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

[Interpreted] Good morning, investors and analysts. Welcome to COSL's 2021 Annual Performance Briefing Meeting. Affected by the COVID-19, and we will have today's meeting in the teleconference format. So thank you so much for your participation. First of all, please allow me to introduce the representatives of the Board of Directors and management team. Today, they are Mr. Shunqiang Zhao, Chairman and CEO; Mr. Lin Boqiang, Independent Non-Executive Director; Ms. Chong Xiaojie, Chief Financial Officer; and Sun Weizhou, Secretary of the Board of Directors of the company. So this performance presentation will be divided into 2 parts. First, Ms. Chong Xiaojie, CFO, will introduce the operating performance in 2021, and then we will have the Q&A session. Next, please welcome Madam Chong Xiaojie.

Good morning, ladies and gentlemen. Thanks all for attending COSL's 2021 annual results press coverage. Please take note of our disclaimer for the materials included in this presentation. Today's presentation will be divided into 2 parts. First is 2021 results overview. In 2021, the global demand for crude oil continued to recover. And the international oil price gradually rose amid shocks. According to Spears report, the scale of global oilfield service market in 2021 increased by 3% compared with that in 2020, although the international oil price has recovered. Obviously, the investment of international oil companies in exploration and the development [indiscernible] and the recovery of oilfield services market was low. In 2021, the company actively coordinated the pandemic control into the production and operation, refined and implemented the cost reduction and promoted the R&D and the commercialization of core technologies. During the period, the company's revenue was RMB 29.2 billion and net profit was RMB 322 million. The operating revenue of Well Services increased by 13.2% over the same period. And the operating profit increased by RMB 337 million to RMB 3.4 billion year-on-year. The computation of operating profit has been continuously improved. From the performance of the 4 segments in 2021, the revenue increased year-on-year, and the profitability continued to improve. Well Services has made efforts to sell key core technologies, accelerate the promotion and application of independent equipment and then realize the continuous risk of profitability. In 2021, the company continued to perform well in [indiscernible] cost on the target of reducing cost and increasing efficiency through reducing material consumption, repairing, subcontracting as well as leasing costs and others. Cost adheres to the strategy of technologic development. The technology development direction is more focused. The scientific and technological achievements are more effective, the innovation ecosystem is now perfect. And the digital layout is more in depth. The company adheres to the core position of innovation and has significantly improved its ability to ensure energy security. In 2021, the company continued to promote the first offshore steam driven project at home and abroad. Focusing on the needs of oil felids: one oilfield, one strategy, one oil well and one scheme, the company spared no effort to ensure the speed and efficiency of heavy oil thermal recovery. The D + W cap ability has been greatly improved, and the applications scale has continued to expand. In terms of market development, the company has made achievements in market development at home and abroad, effectively stabilizing the fundamentals of overseas operations. And laying a good foundation for the HYSY and the sustainable development of overseas market. Safe and efficient service has made COSL Confidence, COSL Power, COSL 936 and other large equipment praised by customers. The company seized the opportunity of the rebound of oilfield service market demand, actively communicated with customers and steadily pushed forward overseas market development, making new breakthroughs in Iraq, Mexico, Brazil, Uganda and other countries. The company adheres to 3 developments, scientifically formulate the development plan, vigorously develop green equipment, take new steps towards the carbon peak and neutrality [ score ] and to speed up its entry into the new energy industry chain. The company always adheres to the concept of safety first and deeply carries our hidden danger investigation and emergency management. High-quality services is an important foundation and ensures the internationalization of COSL. The company attains importance for energy conservation and environmental protection. It actively participates in public welfare [indiscernible] build safe [indiscernible] activities with customers. Here, as a capital market understands the company would in 2021, the company has won many awards such as 2021 Outstanding Listed Company Award, Best Listed Company Award and Best Enterprise Leader Award. It has been honored and affirmed by the capital market and the [ authoritative ] institutions and the company brand reputation has continued to improve. In the next part, I would like to share with you the outlook of COSL. The company will continue to enhance its equipment strength to promoting scientific and technologic innovation and build up integrated service capabilities for the whole oilfield life cycle oriented towards customer's mind, focused on the domestic cycle and from a system with domestic and overseas dual circulation. The company will gradually development into a world-class energy service company with Chinese characteristics under the guidance of the new 5 strategies of technology-driven, cost leadership, integration, internationalization and regional development. The company will continue to practice technology drive, build competitive advantages focused on technology research, optimize scientific research management under control models, broadening the construction plans of key laboratories, comprehensively upgrade the quality of technical products that celebrate the promotion of digital informatization transformation. The company will adhere to technology-driven focus [indiscernible], continue to increase investment in scientific research, fully promote major technological breakthroughs, continue to accelerate the pace of industrialization, improve technical reliability, enhance the company's core competitiveness, help country increase oil and gas reserves and production and ensure energy security. In the face of the new change in the industry situation, the company will continue to refine quota control, accelerate the construction of [indiscernible] structure and the long-term cost reduction mechanism and build across the leadership advantage. In addition, the company's abundant cash flow, sound financial structure and good ratings have given into the capital strength and more flexibility to adopt different operating practice in the environment of fluctuating oil price. In 2022, with rebounding domestic and international market demand and increasing investment into exploration and the development in China, the company will continue to optimize the size and increased investments in technology R&D with CapEx expected to be around RMB 4.16 billion in 2022. Focused on the positioning of a first-class energy services company that provides full life-cycle services to customers, the company will focus on management of substances, oil and gas aside. Before playing to the leading role of geological reserving takes the integrated service model and [indiscernible], strengthening the synergy of various processes. This constructed the system and improve the mechanical and celebrates the achievement of the company's new strategic goals. The company will continue to take advantage of the complete business team to realize the organic synergy of the each business line and continue to expand the scale of integrated services, continuously exploring new markets and expanding market share with customer demand as [ it gains ]. Adhere to 3 low-carbon developments, make efforts in large equipment and great technology to promote the transformation and upgrading of the company, continuously increase investment in environmental friendly equipment and pay close attention to green and low-carbon technology research. In terms of international market, the company will continue to increase the development of overseas markets, promote the development of technology segment business and actively improve the innovation of business model and operation model. Thus enhancing the integration service capability and the competitiveness of the company. The company will continue to leverage the company's competitive advantages in the industry and continue to stabilize its international overseas customers and derive new customers represented by overseas regions such as Iraq, Indonesia and Mexico. By gradually realizing the scale effect in overseas market, the company will achieve the goal of expanding the scale of overseas revenue. The company adheres to the regional development strategy make [indiscernible] to promote the construction of overseas regions, optimize the layout of overseas market, [indiscernible], improves overseas refinement management and building a strong overseas project operation team. Let's look into the domestic market next. The company's core market is the Chinese offshore market. We will further expand the project of cooperation with core customers and closely check the potential workload of [indiscernible] new blocks. We will continue to strengthen cooperation with China International Petroleum Corporation, China Petroleum & Chemical Corporation and other customers to prevent differentiated technical support to achieve renewing cooperation in the future opportunities from new projects such as land-based business and wind power and expected increase. As of December 31, 2021, the company operates and manages 57 drilling rigs, including 43 jack-up drilling rigs and 14 semi-drilling rigs. The company continues to promote the transformation of its new rigs, continuously optimize the equipment structure and expand the channels of drilling services. The company attained great importance to the pandemic prevention and control and will continue to implement proper and effective measures to prevent and control the pandemic to ensure normal producing and operating. Based on the company's unique integration advantages, stable financial structure, high-quality and efficient operation team under the guidance of technology-driven COSL leadership, introducing internationalization and regional development defined strategies because we create more valuable returns for shareholders, customers and all parties. Thanks again to all the shareholders and the investors present for your support and understanding of COSL. Now we're happy to take your questions.

[Interpreted] Thank you so much Madam Chong. So now let's go into the QA session. In order to give more investors and friends the opportunity to ask questions, please ask no more than 2 questions per person. Please also inform your name before asking questions. Because we want to have the consecutive interpreting, so please allow time for translation when you expect. And thank you so much. And now I would hand over to the telephone host.

[Interpreted] [Operator Instructions] And now let's go first to Crédit Suisse, Horace.

[Interpreted] So I have 2 questions. And for the first question is recently, we have seen the oil prices returned to over USD 100 in the international markets. So I wonder how's the workload of overseas market in 2022. Can you elaborate on this? So would we expect any pickup of the price of the market -- in overseas market? Second is last year, we have seen a significant drop of the daily rate of semi-submersibles, down by 27%. And how would the daily rates for semi-submersible and jack-up this year, would they have an increase of the daily rate?

[Interpreted] So for the first question, we indeed have already seen the oil price in international markets rising above USD 100. I think the main reason is because of the Russia-Ukrainian conflict. And also, the second reason is the post-pandemic [ inorganic ] recovery. But the first reason is definitely the major reason. And we have seen that because of the short-term conflict, the price is now surging to a high level of oil price in the market. And we have seen that this is definitely positive for the overseas market in a general way. In 2021, we already see the picking up and the warming up of the oil market overseas. And in 2021 to 2022, we definitely have dealt a faster speed of getting and acquiring the markets faster than the speed of the oil price pickup or the increasing of this oil field service. And you also have to know that without any doubt, it will have this positive influence on us in the short term. But I think the short-term influence will not be too significant. And we still have to focus on the long-term development. It's mainly focusing on the improvement of the overseas market quality and the environment of that. And for the second question, for the daily rate, and recently, we have seen the picking up of this offshore operation and demand and also the rise of the market price. Because of that and also because of the rise of the oil price, it has seen a significant more demand of that. And we also have seen without any doubt, the overall roadmap of the entire channel of China. And the oil field service is still under this dynamic adjustment. So for the deepwater rigs and facilities are just not compatible with this offshore shallow water ones. So for this kind of shallow water development and exploration, together with the deepwater rigs and the drilling devices, we have seen this incompatibility. And the utility rates plus this low price has also made this [ incompatibility ] of the resources. So we can see that the -- because of the downtime and the waiting time and it also has boosted the cost of us. So I would say that in the future for the situation of semi-submersibles, we definitely have this stable increase of this profitability, but it's not like too significant. I will now have the confidence to say that.

[Interpreted] So now we have Toby from Citi.

[Interpreted] The first one is about the [ oilfield ] technology. And I have seen the speed of their development in 2021 was pretty good. And I also have heard from the management team at the early days of 2022 that you were about to explore and develop the overseas market for oilfield technology. I want to know what's the situation now? And the second question is also early 2022, we have mentioned about 5 major strategies about the integration. I want to know what's the new progress now.

[Interpreted] So for the first question will be answered by Madam Chong.

[Interpreted] Thank you so much for this question. Indeed, you have asked about this oilfield technology development and the overseas development of the market. So indeed, we have already said in the performance reported before, in 2021, our revenue has reached CNY 15 billion for this technology part, and up by 13% compared with 2020. And thanks to our R&D, our investment, our preparation of the reserves and the increase of the production. And indeed, we have seen this steady growth of that. We think we will also have better transformation of the technology, and we have seen record high [indiscernible] history for both revenue and profit. So for overseas markets, we have invested more in technology, R&D and exploration. For example, for our high temperature, high pressure [indiscernible] and the [indiscernible] in Middle East and helping to solve this world-class problem of cracking this soft gypsum layer. And in Southeast Asia, we have also got this land cementing and drilling and completion fluid project. And we also have self-invested our own Middle East [indiscernible] and our own self-invested logging device. MUIL has successfully launched these developments in Middle Eastern markets. We also have entered the American land drilling and completion fluid service market and preferably obtained the service orders. And for Uganda, we also have locked the future workload in Africa. So I believe the performances would definitely be shown in the future.

[Interpreted] So I will answer your second question. Last year, we have revised the technology and the strategy of the overall company. We have adopted this overall integration strategy. And we have integrated all the business units. And within each of the individual business units, we also have integrated all the workflow and the work line. And for the past time over 1 year, we have implemented that, and we have already seen some great progress. So there are several changes. For example, for our main business integration, take this geophysical survey as an for example, previously, we mainly do this leasing of the equipment and devices. But now, we have changed and into the one stop of design to acquisition to this interpretation of all these. And we have also seen in the market. And we see the opportunity that previously it was not even considered an opportunity to your market, and it is [indiscernible] by our team view of geophysical survey. And now -- let's talk about oilfield technology and chemical development. We have, based on the demand of the customers, from R&D to the implementation to experimentation and to the revision of the technology system, we have done a complete service of that. And indeed, for this we have seen that the margins has also given us a very good response because we have rapidly reacted to that. And it also has given us positive impact in a fast way. And I have to say that this both domestically and overseas market has reacted like that. Although the feedback and return is not that significant, it just have proved our efforts in being the right direction. And for the oilfield service technology aspect, every technology has its own features. So maybe -- I wouldn't say that every technology would have a big sales or with a significant amount of profit. However, when we are approaching different customers, we could offer them like diversity and portfolio of different technologies, we would offer them more opportunities to choose from us and it's also cementing our position in the market. So I wouldn't say that the return of single technology is too much. However, it just boosts our overall positioning and the power in the market and cementing and stabilizing our business, pleasing our customers at the same time. So the overall business unit of integration has also seen great vigor and vitality. In the past half year, I wouldn't mention any specific absolute number or the base or the bottom line, I would just to say the contract -- about the contract that has been signed, the contract that is being negotiated and the contract is being processed and audited. It's already increased by over 30% to 50%. So we have followed the trend of exiting the traditional markets but taking a more diversified and scattered approach to satisfy the market and we have seized the moment. Thank you. That's all for my answer.

[Interpreted] Now let's have with us Mu lei from JPMorgan.

[Interpreted] There are 2 questions. The first one is the scarcity -- speaking of our 3 core technologies, they have been research and development, for example, like our high temperature, high pressure and highly deviated well and our rotary steering technology. And we have already done this, the self autonomous [indiscernible] search and development and application of that. So how is the gap between us and these overseas developed competitors? So how is that? And what about the working time of this high temperature, high pressure and highly deviated well is being done? And the second one is about this offshore being the power business in the company. What is the progress currently?

[Interpreted] I will first do the answer of the first question. And the question is the [indiscernible] is their profession so they definitely you know go through a lot. And for the R&D and the domestic application of this SaaS developed technology, I have to say that there is still some gap compared with the top 3 oilfield service companies in the world. And I'm saying that compared with the top-notch technology -- I'm not saying that it's the top technology is still having some [indiscernible] but generally speaking, there's still some gap compared with the top. So we have a series of products that will still take time to develop. And I have the confidence that if you give us like 3 to 5 years of the time, we will definitely compensate and fill the gap. So for the technology aspect, I am confident that we could be as good as the top in the future. So for this current examples like our directional well, our logging, we are focusing on improvement of the quality. So our onetime success rate now is already as high as 90.2%. And I think that in the next 2 to 3 years, we are confident that we will at least reach this bar average level of this entire market or even as good as the top-notch high quality in this competitive market. And the next thing is for the parameters of the different devices and the equipment we have just mentioned, I have to say that part of the parameters, we are better than our international competitors and parts are still not that good. And with this kind of situation of parts being very good, parts being not that good, we are still trying to develop. And we have also cooperated and communicated with our competitors, and they are even acquiring and purchasing some products from us. And for the software platform, we are also sharing this without the international counterparts. So I think we are definitely getting close to the top notch and making the gap smaller. So this is just my personal judgment. This is my personal judgment from the insider perspective being myself, and everyone's judgment is different. So for the technology aspect, I think it has already making an ever increasing contribution to the overall revenue and profit of the whole company. And the management team also hopes to maintain this trend. And with us having this dominant role, the domestic markets being achieved, we are also actively developing and exploring the overseas market. And for the technology, while we hope to have a better radiation of that and with a better ROI and maximize the profits, and also to expand the marginal effect of that. So -- but when we go to international overseas markets, there are some competition of the price and demand, but we are confident that in the future, we will still have this developed technology to make more contribution to our overall value, profits and revenue and also contribute more to the overall performance and key indicators of the company. For the second question, indeed, the wind power is the first sector that we tried to get into this new energy industry. And I think now the market of wind power is competitively speaking quite mature. And the matter is for the R&D, for the manufacturing, for the operation, application and maintenance, the market's technological threshold is not that high. And thanks to our large-scale devices and our offshore experiences for the operation and maintenance of these is actually -- it can be done in a synergy with our COSL traditional business. And thanks to the COSL's years of offshore and on sea overall experiences, I would say that we have a very good understanding and knowledge about the safety, the weather, the condition of the sea. So for this sea operations and maintenance, I would say that it's an advantage of us compared with our land-based companies. And we also have seen this program from the basic reason to works. And the efficiency and speed has fully supported what I have said before. And I want to say that for the support of installation and operation and maintenance would still be our focus later. And we also would focus on the marine support. We will differentiate us as a specific competitive edge as dealing with this large amount and complicated situation and conditions. We have already tried it last year at COSL, it is very compatible with our current business. And except for the trial of installation and the maintenance and operations, we also have tried to differentiate our marine support. And I have the confidence to say that we will carry on doing that, and it has already given us quite great rewards. Thank you.

[Interpreted] Because of limited time, so we will move to the last investor to propose the question. So we will have UBS, Guo.

[Interpreted] So I have 2 small questions. The first one is about the objectives and measures in cost of control this year of COSL. The second one is you have just mentioned about the wind power market. May I ask the company's layout and progress in the other field of new-energy and low-carbon markets?

[indiscernible]

[Interpreted] Thank you so much for the question. I would answer this, first of all, the cost control. So for 2022, we still carry out this cost control matters we have started last year. And you all know that because of the overall environment, the cost of control is under huge pressure, but we believe the control of the cost is a very significant method of the improvement of our competitiveness. And last year, we have adopted this cost leadership strategy, and we have done this a systematic structured and the long-term cost reduction and improvement of the performance strategy. And we also have seen some delightful results. So we also will carry out this lean management of costs in this year. So technological innovation is one way for us to lower the cost, for example, the retreatment of our self researched and developed material and devices and also the remanagement of the subcontracting, these are all what we will do in 2022. And the next one is about the potential hedging and the reducing of the cost of procurement. This is what we will also focus on, and we hope that we would rigorously promote this, any associate orders called across categories, central active procurement, open bidding, cost management, et cetera. Number three is the strategic partnership. We have already seen good results. However, there is still big room of that. And we will further categorize and develop our upstream and downstream synergies to try to influence the whole industry and supply chain more to raise our voice and have more cost reduction. And we also will focus on this fixed of offer and fixed amount of expenditure projects. And also would have this integrated well, auditing for its expenditure. And we have already seen a quite good management result in the integrated well management in Middle East area. We are confident that in 2022, we will expand such success for example and practice, and have the confidence that it would also have further success in overseas markets. So the 2022 strategies will still be taking off the potential and reducing of the cost of procurement and also the improvement of technology. We also believe that with this scientific and the strategic cooperation with our partners and the integrated well management, we will definitely have more contributions.

[Interpreted] Thank you so much. I will answer the second question. So currently, for the new energy, it's mainly entering the industry of wind power, and there are also other businesses and the parts are being explored and developed by us. Currently, we mainly use those businesses that we could enter with low cost, basically like the radiation expansion of our existing mature business. For example, like when we are manufacturing, we would also deal with oil and water for the treatment of that and other -- also other -- some pump businesses. Although these businesses are not of very great scale. We still believe that we want to develop that and also relate to this technological improvement will have better performance. And also, thanks to our current integration strategy, we are dealing with more diversified demand from our customers. So this kind of technological diversification will also do favor to us. And next thing is that I believe the current strategy of low-cost entry into other related industry is also very feasible and practical. And I also have to say that we just -- when we are introducing and promoting our mature businesses to the customers and users, we are also, at the same time, introducing some newly developed spin-off businesses and opportunities to the users at the same time. The second thing is about synergy. So for example, for wind industry, we are utilizing our large-scale devices to do this maintenance and the installation for these wind businesses. And you can also see that we could utilize our management advantage and the low threshold of entering the other market to have the synergy and collaborated effects to also guarantee the good turnover and the return of our investments and resources. And in the future, we also will focus on this and energy. So for example, like R&D of the middle energy, we have already developed 12 vessels for that. And because of the faster speed of the price increase of natural gas compared with oil, we have already seen some problems. But we believe the development of those boats and vessels is definitely worth the try. So except for R&D, we also have explored some other end resources for 2 concerns. The first one is when most of the regions and the markets in the world are seeking out a way out and getting this restructuring of their energy mix, we hope that we could do this positioning and the research in advance, and we will not be left behind when the day finally comes. The second thing is actually, we hope to utilize our current technology and then try to make the development and influence as early as possible. Thank you. Previously, we have already updated our interaction question between investors with this broadcasting and the notice board. And we have seen that from the QA session, all the concerning questions have already been dealt with. And thank you so much again for attending the COSL 2021 annual performance briefing meeting today. And the company will continue to communicate with investors and friends in various forms at the end of today's communication. Thank you. Thank you so much for the host. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]