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

[Foreign Language]

[Foreign Language]

[Foreign Language]

I have 2 questions for the management. First of all, thanks for the introduction, just now. And you just let me know your strategy about the global expansion and the global orders. So I'd like to know what's the exact strategy that you will lay out in each business segment, including the rig, drilling and the integration services, how do you compete for a market share over the international market? Second question is about the dividend payout ratio. This has been lifted up from 30% to 32.5%. So what's your idea on the returns to the long-term shareholders? And what's your take on the allocation of capital?

[Foreign Language] [Interpreted] Sorry, you just asked about the expansion of global market. As you know, we set up our strategy of going global in 2025 covers 5 major strategies that is the technology-driven and cost control interpretation and international normalization and focusing on key regions. For those global markets, as you know, we have 5 major regions covers Asia Pacific, Middle East Europe, America and American continent. For the Asia Pacific market, which we have been developing for 20 years that witnessed our growth from a single client to multiple clients from a single country like Indonesia to many other countries. Just in Indonesia alone at the beginning of the 20 years ago, we were working with only 1 single client. And now we are covering 15 business projects with the clients in Indonesia and other all business segments have the presence in Indonesia. The client is also diversified from our associate parties at the very beginning to last year that 99% of our client base in Indonesia were consistent with the international oil company or local oil company. They are all external clients. So definitely, we make a diversification of our business in Indonesia, more than that we cover more geographical regions in Asia Pacific from Indonesia to Malaysia, to Myanmar and Thailand. The revenue in that region as a whole achieved RMB 1.74 billion and the profit RMB 16 million last year, Indonesia market alone achieved RMB 1.44 billion revenue and RMB 16 million profit last year. So it is fair to say we have achieved diversified competition landscape, diversified client base and diversified markets and business in this region. That's why we want to pursue a new excellence -- new level of excellence in Asia Pacific by developing our interpretation services and technology-driven services. Middle East, as you just have from the presentation of our CEO that we had contracted value last year, that is equal to RMB 14 billion and which laid a very good foundation for our further development. But as you also noticed that in Middle East, there are a couple of countries. [Foreign Language] At each region, like you know, in Middle East, we want to strengthen our presence there. Last year, we signed a good number of contracts. I hope that could serve as an opportunity for us to get into that market and make long-term cooperation there. We will start with rig operation, and we want to ensure smooth operations of those drilling rigs this year. But from then, we can build our presence in the Gulf of [ Arabic ] and build up our image of COSL there, then we can transform those initial contracts to be a kind of a competitive edge. And we also want to get in to -- get access to more of our services and technology products into that market. In the African market, we want to boost our capacity at that place. As you know, through bidding last year, we got the contract in Uganda 1 for drilling rig, the other for logging and 17 projects. All of those projects serve as kind of the stabilizing force for our further development. We hope, starting from here, we can get more access to our integrated services and technology services and expand the market share there. American market, it is the place we want to expand. In Canada last year, we got one client signed with us a contract value CAD 500 million that will last a 5-year loan for a drilling wells services. In the future, we will build up from this foundation and to expand the North American market. In Mexico last year, for the first time, we got the 17 projects there, that valued USD 100 million. It's a land project. And of course, we want -- we can stand up from this very solid foundation and made new progress. [Foreign Language]

I'll take the second question about the payout ratio. On one hand, we're focusing on the management of the company. On the other hand, we definitely committed to the return to the shareholders according to the company's article, the payout ratio should not lower than 20%, if not higher, but I've noted, starting from 2012, the payout ratio of our company has been remaining over 30%. And the accumulated amount of the dividend from the listing to now is over RMB 13.5 billion. [Foreign Language] Just in yesterday, we announced that the payout ratio for 2022 will be lifted up to 32% based on 3 reasons: the first of our outlook for the operation, the CapEx and the healthy level of cash flow. This kind of the increase shows the confidence of the management on the operation for the future, and we will definitely share the benefit from our development.

[Foreign Language]

[Foreign Language] From Morgan Stanley, Albert Li. I have 2 questions. First, about well service. Last year, as we might notice that well service, we increased very strong momentum of growth, especially from the overseas markets. So I'm trying to ask do you think the oversea market will be the major source of momentum of development in this segment. In the meantime, we noticed this segment is contributing a larger portion to the revenue of the company. So I'm trying -- I want to ask in the future, what's your take on the major momentum of the well service? It will come from the domestic Chinese market or the overseas market or the 2 markets will contribute kind of evenly? Second question is related to the gross margin starting from the second half of last year, we found the decrease of the -- decrease of market -- gross margin because of the cost increase like the labor cost and the other costs. So could you review those cost pressures and let us know your prediction for the cost in the upcoming years?

[Foreign Language] Our company has been driven by the 2 markets and will be driven by those 2 markets, of course, the domestic and the international. According to the data last year, 18% of the revenue was contributed by the overseas market. And according to our plan, the growth rate of overseas market will be higher than the domestic market.

[Foreign Language] I'll take the second question about the gross margin of the [ Well Tech ] segment. Last year, especially my prediction for the gross margin in 2023. Last year, Well Tech segment contributes the larger portion of our revenue from 52% to 55%. In the upcoming year, I mean, 2023, of course, Well Tech will contribute more as I predict because of the larger workload and other expansion efforts of global markets. So I definitely predict the growth of these segments in both revenue and profit and the contribution from this segment -- and the gross margin will be -- this year will be a bit higher than last year. [Foreign Language] Just now you asked a very typical question that might be followed by many other investors. It's also very challenging so I'd like to add a bit of my thoughts. As we just reviewed all of our specific business segments in total 15 and streamlines the 16 technical system that are under operation of our company. And we found out an essential strategy that is to meet the demand of the client. So we will judge and determine the operation of all of those systems based on the suitability to our clients and how the market will accept it. Therefore, we find out the domestic market as well as the international market will play their own role in our business. The domestic Chinese market will serve as the pilot zone for our new technology and also will be the original place for all of those innovations through this, and we could make our technology and service comprehensive for those mainstream technology and build up our unique strengths. In the meantime, we could make our key innovative technology outstanding. And as you asked about the driver of the future development, I think the domestic market will always serve as the fundamental of the development because we will set up the pilot scheme, pilot technology there. And once it succeeds, we will put forward to other markets. Whatever you think we are the third or the fourth largest player of this industry we have been committed to make the best out of the asset of our client that covers the whole life cycle. That's why I believe both the domestic and the international market can play its own role for the international market. Of course, we will focus on the efficiency and release as much as possible on those margin values and explore the high-end clients and make the breakthroughs on these technology issues. Through doing this, we could add value to our clients.

[Foreign Language] From CICC, Beina, I have 2 questions. The first is about the Equipment segment. As I noticed, you expanded the CapEx in this segment. And the utility rate of the jack-up rig is in the upward curve. So could you give us your ideas on the structure of the CapEx and give me an idea for the drilling fee in 2023? My second question is about the labor cost. As I know from last year, we find an increase of the frontline labor cost, which is quite reasonable because after a downward cycle, the frontline workers might need a better well-being. So what's your idea about this year? Do we still have the space to reduce the cost, especially the labor?

[Foreign Language] Thanks for your question. I'd like to take the second question first. Thanks for your attention. As you know, the cost is the universal pressure for many companies, including the service provider like us. And we know last year, we suffered from the inflation according to the third-party agencies. The inflation rate last year was as high as 8.8%. Even this year, the inflation rate has been downgraded for the prediction, but it's still at 6.6%. [Foreign Language] Facing the cost pressure, we take proactive measures, the past 3 years, we have been taking the systematic structure driven and the long-term measures to deal with those cost pressures. [Foreign Language] We take 3 major proactive measures to deal with the cost pressure. First, the innovation of technology and transform those innovation results into application. We remain high investment in R&D, which is around RMB 1 billion in the recent years. And as you know, the Xuanji system is into operation and in scale production of that will help the cost of the cost, and through the R&D efforts. The second is the supply chain management. We set up the strategic partnership with the suppliers along the supply chain. Just last year, we find out really exciting achievements from this partnership. So that reduced [ 68% ] of the cost from the retirement cost of our equipment. The third aspect is the increase of the utility rate of the equipment, then we can boost up the efficiency. Through all of those measures, I believe those profitability figures this year will up.

[Foreign Language] I'd like to take the first question first. As the equipment company, you just asked about the rig ridge and the CapEx structure. Last year, the drilling rig, of course, we found the cost increase in terms of the -- and the cost increase at various regions, even it might not be that identical for each region, but the upward change is kind of common. So globally speaking, the supply for the drill rig services is kind of the short of the supply. So our CapEx structure is mainly consistent with the technology cost and our infrastructure. While you see such kind of the big CapEx, that's mainly because we need to do a lot of preparation work before a contract take into operation, like the projects that we got in the Middle East, we need to invest to adjust our suitability, improve our standards and replace equipment or parts in order to put those projects in operation. So I believe after the first 3 quarters of this year, when all those new contracts were put into action, we can find a kind of the returns and we can also find all those figures will get up. And for the strategies, the leading cost control we have been, this strategy has been attached to great importance, which is the same as all the rest of those strategies. As we can even put like this, the cost control is the key for most of our business because whatever the market, the technology we have, if we don't have a good cost control, all the rest will be kind of effect less. That's why we have set up the aspects or standards for 8 aspects -- to cover 8 aspects in order to control the cost of well. From those 8 aspects, the first 2, that is to manage according to the standardization, and we managed our business model by model, and we put a systematic and standardized management to other company. All of those aspects are targeted to transform a conventional player like us to be a good player in controlling our cost. Our industry is intensive in capital and now there is a lot of the supply over the market. We have to figure out a way to make the best efficiency out of this kind of situation. The rest of 4 aspects covers mainly the informatization, developed through intelligent services, development through our intelligent advances and automatization as well as digitalization. All of those aspects are targeting to transform a conventional player like us to make the best out of the cutting-edge advantages and transform according to the latest situation. All of those efforts I hope in the future will yield the best results for us in terms of the cost control and then we can kind of blaze a trail for a conventional player like us on how to manage the cost well. For cutting cost or controlling the cost, we implement quite a specific management that covers each specific rig, each specific, drilling platform and each specific projects and business segments, only by doing the control from the bottom level, we can control the overall cost as well. That's why we are redefining or finding out the profit expenditure and the cost expenditure of our company. This is the latest campaign. We will concentrate more talents, resources, labor to those profit controls and set a limit to those cost controls that our CFO just said. On top of that, we still do the systematic structure driven and long-term cost control measures, all of those measures are still in place.

[Foreign Language]

[Foreign Language] Thank you very much for the opportunity and welcome for visiting Hong Kong. I have 2 follow-up questions based on the previous question and answers. First, on technology side, as I noticed that the Well Tech is contributing a larger portion of the total revenue, but our financial people are kind of the layman to those technical content. So what's the measure are you going to take to make better disclosure and keep us better informed because we are merely relying on the signals, the predictions you offered to them on those -- on such technical business? The second is about the rig. As I heard from the market, it's not -- as I heard from the market that you're about to acquire certain rigs and because of the owner of those rigs, they think the market price is getting up. So is that influenced the acquisition that is in place that is undergoing or if those rigs delivered to COSL delayed in that form a kind of the impact to the operation of your company? And what is your outlook for the first quarter margin taking this factor into consideration?

[Foreign Language] I'm trying to take the first question about the Tech segment. Last year, we made -- this segment made RMB 15.66 billion revenue accounting 55% of the total revenue. Of course, it's a big contributor for both the net profit and operating profit. Just looking back to the history, the highest point was achieved at 2022. This segment achieved RMB 35.66 billion revenue. And the second high was 2014, it was almost 9 years ago. At that time, this segment contributed RMB 33.7 billion and the net profit generated from that was RMB 7.5 billion. It's accounting roughly 1/3 of the total revenue and 1/5, less than 1/5, I'd rather say 15% of the net profit, it was 9 years ago. So looking back 9 years later, if we look at this issue from a larger picture, we can definitely find this technical segment is contributing a larger portion to both the revenue and the profit. So if we are not sure on how the future will be, we'd rather review the past and we will get informed, then we will be rather confident for the development of this segment in the future that justifies our continuous increase in investment in R&D.

[Foreign Language] I'd like to take your question about the capital markets. As the investors, I can understand you always want to get as much information as possible to have a better idea on the operation of the company. For us, as the management, we just want to keep the certain space or make necessary reservations on those disclosures for the compliance issues of the double listing. And we just want the investors could decode the growth mechanism or the philosophy of development from the disclosed information. Specifically for your question on those Tech segments, I'd rather suggest you to take a longitudinal review of our development in the past and certain parameters you can put it in your mind, that is the investment to R&D, whether it is continuously growing up and the rate of growth of R&D, whether it's higher than the growth of the revenue and the other, the last parameter could be the growth rate of the profit. Once you have the certain revenue and it will be transformed into a kind of the productivity force that might be at the initial stage or in the later stage. So from this review, I can definitely ensure you to get a kind of the pattern of our development. For the rig, as you mentioned, of course, there are -- in some regions of the world, there are some supply, there are some demand outstrips supplies. But to look at the global market, for us, the rig utility rigs like the jack-up rig is around 75%. And globally, there are 470 to 500 rigs. So the kind of the shorter supply of rigs is really a regional issue because globally, the supply is still a bench over the demand. That's why -- but regionally in certain places, it might be a bit short of supply. But in other places, it will be quite mild. For us, the acquisition of the rigs , we're really depending on the regional supply. For the price, I think price is just quite normal. It's the perception to the value. So -- but we won't just stick to the acquisition of new rigs. We are open to other kinds of the possibility to have new rigs like the joint own or various kinds of leasing. We have 50 to 70 rigs under operation, and we can put all of our investments in that single aspect and suggest to relate to the latest government policy on green development, open cooperative development and development should benefit for all and should be innovation-driven. So we can share the benefits of development through joint owning rigs or leasing rigs.

[Foreign Language] [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]