also achieved outstanding performances. Haiyang Shiyou 708, a deepwater surveying vessel, apart from commencing deepwater service, also successfully completed a Christmas tree recovery and installation operation with a single vessel at a depth of up to 1,500 meters, thereby established a new model of oil and gas Christmas tree installation operation in offshore China while creating value for our customers. On the other hand, Haiyang Shiyou 720, the seismic vessel, has broken many 3D seismic collection records in China's South China Sea. We believe with 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 remained safe.
We also continued to make progress in construction and improvement of our environmental protection system while major risks were under effective control. Our OSHA score remained 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 2012, COSL continued to strengthen its investment in research as well as recruitment of talents. We also constantly improved our supporting infrastructure, fueling the sustainable development of the company. The success rate of a research project is increasing. The number of patents granted is growing while transformation of scientific research is speeding up. We are granted, once again, a high technology enterprise status by the government, which is a booster in promoting improvements in our technologies.
COSL was rated A3 stable, A- stable, and A stable respectively by Moody's, S&P and Fitch in the second half of 2012. COSL, through a subsidiary, successfully complete a USD 1 billion 10-year bond issue at a coupon rate of 3.25%. The issue secure a source of low-cost, long-term funding that helps fuel our future development. Completion of the issue lead our overall funding cost to around 2%. With outstanding performance in all aspects, we receive many awards and recognitions from the capital market. For example, COSL has been included as a constituent stock in FTSE China A50 Index, SSE Corporate Governance Sector, and Hang Seng China A Corporate Sustainability Benchmark Index. Now, let's review performance of our four segments in 2012. First of all, let's have a look at the financial performance of the four segments during the year.
The drilling segment comprises the largest proportions of our revenue and operating profit at 51% and 66%, respectively, followed by the contribution from the well service segment. The segment operating profit contribution remains stable. With increasing operation volume and larger capacities, revenues and profits from the four segments increased by 16%-26% and 6%-36% year-on-year, respectively. Let's have a look of each segment performance in next few slides. Drilling. Despite fierce competition, COSL managed to achieve good performance through development of deepwater capacity, capability, and highly efficient allocation of resources. The full year segment revenue surpassed CNY 10 billion level for the first time. The growth driver was the operation commencement of new deepwater equipment, including the ultra-deepwater semi, Hai Yang Shi You 981, and the deepwater semi, Nan Hai 8, COSLPioneer, and COSL Innovator.
These deepwater equipment not only increase our operation volume, but enhance 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 COSL Seeker, COSL Competent, and the four 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 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&D resource to increase the technology value add of the whole efforts. COSL has also selectively expanded into unconventional resource areas and have made good progress in providing service for CBM and shale gas developments. Marine support transportation.
By the end of 2012, the 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 four vessels less. Despite the demand for marine support transportation service in the offshore China remained strong. We are, 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 low-spec and conventional markets by managing and operating third-party vessels. With these measures in place, COSL managed to maintain its market share and achieve profit growth. Geophysical and survey. We operate at full capacity and achieve effective market expansion in 2012. The operation commencement of new and deepwater equipment enhanced our capacities and efficiencies. 3D seismic data collection and processing record significant growth year-on-year.
Besides, COSL offer coordinate joint operations in adjacent areas to optimize the operation efficiencies. This helps lower operating costs for clients and achieve win-win situation. The deepwater survey vessel, Hai Yang Shi You 708, commenced operation in May, further enhanced COSL's deepwater surveying capability. Thanks to the increase in capacities and full capacity operation, engineering survey services record a revenue growth of 43.2% to CNY over 600 million. 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. The CapEx will be around CNY 4 billion-CNY 5 billion. If we can lock up new asset package and reach the agreement, the number could be above the range.
The above operation plan is based on COSL's current operating condition and market environment. It will not constitute the company's profit forecast , actual promise of the board, whether the company can achieve the expected result or not in 2013 will mainly depending on the market and the economic situation. Please be alert of the risk we decide on our investment. We never disclose the profit and revenue forecast. Just to satisfy the new requirement by the China Securities Regulatory Commission requirement, we add the paragraph here. Through the collaboration of the efforts as below, we are confident that we can meet these targets. First and foremost, we will continuously satisfy the growing needs for the China waters. Offshore China is COSL'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 developmental guidelines for each business segment. 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 oil market, COSL will also continue to expand the scale of our international markets. In the past few years, COSL has established an outstanding brand image with our high-quality service and unrelenting efforts when developing international business. Looking forward, COSL will continue to actively identify suitable international business opportunities. With operation commencement of COSL Innovator and COSLProspector, European market is expected to achieve substantial growth in 2013.
The company will continue to increase its investment in deepwater and harsh-environment equipment in the next few years. As most items listed on this slide, we will commence construction within this year. COSL will accelerate commissioning of equipment construction, continue to identify suitable equipment procurement targets, while tap third-party resources when needed. As shown in this slide. Next slide, please. We can clearly see updates of capacity expansion in the four major segments from 2013 and beyond. Although part of the new equipment are expected to commence operation in or after 2015, the addition of this capacity will contribute to our future business growth tremendously. Apart from the upcoming new capacities as shown in this slide, COSL is considering to acquire other equipment to meet the demand of the market, both domestic 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 win notice and will sign contracts soon. Other segments also see steady growth in their business. In terms of the secure contracts of the four major sectors in 2013, 88% of our revenue is already locked in by contracts, of which over 60% will come from offshore China, which will provide a steady income stream for the company. Our clients include CNOOC and ConocoPhillips and Statoil. COSL 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 shale gas in 2013, COSL 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, Li [Non-English content]. We now open the floor for questions. You may feel free to ask in either Mandarin or English. First question, please.
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This is a question from BOCI, Mr. Liu. The question is about the Norwegian tax implications. There is a reserve you noticed of CNY 190 million as reserves for the tax implications. Can you please expand on that?
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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.
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In the annual report for 2012, the CNY 190 million that we have disclosed is significantly smaller than that disclosed earlier.
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There are two points I would like to make in this regard. First of all, the CNY 190 million disclosure is worked out according to the discussions and negotiations with the Norwegian tax authorities and also is consistent with international GAAP.
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This is, with the present condition, the best estimate that we can come out.
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In fact, through discussions and negotiations with the Norwegian tax authorities, I would say that we have come to consensus on the majority of the issues except for a minority of the issues outstanding.
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This CNY 190 million 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.
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I hope I've answered your question.
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I would like to supplement that this is not the final result because this is a negotiative process. There may be certain changes yet.
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After all, both sides will have to come to an agreement and consensus.
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This figure is really the result of two things. First of all, the process and the results so far of the negotiation and our own internal analysis.
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Next question.
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This is a question on unconventionals. What was the revenue for last year and for this year? What are the projections?
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In fact, we have just started this segment of our business, unconventionals, so the numbers are really still small.
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Even though there will be growth and probably some significant growth in this segment. However, overall speaking, compared to the other segments, it is still a smaller number.
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If you really want a figure, it would be about one or just above one of the overall.
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That is the contribution to the overall revenue of the company, about just over 1%. [Foreign language] I have also noticed that the company's dividend payout ratio for this year has significantly increased. Is that a policy? Will it continue in the future?
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The recommended dividend payout ratio is 30% of our profit for this year, as opposed to 20% last year and before. This is an increase indeed. [Foreign language] There are two reasons to this.
One, the CSRC has come up with a guideline for A-share issuing companies in terms of their dividend payout ratio. [Foreign language] One of which is the desired indication level of 30% of payout ratio for A-share companies. [Foreign language] The board of director has taken this into account and we also take into account the very healthy cash flow that the company has. [Foreign language] Therefore we have recommended a 30% payout ratio. [Foreign language] This is not a commitment that we will adhere to this 30% in the future. [Foreign language] 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. [Foreign language] May we have the following question? This one.
Hi. Akhil, JPMorgan. 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, are you also seeing margin pressure on the domestic operations, or is it international operations? If it is domestic operations, why are you not able to pass on the cost to CNOOC?
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Is your question asking, is it due to the subcontracting proportion so that the profit growth is lower than the revenue growth?
My question is
Can you have the microphone first?
Sorry. Are you seeing a margin drop on the drilling operations domestically? 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.
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Actually, the margin drop for drilling is really because of the Norwegian situation last year.
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Both the commissioning of Innovator and Prospector have been delayed for two to three months.
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Of course, there would be costs incurred in the delay, and in fact, both vessels had to be changed and modified according to the requirements of the oil company. That was the reason why the margin dropped last year.
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That is the major reason.
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In fact, there were no subcontracting issues for drilling last year.
Thank you.
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For the domestic part, the cost was relatively higher, as you all know, because 981 is leased from the parent company.
Maybe we have the question from the back and this gentleman. [Foreign language]
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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 second-hand vessels. I thought in the previous presentations, the company had mentioned that basically there is a policy of acquiring new vessels. Can you explain? There is another question which will follow.
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It is true that last year in this forum, I have mentioned that we are not thinking about second-hand 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. One, the market and the vessels fleet. We cannot have, for example, the same age for the entire fleet of vessels.
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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. We have seen in the past period the market picking up and the economy also looking up. We are, as Mr. Li had pointed out just now, looking into the acquisition of new equipment, including new vessels.
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Concerning 981, it is an operation again. Is it possible that there will be again maintenance works to be done on 981?
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981 is indeed in normal operation right now. For such large-scale equipment, there are statutory requirements as to the maintenance and days, etc.
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I heard you saying that you said that there will be further maintenance. I'm not sure where you picked that up from.
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I cannot really expand on that question of yours.
OK, thank you. Question this side, this gentleman, please.
Yes. Thank you. Neil Beveridge from Bernstein. Two questions. First of all, on the additional capacity that you are 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? If it is China, is it predominantly shallow water, or is this new deep water demand that you are seeing?
Maybe shall we translate and answer the first one?
Yeah.
Thank you.
Thank you.
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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.
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The other is from the domestic near shore.
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For the demand, it is mainly from conventional, basically for jack-up.
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400 feet.
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Another part comes from deep water demand.
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At about 1,500 meters depth.
Yeah. My second question was the move into oil sands. You mentioned some exploration works around oil sands, some small development work. This is new for the company. Do you think you will pursue the move into oil sands in an organic way, or do you think you will have to make acquisitions really to move into this new area for COSL?
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Indeed, this is a new area 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.
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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.
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As for acquisitions, I cannot say at this point that there will be none in the future. Thank you. [Foreign language] 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?
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[Foreign language] In Canada.
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Actually, in Canada, we have just registered our new company. We do not have a lot of staff on site.
Thank you. Two more questions.
Can you speak a little bit louder?
Yeah. Sorry. Two other questions. One has to do with your deep water rig. Other than Husky and CNOOC, has it been contracted by independents for deep water South China Sea?
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Yes, indeed. Our rigs are engaged by Husky and CNOOC. We are talking to others as well.
Thank you. The final question has to do with your four jack-ups in Iran, which mature first quarter of this year and second quarter this year. I was wondering if any of them have been recontracted, and if so, where are they headed? Thank you very much.
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In fact, the contract does not come to term for the first jack-up until September of this year.
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We will be coming up with new contracts for the four jack-ups 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 four jack-ups going forward.
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This is a question from Goldman. Very happy to note 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?
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Thank you for the encouragement.
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It is indeed true that the CapEx of CNOOC had increased, that would include the international part as well. As for COSL, our company, there are increases in our revenue.
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Yes, indeed, we have mentioned no less than 10%, of course the bigger, the better. We would want to exceed that, of course.
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One point to supplement. It is indeed true that when CNOOC increases investments, COSL would benefit, or there would be raises. This will affect COSL as well. It is not a linear relationship. Also for the 10% figure, note that it is no less than 10%, it doesn't mean 10%. In fact, the company had never wanted to release that figure, it has never done that before. Because the company is an H and A share simultaneously listed company, according to A share new requirements, the company will have to disclose this, therefore the company has done so. On the other hand, Mr. Liu also notes that the company would of course want to be transparent, the investors will have to know what they need to know. If it is as transparent as glass, would the securities market be as attractive?
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Last question.
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This is a question from HSBC concerning the cash flow. Notes 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?
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A couple of points here. First of all, the company has very healthy cash on hand situation, and the cash from operation is also healthy.
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As for CapEx for acquisition of equipment for the short term, the company has sufficient cash for that purpose.
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As for the gearing ratio, we would want to lower the ratio.
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Given the present cash flow of the company and also the market situation, it would be acceptable even if we should raise the gearing ratio some.
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Now comes to the end of today's presentation. Thanks again for coming.
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