Earnings Call: H1 2012

Aug 22, 2012

Friends of the investment community, good morning. Welcome to the presentation on 2012 Interim Results of China Oilfield Services Jian, Yang Hai Jiang, Company Secretary. Now I would like to pass the time to Mr. Li to walk you through the company's results. Mr. Li, please. Thank you. Ladies and gentlemen, good morning. Thank you for your coming. And now it is raining outside. My presentation will be today will be divided into 2 parts. Firstly, I will share with you our results performance in the first half of twenty twelve. And then we move on to prospects of KOSO in future. During the first half of 2012, KOSO achieved satisfactory results by capturing market opportunities, effectively integrating external and internal resources, optimizing our equipment structure and striving to operate new equipment at full capacity. We achieved steady and healthy record in our QHSE score, increased certainty of safe production and made solid achievements in technology development. The 4 business segments achieved stable operations. The company's integrated competitors has been strength further. Now let me walk through our results in the first half of twenty twelve. Benefiting from full capacity utilization in both domestic and overseas operations as well as commencement of operations of new equipment. The group's revenue for the 6 month period ended June 30 reached RMB10 1,000,000,000 up 23% year on year. Meanwhile, the operating profit margin slightly declined to 29.5% due to cost pressure. Operating profit reached RMB2.95 billion, up 13.1 percent year on year. Profit attributable to shareholders surged 15.8% year on year to RMB RMB2.4 billion. Basic earnings per share were RMB0.53. At the end of June 2012, our total assets were further enhanced to RMB66 1,000,000,000. Shareholders' equity was up 5.7% year on year to RMB30 1,000,000,000. Cost of balance of cash and cash equivalents surged by 33% and our capital structure will further improve. Khoso's financial 54.5 percent and net debt to equity ratio down to 68.5%. Khoso's competitiveness continue to be enhanced due to the effectiveness market expansion. Khoso proactively stayed abreast of its clients' needs in exploration and deploy offshore China, so as to further consolidate our leading position and market share in China waters. Our deepwater business commenced operation smoothly. Revenue from the domestic market reached RMB6.85 billion in deepwater business. In international markets, our drilling, well service as well as geophysical deployed high spec equipment in international markets and won a number of drilling contracts. Our international market revenue increased by 40% year on year to RMB3.16 contributing to 32% of total revenue. With our expansion in the the markets, while we continue to deliver high quality service from the 4 module rigs in Gulf of Mexico. Our jackup drilling rigs caused our confidence and Haiyangxiao 936 won long term operation contracts in the same area. We expand further into Indonesia with diversified client base, RCI jackup trading rig, KOSO Board won contract to provide service for BP. In addition to heavy equipment, our our well service also capacity in self developed technologies. The well service provided to Nissan oil fuel in Iraq has start operation. In geophysical segment, we proactively expand into international markets to boost the utilization rate of large scale equipment a batch of deepwater equipment put into use, Koso's deepwater business commenced operations 12. Thanks to the adequate preparation done early. All deepwater projects have been well executed during the during this period. CorSo has capabilities in operating and managing deepwater equipment such as Hangzhou 981, Hangzhou 720 and 708. Currently, Haiyangxiao 91 is drilling the 3rd well for Sino and its operations efficiency and performance as measured by numbers of indicators have been well recognized by its customers. Our drilling capability was enhanced with operational depth increase from 500 meters to 1500 meters. In addition, Pioneer was named efficiency among the 29 drilling rigs operating at in North Sea waters. QHSE is one of the most important task for KOSO. During the period, our overall performance on safe production remained stable with all size score at a relatively lower level. We further enhanced the quality of QHAC system by improving our response to emergencies and promoting environment protection and emission reduction. Meanwhile, with the expansion of our international business, Kozo as an international citizen public welfare activities. We further strengthened our investment in science and technology research to enhance our R and D capability and we have achieved satisfactory results. By end June, we had a number of 409 patents with a 10% increase in numbers of authorized patents in use from end December last year. As a high technology enterprises, our research funding is based by fiscal budget population from government, CNO and our own capital. Our research is to tackle the difficulties that strict operations meet demands of our important clients, develop technologies associated with well-service and enhance our our capabilities in self development technologies. I show here high precision seismic exploration technology, logging equipment and the rapid logging equipment are the examples of a successful industrialization of our self developed technologies. After reviewing the overall business situation for the first half of twenty 12, let's move on the equipment portfolio by business segments. As an integrated oilfield service providers, the equipment capability in our core segments are overachieved growth during the first half, especially in the drilling and geophysical segments. For the drilling segment, we add 2 semisubmit and the offshore commencement of operation of Haiyangxiao 981, which is operated and managed by Khoso. For the fiscal segment, we add 1 deep water survey vessel, Haiyangxiao 708 and 10BC team. Now let's take a detailed look into performance of the 4 segments. The drilling segment was still the biggest driver among the 4 segments, with revenue and operating profit contributions of 53% 68%, respectively. Well Service ranked 2nd in terms of revenue contribution and its contribution to profit maintained the same level 11%. As operation volume and capability continue to increase, revenue derived from the 4 segments, revenue grew 16% to 25% on average. However, due to the rising fixed costs and additional chapter costs, All segments recorded slower growth in operating profits, except for the drilling segment, which saw operating profit growth faster than revenue. In the next few slides, we will look into the details of each segment. For the Drilling segment, high spec jackups and semi submittals recall outstanding performance in terms of contract wins and further widened the gap from traditional low spec drilling rigs. Under these circumstances, on one hand, CorSo continued to strengthen its leading position in offshore China. On the other hand, we further improved its influence and competitiveness. The main driver of our rapid growth in revenue and profits for the Drilling segment is high utilization rate of and new equipment that add more operation days at a higher day submersible's Coso Pioneer and ultra deepwatersemi submittable HyoCR0991. Utilization rates increased for COSO Seeker, COSO Competence and 4 module rigs in our in equipment equipment portfolio. Calendar day utilization rate rose 2.2 percentage points, while available day utilization rate was close to 100%. With higher contribution from hard spec and deep water drilling rigs, the average daily rate of our drilling fleet increased 13.8 percent to US140 $1,000 per day. For Well Service segment, for the first half of 2012, the segment record a higher growth from the same period last year. Currently, the company developed new markets and business to provide service with higher value adds and enter into deepwater and non conventional markets. As a result, this segment achieved a 20 4.4% increase in revenue from the same period last year. On the other hand, to fulfill demands in the market, certain projects were outsourced thus lowered the profit margins of the segment. Marine Support and Transportation. Due to vessels being written off, upgrading upgrade and modify, there were 5 fewer vessels in our fleet, lowering the calendar day utilization rate to 91%. The number of operation days achieved by 8.3%. During the first half, although we faced strong market demand in offshore China, competition within the industry was further intensified. Under such a situation, we differentiate ourselves by in and commissioning construction of high spec and high horsepower utility vessels. As for the lower spec and the more conventional equipment charter more vessels from the 3rd parties to maintain our market share. As the total number of vessels Kosar managed and operates increased, revenue for this segment achieved growth, while due to decline in numbers of self owned vessels and increases in business performed by segment. New and high spec equipment significantly improved capacity and operation efficiency. Our total number of streamers reached 38, which greatly increased our capability and efficiency in geophysical operation. Significant growth was achieved in 3 d data collection and processing volume. Apart from increase in capacities, we apply strong region collection model for the first time, which enhance efficiencies and lower operating costs for our customers achieve a win win scenario. Earth's demand for geophysical service continue to increase, we are currently under equipped in order to maintain our leading position in the offshore market in China and secure our existing in some business in this segment. At the same time, cost for the raw materials, maintenance and the staff, all record increase with lower operating profit CorSo. Due to the uncertainties in the macroeconomic, most 3rd party organizations forecast that the crude oil prices to remain volatile situations in the short term. EIA forecast the global demand for oil will increase slightly and will achieve an equilibrium in demand and supply by 2013. Based on the figures from the contribution from deepwater and non conventional resources will continue. From the figures showing global capital expenditure, we can see that China and Americas shows the strongest capital expenditure in global oil and gas exploration and production. Oil sands. From the figures, we can oil sands. From the figures, we can see that Russia, Brazil, Australia, Europe and West Africa African show strong efforts in promoting global oil and gas exploration production. On the other hand, deepwater and non conventional business contribution take up almost half of the world's capital expenditures in this sector. Against the backdrop of double digit growth in global oil and gas CapEx, the global drilling chart here show that the day rate and utilization rate of global jackups and semi in the next 2 years. Generally, the number of jackups with contract coverage as well as the utilization rate have bottomed out from the lowest reach for the lowest reach in 20 9. The utilization rate of high spectra cup has been rebound to 90% or above and its day rate has differentiated itself from those low spec periods. Meanwhile, with the important discoveries in Brazil, Gulf of Mexico, Western and Eastern Africa and North Sea, the global demand for semis is experiencing shortage. As the utilization rate remains at a high level, it is expected that the day rates will remain high. Our CapEx for 2012 is expected to be above RMB4 1,000,000,000. In following years, our CapEx is mainly used to construct and acquire high spec and deepwater related equipment. We are aiming to achieve a balance of investments, which driven by market demand. According to CorSo's financial position at the moment, our cash flow is able to support daily operation as well as our capital expenditure even our active financing. In recent years, Coso has been continually optimizing its equipment structure, which saw gradually increases size of the equipment portfolio with significant boost in performance, structure and efficiency. Looking ahead, we will continue our effort in optimizing equipment to enhance our competitiveness for stable and stable growth. For the newly delivery and upcoming equipment, we have already confirmed their contracts. The above tables shows our contract status for beyond. At the same time, following the operation commencement of high spec semi submersibles, we expect day rates to increase further. Deepwater exploration is the major development trend for offshore oilfields and will also be a key development areas for us to stay in the 12 5 year plan. Khoso will work along with CNO's deepwater strategy in South Chardai Sea, strengthening ultimately boosting Koso's comprehensive strength in deepwater exploration and production. With increasing demand from oil companies in South China Sea, Khoso is optimistic with subsequent operations operational arrangements of Haiyangxiao 981 and other deepwater equipment for coming 2 years. Apart from deepwaters in South China Sea, with operation commencement of KOSO Innovator in North Sea Waters, we are going to expand our business scale in this region, creating ergonomics of scale to enhance our overall profitability. Development of well services will be a key driver for KOSO. With clear positioning and effective business development, we will enlarge our market share in well service segment. In order to boost our market share, CorSo is deploying technology and equipment in a bid to address needs from the customers in low permeability oilfields in China East Sea. We also pay close attention to related service in the new area. In addition to the expansion of existing technology, we will continue our efforts in research and acquisition of in house technologies, such as critical technologies for fracturing of CBM wells. All in all, 2012 will be a year full of challenges and opportunities for KOSO. We will strive to overcome challenges ahead of us in achieving stable growth. With that, here comes to the end of my today's Now we have the question and answer session. So we have the first question from the gentleman in the middle. Good morning, everyone. It's Scott Darling here from Barclays. Two relatively quick questions. What's the status on your dollar bond issue? Have you got the credit rating? And are you still targeting Q4? And if Cenu does complete its acquisition of Nexen, how will that really change your business in the medium to long term? Thank you. The second question is related to SINA? Can you repeat your second question again? If SINA completes its acquisition of Nexon, how potentially could that change your business? Or where are you positioned in these areas? The company has already appointed credit company to do the rating, and it is expected that the result will be available soon. As for the second question, the acquisition is now in progress. If it goes ahead, if it's completed, it is a positive thing for the company. It is important as well and it will expand the overseas operations of CorSo. Next question? Maybe we come. The day rates that you have mentioned for 981 is different from what we have. We have not announced about the date rate yet and how it compares to the market. I'd like to know more about the acquisition. If the Nixon acquisition goes ahead and is completed, well, we have to add bearing in mind that Nixon operates in the Mexican Bay and North Sea and it's basically deepwater operations. And given our contract with Statoil with a tying up of our vessels and our capabilities, will we have to add capabilities The acquisition is in progress as I have mentioned. But if it is to be completed, it is a positive for the company. First of all, it presents more opportunities for oilfield opportunities for oilfield servicing. And if further it is completed, we will be looking at our equipment capacity and we'll also be looking at that in the backdrop of demand from the market and we will consider further any deployment. But for now note in the past couple of years deep sea equipment we have done a lot of work in that regard. The 981 South Sea exploration and has proven our DTC capabilities and we have accumulated the experience and this will be good that is the experience and the capabilities will put us in very good stead for development in the future and deep sea work. Kevin Lian, HSBC. Shall I ask the first question? This is Kevin from HSBC. About the Norwegian tax dispute, when do you expect the final resolution of that dispute to happen? And what would be the tax implications in the base case situation? Discussions. But as of now, there is no official communicate as to what the tax implications will be in terms of amount and timing. For tax disputes, usually it is it takes a very long time and it's difficult to estimate at this point as to how long it will take. Option period. This is about the This is about the Iranian operation. There are 4 jackups and in operation in Iran. And in the next 6 months, they will go into the contract operation period will be up. So what is the plan for the future? Will they stay in Iran? Or how would that impact the day rates going forward? Yes, you are correct in pointing out that there are 4 checkups in the Iranian area. However, the timing is a little bit different. From what you have described, there will be a 9 month elective period before the contract is actually up. And when the contract has come to a conclusion, we will be looking at other markets and it's difficult to say at this point as to how that would impact our day rate as we have not returned in the market yet. Thank you. Next question, please. I'd like to know, proceeds? Yes. So you optimize our portfolio of equipment, especially in deep sea operations, drills, vessels, etcetera. There is no plans at this point for any acquisitions. Let us explain 1 by 1. I'm Lee from UBS. Concerning 981, will you be acquiring from the parent or will you be leasing? What would be the timing for if there is to be an acquisition? And would that entail an issuance in the Asia market? 981 is the parent's investment. There are no plans from our company to acquire it at this point. If I may supplement, in fact, the leasing arrangement is very beneficial to our company. So at this point, it is meaningless to acquire 981. From reports I note that it is reported that our company will acquire some second hand selling results for the latter part of this year. Do you have anything to say? Yes, indeed we are looking at opportunities of acquiring secondhand semis and further equipment in the market, especially for near shore operations. Cost and quality as well. Okay. So, looking at the cost and quality as well. I I would like to ask a question about Marine Support and Geophysical. The revenue I note have gone up, but the EBIT came down 24% and 19%, respectively. Why would that The main reason for MS and T is because of the difference between our self owned and leased vessels. We are retiring some vessels according to the national requirement of number of years of usage. And secondly, we're restructuring some other vessels. Leasing for vessels is very different. That accounts for the MS and T EBITDA. As for the geophysical part, the same reason for MS and T applies. And further to that, there is the fuel cost. It has risen significantly compared with last year. And also there were some special incidents out of the operation of the oilfields lowering the efficiency of operation. And further, staff expenses, which is an issue open and facing faced by all has also risen in the past year. Thank you. Maybe we take the last three questions from the back. The gentleman first, the gentleman in the net result first. BOCI, concerning 81 981, can you disclose the first half day rate and the margin? Well, it's premature to disclose 981 situations. But if you look at other drillers of our company and compare the rates that of the market, you'll be able to get to feel. For 981, basically it follows the principles we have for our major clients.