China Oilfield Services Limited (2883) Earnings Call Transcript & Summary

[Interpreted] Investors and analysts, good morning. Welcome to our annual results presentation of COSL. I am the Board Secretary, Wu Yanyan. We're conducting the meeting today online, and some of you are joining us through the telephone line. So thank you very much for your coming. First of all, let me introduce our management to you first. Today, with us are Mr. Qi Meisheng, Chairman of Board and the CEO; Mr. Shunqiang Zhao; Executive Director and President; and Mr. Zheng Yonggang, our CFO. So while we grew our business, we have received great amount of attention and the support from all of you, and we have been setting new communications with our shareholders and investors as well as showing our result [ capital ] with our customers, shareholders and employees to realize high-quality of growth in COSL. The flow of the results presentation will be next stage. Mr. Zheng Yonggang, our CFO, will walk you through our business performance. After that, we will open floor for Q&A. We have -- already have some investors that have joined us online. So we are going to take questions from the telephone line first. [Operator Instructions] Now the floor is yours, Mr. Zheng.

Good morning, ladies and gentlemen. Thanks for attending COSL 2020 Annual Results Press Conference. Please take our notes, our disclaimer. Today's presentation will be divided into 2 parts: First is the 2020 results overview. In 2020, under the impact of COVID-19 dynamics and lower oil price, the global investments in oil and gas industry fell sharply. Multiple upstream exploration and development project were suspended, postponed or canceled. The oilfield service market was impacted and challenged seriously. Facing challenge, COSL insisted to implement the strategy of technological and international development, actively coordinates the pandemic prevention control, specifies the implementation plan of improving efficiency with higher quality and lower cost and speed up R&D and conversion into core technology. In 2020, under severe industry environment and the service price pressure, COSL's revenue was RMB 28.9 billion, and profit for the year was RMB 2.7 billion, which achieved an increase of RMB 190 million year-on-year. Next, looking at specific performance of our 4 major segments. For Drilling service. So overall Drilling volume declined because investments in upstream exploration and development decreased globally. For Well Service, revenue had declined, and gross profit margin had increased year-on-year, appearing advantage in competition. For Marine Support service, the operation days of self-owned vessels remained stable. Operation capacity and the safety performance improved steadily. The business volume of Geophysical Acquisition and Survey declined due to the impact of pandemic and low oil price. Facing the challenge of insufficient demand and oversupply in the equipment segment, COSL track this development trend of industry closing, and chose to achieve high-quality development through continuously enhancing management and strengthening cost control. The equipment utilization rate of just fiscal acquisition survey, drilling and marine support of the company were higher than our peer companies. In 2020, the company continued to perform well in cost control of a target of reducing cost and increasing efficiency. The total variable cost was reduced by RMB 2.1 billion to reduce material consumption, repairing, subcontracting as well as leasing costs and others. For market exploration, the company made achievement in both domestic and overseas market, signed 70 new overseas contracts. COSL was also awarded the Best Contractor of the year 2020 by Pertamina due to the safe and efficient service. COSL CONFIDENCE received praise from the PEMEX, and the COSL HUNTER received praise from the customer for its high-quality and efficient operation. For overseas market, the COSL made full efforts to promote the construction of our 6 main area and optimized layouts of the global equipment to improve profitability of 2020. The company made a significant achievement in Asia Pacific, Middle East, America and other regions. COSL adheres to strategy of technological development, continuously optimizing system, promoting research on the key technology and speeding up industrialization of independent technology to help to increase reserve on the production of oil and gas. COSL insisted on the core position of innovation and improved capability of ensuring energy security. As of 2020, the company had 805 staff of technical equipment, a net increase of 211 staff compared to the beginning of 13th Five-Year Plan. So independently, we researched and are developing D&W equipment increased from 0 to 66 sets. COSL own a large number of key technologies and equipment, which ensures the efficient implementation of Seven Years Action Plan. In December 2020, COSL completed the first offshore application with a self-developed, high-speed pulser -- pulser well drilling, filling the gap of the application of high-speed pulser technology China. COSL became the third company owning this technology in the world. COSL always adhere to the principle of safety first and carry out in this investigation to eliminate hidden dangers and unimagined emergency. So annual OSHA index reached 0.065. The outstanding performance in quality and safety management was a crucial foundation to assure the internationalization of COSL. In addition, the company attached importance to the energy conservation and the environment protection, actively participate in public welfare and organize activities of safety and culture with customers. Here are the honors of company obtained in capital market in 2020. The company won various awards such as excellent management of corporate, most valuable investment award and the Top 100 Chinese enterprise award of 2020. Receiving honors under recognition from the capital market, the company has secured a continuous improvement for its brand reputation. In the next part, I would like to share with you the outlook of 2021. Accord to the latest IHS report, the annual average price of Brent crude oil will be $57 per barrel in 2021, and average oil price will be around $60 per barrel in 2022. The gradual recovery of oil price is conducive to the recovery of oil and gas companies' capital investment. The total CapEx of global upstream exploration development will increase in 2021 compared to the 2020, among which onshore business grows faster. Last, looking at the domestic exploration and the production environment from China and consumption structure, we can say that oil and gas continued dominating China energy consumption structure. Our conscious of latest Bloomberg data, nearly 70% of the crude oil in China depending on importing. The Seven Year Action Plan of domestic oil and gas companies will guarantee the prosperity of oil service industry in the certain period. As we all know, CNOOC is our important customer. According to its latest figure, CNOOC, the latest CapEx budget is around RMB 90 billion to RMB 100 billion, which is expected to provide stable workload for COSL in 2021. Under this background, COSL will center on the 5 aspects: innovation drilling, green and low carbon, overseas development, market leadership, and talent-based development of enterprise to build capability respected by the industry. The company will focus on high-quality development and realize the strategy of technological and international development, gradually developing itself into an integrated oil service provider, covering multiple energy field and being internationally competitive. In 2021, the company will continue to speed up the serialization on the industrialization of technological products on the foundation of previous achievements and experience to ensure a new layout of a mutual promotion of domestic and international dual circulation. COSL will aim at the development direction of the industry, deeply understands the needs of customer and accelerate R&D of mainstream technology in the industry. At the same time, COSL will give full play to its industrial chain advantage, improves the comprehensive service, achieve efficient allocation of resources, and cultivate and improve its core competitiveness. COSL formerly implement green and low-carbon development strategy through various ways of rent, management, purchase and construction. The company has formed a diversified equipment group in the whole sea area. So improvement in equipment's strength lays a solid foundation for the company's developments. Let's look at the domestic market. At present, the China offshore market is our core market, and CNOOC is our core customer, which are obvious advantage different from other competitors. In the current industry environment, COSL will explore new business and core operation models, improve the competitiveness, reduce operating costs, form sales strategic opportunities of national energy development and try our best to meet domestic exploration and development needs. Based on the domestic market situation, we prepared one slide to present contract information about the jack-up drilling rig and the [indiscernible] semi-sub drilling rig that we operate and man in China currently. As some of the contracts still in the process of bidding or negotiation, we will update information if there are any change. For the international market, COSL will build a dual-circulation of domestic and international market with the domestic market as the main body to promote internationalization effectively. COSL will focus on the 6 main overseas area of Asia Pacific, Middle East, Far East, Europe, America and Africa to enlarge the international market, and the company will continue to give play to the competitive advantage in the industry and achieve scale in that gradually to expand the scale of overseas revenue. Let's look at the operation of drilling rigs in the overseas market under contract information about 11 jack-up and 3 semi-sub drilling rigs that we operate and manage overseas so far. As some of the contracts still in the process of bidding and negotiation, we will update the information if they're any change. As mentioned above, oilfield service market is still -- and a fierce competition in 2021. COSL will continue with the process cost control, strictly carry out prudent capital investment, pay attention to the dividend return to our shareholders and maintains the leading edge in cost. The capital expenditure in 2021 will stand around RMB 4.3 billion. COVID-19 pandemic is a global serious crisis of public health over the past 100 years. In 2021, COSL will continue to perform well in the prevention and control of the normalized pandemic, strictly implement the requirement of prevent overseas case, prevent domestic rebound, and protect both people and materials, and pay attention to various measures to prevent and control the pandemic. In 2021, COSL will remain committed to the goals of technological and international development and further transform the cost [indiscernible] into the core competitiveness. Based on the company's unit integration advantage, stable financial structure and a team with extensive experience in management and operation, COSL will create more valuable returns for our shareholders, customers and all parties. Thanks again to all shareholders and investors. This is all for today's presentation. Now we are happy to take your questions. Thank you.

[Interpreted] Thank you very much, Mr. Zheng, for your presentation. [Operator Instructions]

[Foreign Language]

[Interpreted] The first question is -- I'm [ Tony Wang from Chungtai International ]. Two questions for the management. The first one is carbon emission and the carbon peak are -- they are heavy work because it involves international strategy, and the government has already put forward this strategy before. In June, the carbon trading system will be picked up. Just want to know that in the upper stream service company, in the OEM field in the oil industry, what measures are you going to take in order to promulgate the carbon management? The second question is that it is said that COSL has already started acquiring resources in the upstream in UAE. Just want to understand, what is the operations status for right now? And do you see any new capabilities as the business grows there.

[Interpreted] Thank you very much for your questions. I'm going to take the first one. Talking about the carbon emission and the carbon peak, absolutely, it is the long-term goal for the country, and it is also the planning and the vision from the central government. Chinese companies have already started planning and dropping -- establishing their own system to take these goals. As for COSL, we focus on 3 areas. Specifically, first, we actively participate and coordinate with our customers in their designs from the tech level on how to hit this target of carbon emission and carbon peak. Secondly, for COSL itself, we started our own internal top design in our own system and also planning for their consummation. And number three, from the social and industrial point of view, we also actively get engaged into the top design as well as the measure establishment. The new specific examples regarding these 3 areas and for the sake of interest, I'm going to give you a very brief -- some brief examples. For their customers' end, for example, some of their customers, they have operations in Mainland China. And in terms of the manufacturing and production from their offshore equipment, we'll provide our assistance and get involved into the top design. And in terms of our cost of our -- COSL's internal system design, several years ago till now, we have already launched 12 LNG cold vessel support supply and engineering services to our rigs. And this has already started our leadership in guiding the whole industry into clean energy. After launching those 12 vessels, if they're successful, this will promote the conversion from the conventional energy-powered vessels to clean energy-powered vessels in ourselves as well as in the whole industry because we have over 140 vessels that are still using conventional energy. Meanwhile, we are also working very actively with some European countries. For example, Norwegian government is one of our partners. It means such a cooperation in the areas of energy management, particularly for those large-scale equipment for the offshore oil services. Third area, as I mentioned before, just about the whole supply chain of the whole industry, company will have already invested with a lot on the exploration and the divestments. For example, for the offshore wind power as well as onshore clean energy. So this is to your first question about carbon emission and carbon peak. As we all know that carbon emission and the carbon peak are very important to the government and to the country. And this is the beginning of the first year of the 14th Five-Year Plan. For COSL, we have already started actively designing our own systems internally and preparing our own plans. Your second question about UAE. We had and we still have some business in UAE that are still under operations. And UAE is at the operating center and headquarters for COSL in the Middle East, which supports all the neighboring countries. In the past, we had over 10 years of a cooperation with [ Atloc ] in Year 8 in the area from onshore business. And in the future, we're going to introduce more high-end technologies to, not only UAE, but also the neighboring countries in the Middle East. I hope I have answered your questions. Thank you.

[Foreign Language]

[Interpreted] This is Tingting from BoA -- Bank of America Merrill Lynch. Two questions for you. The first question -- before I ask a question, congratulations on your very good performance in the last quarter last year. And if you put the impairment back, your net profit would be CNY 1 billion, which is also high. Just wanted to understand why. What are the factors that have to be such a high level of profit -- net profit. And in my understanding, perhaps, it has a lot to do with your first review with [indiscernible]. And just more to understand, how much of the performance is from the price review with [indiscernible]? The second question is about cost potential. We understand that you did a very good job last year, on the gross cost control, 2.1 billion last year. I just want to understand what do you think about the room of further cost control for this year. For example, in cost reduction, as we understand that the raw material prices are getting up, for example, steel. How do you think that you can further reduce your costs?

Thank you for your questions. I'm going to take your first question. And the second question will be answer by Mr. Zhao, our President. So just also about our profit performance in Q4 last year. Actually, we didn't have any big price review with our customer [ In Look ]. The good performance now on net profit is, first of all, brought by our business model innovation with our customers in terms of the integration -- as service integration as well as the [indiscernible] are for. The second factor that helped with the net profit contribute to the performance is that we have a lot of contractors, and we also innovated in how we cooperate with our contractors that is our business model innovation. We are then to share the risk better, and we are then to share our profit together. But that's why we innovated our business model with contractors and late year final settlement in the fourth quarter of the year -- before the year. So for the both model innovation, they follow the -- our business principle. As for how much room we have for this year in cost reduction, as we were still discussing and exploring about it, we don't have any specific profits for this year. Of course, we will definitely keep working on them. And the second question will be taken by Mr. Zhao.

[Interpreted] I'd like to take your second question. The first thing is the impact in 2020, we had already strengthened our actions in those issues in negotiating with our contractors. I'm talking about cost reduction. It resolves 3 areas: the cost of raw materials because of maintenance and repairing, and the long-term annual agreements. In 2020, we had price reviews with our key material suppliers. And in terms of our contractors, we also encouraged them to have a profit-sharing business model together with COSL. So for the key raw materials, we realized 5% to 10% of cost down. So in terms of the maintenance and recurring fees, we also realized a high degree of price down in that we have also set up ahead with drilling rigs, but in the past, a rig may be repaired by different suppliers. And now we just put the rigs into one suppliers or one repairers so that, with higher volume, we can get a better price. Last year, we started negotiating with our suppliers on annual basis or long-term corporation basis. And we also reached some agreements for such -- with some suppliers. And we also do this to have this long-term agreement with them to guarantee the future revenue. Of course, we understand that the room for further cost down of cost reduction expecting smaller and smaller will help us through long-term cooperative agreements and annual agreements as well as strategic partners. We can realize -- we can expand this room. In addition to this, we hope that to be a point-to-point or end-to-end price adjustment we can have with the expansion of this room for further cost reduction. Thank you.

[Foreign Language]

[Interpreted] This is [indiscernible] Securities. Congratulations on your good performance last year. I have 2 questions for you. The first question is about your technical improvement in terms of R&D. Just want to understand what new achievements have been made in terms of technical R&D that can help with your further business performance in the future? The second question is about the impairment. In 2020, you made impairments on the assets under your facility. And is it in your credibility? Just want to understand what will be the impact. And what about 2021?

[Interpreted] So thank you for your questions. Let me take your first question in terms of our technical advancement in our R&D. As far as the benefits, you can see it's very, very obvious benefits that we got last year. A lot of our technical R&D activities being promoted. You can see we have realized achievements in terms of the directional well, the down well as well as some other areas. Along with our investments in the oilfields as well as in the chemical industry, we can see that there will be more benefits -- positive benefits to our business performance. Besides, we have some charter rigs, and this number has been going up and the base are also positive influence to our business performance.

So let me take your second question about the impairment. So from 2015 till now, the major service providers as with the drilling companies have already made impairments at different times. Of course, for COSL, we have been following the international accounting standards, and each quarter, we just follow -- we just keep tracking the signs for impairment. So far, we haven't found early signs of any further impairments in our assets and liquidity. Along with the uprising oil price actually as more and more drilling activities being taken, we see that the pressure for further impairment actually is going down.

[Interpreted] This is the last question for the interest of time. This is [ Mo Lai ] from JPMorgan.

[Interpreted] Two questions for you. The first question is about the CapEx. We see that in 2020, your CapEx increased, particularly in terms of the oilfield technical service sector. However, according to your presentation, you are going to reduce the amount of outsourcing in your business as well as improve your self-developed technologies. So how should we understand the trend in the future of COSL? The second question is that, in 2021, your major client, CNOOC, has increased its capacity, particularly for the domestic market [indiscernible]. In order to hit this product over 2 million barrels per day. But can you please share with us your long-term strategy, first of all, from 2022 to 2023. What will be your business development cut rate?

[Interpreted] Thank you for your questions, very good questions and very professional. So you ask about our CapEx. In 2021, it is true that a major point of our CapEx will go to the [ real ] technical service sector. And that is because that we're going to reduce the amount of outsourcing as well as encroaching self-developed technologies. In July, one of the joint ventures between COSL and the manufacturer will be ready for operations. After the operations is done, our production capacity will be enhanced. So when the production capacity reaches its level -- its normal level, then we'll be able to further reduce the outsourcing and making use of more self-developed technologies. Thank you.

[Interpreted] Let me take your second question. We do have already seen that our major customer, CNOOC, has increased its CapEx in 2021. I think that you must have already a lot about the mid- to long-term strategy for CNOOC, and I would love to share with you some of my ideas. For CNOOC, it is has already established a strategy very clearly in their conversion of 4 specific business sectors. The first conversion of the sector change is from the conventional to clean energy. The second one is from offshore to onshore. The third one is from shallow water areas to deepwater areas. And the fourth one is from the domestic market to the overseas market, that is to say, more investments in the overseas market. As you see that CapEx has prepared its CapEx for 2021. And the CapEx of the capital will be allocated into these 4 areas. So thankfully we can see that it will be very steady and stable amount of capital to be allocated into the conventional area, and there can be a slightly increase of such capital allocation. Of course, for COSL, we will definitely be ready to capture the opportunities in these 4 areas accordingly brought by CNOOC. So for COSL, in the conventional area, offshore exploration and development, because we are a pay contractor to CNOOC, we will also allocate adequate amount of capital into this area, and there also can be a slight increase in this area. CNOOC has averaged more effort into the divestment in Mainland China in the domestic market. And this is the third year since the launching of the Seven-Year Action Plan. Benefited from this Seven-Year Action Plan as well as other players in the industry, COSL has realized a high quality of growth in our own business and won recognition from the society. And we will be ready to capture the opportunities in the rest of the 3 areas in order to support the growth in the upcoming 2 to 3 years. Thank you.

[Interpreted] So the question just now were from the telephone lines. And as I said before, that we have collected some questions. So after the announcement, and basically, all the questions are focused on the carbon emission and the carbon peak, which has already been addressed by the management just now. Other questions are basically covered during the Q&A just now already. So there's no further question entering right now. I must thank you that all the questions are very good questions and are very good professional ones. And thank you for your consistent attention to our performance and for our growing -- the growth of the business. Through this Q&A [indiscernible] you must have got a better understanding of the company. Once again, thank you very much for your time and for your participation. Thank you.

[Interpreted] So this is the end of the presentation. Thank you very much. Thank you.