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

[Interpreted] Investors and analysts, good morning. Welcome to the 2024 Interim Results announcement meeting of COSL. Please first allow me to introduce our Board and management members who are attending this meeting. They are Mr. Shunqiang Zhao, Chairman and CEO. Mr. Yao Xin, Independent Non-Executive Director; Mr. Sun Weizhou, Vice President and Board of Secretary; Mr. Ji Qie, Chief Financial Officer; Mr. Zhang Shaoying, General Manager of [indiscernible] Business Division; Mr. Tang Haibo, General Manager of Support Vessel Business Division. COSL has responded proactively to the new trends change and challenges in the global economy and oil field service industry in the first half of 2024. It has driven to become a world-leading company through reform and innovation and has achieved a new progress in its operation driven by the fiber strategies, technology-driven, cost leadership, integration, internationalization and original development. The company has pushed ahead with its sustainable operation, balancing economy, social and environmental development, providing domestic and overseas clients with safe quality, efficient and environmental friendly for lifecycle services and bringing winning results to employees, clients, partners and shareholders while boosting the quality development of the offshore oil industry. [Interpreted] Today's event has 2 parts. First, the management will make a presentation about the 2024 interim results and the future outlook. The second part will be the Q&A session. Now I will give the floor to the management.

[Foreign Language]

Thank you for the introduction. Now we will start the Q&A session. [Operator Instructions]

[Interpreted] I came from Merrill Lynch. I have 2 questions. Actually, we have noticed that the 2 rigs have get new orders. And the performance in the second quarter of this year has been very good. My first question is about the income tax. The income tax is very high in that -- in the first 2 quarters. So what's more take on the income tax in the second half of this year? The second question is about the well services. The growth rate of the well service segment has reached 20% and its operating revenue rate has increased from 10% to 18%. So how did the company achieve such a growth rate? And what's your take on the performance in the second half of this year?

[Interpreted] Thank you for the question. I will take the first question about the increase of the income tax. Our income tax in the first half of this year was around RMB 700 million. And the last year, in the same period, the income tax was around RMB 406 million, so there is a RMB 300 million increase, which is quite huge. And in the first half of last year, the international tax policies actually have not changed, almost all the countries keep their original tax rates but there are several reasons that drive all over income tax. First is about the payments of the overdue tax in Mexico, which will result -- which resulted in the increase of our income tax. The second problem is about our project in Saudi Arab. Our client for that country has suspended due to the project of some rigs. The change of the contracts of the 4 rigs there will also impact our income tax. So that's the reason why we saw an increase of the income tax. In the second half of the year, I believe our income tax will go back to the normal level without the impact of the factors mentioned before.

[Interpreted] Thank you for the question. And I will take the second question about the increase of the operating revenue of the well services segment and the outlook of that segment. There are several reasons to explain the growth in that segment. First, in the past months, we have seen the increase of workload both in domestic market and overseas market. So we have achieved the scale of the economy. The second reason in domestic market, 1/3 of the workload is connected with high temperature, high pressure and deepwater operations. Such difficult environment actually will bring us both opportunities and challenges. And our new technologies and our special technologies as well as our products can be well applied in those kind of difficult situation. So that will help to create value to COSL. The third reason, over the past 3 years the management of COSL has emphasized on the importance of cost control. We have built up a systemic and comprehensive cost control measures. And we have tried to control the cost at the smallest unit, for example, we try to control the cost of each single rig, each single project and each single line of business. And also, we have built on some other standards and indicators to ensure we have efficiently control all the costs. So we have built up a scientific and systemic cost control system. The fourth reason, we have always emphasized the importance of the quality and the safety operation, and we have stress importance of nonoperating time management and the safety and the quality departments of the company makes report every day about the NPT management in domestic market and the overseas market everyday to the management. So we have enhanced our NPT managing capability. So all the 4 reasons explained why we saw an increase in the operating revenue of the well service segments. Then about the future outlook. I believe in that segment, we will continue to keep the growth of the operating revenue. That's because, for one thing, we have tried to expanded our foreign market over the past years. Our market share of the foreign markets has increased from 16%in 2022 and 21% in 2023 and eventually to 25% in 2024. We have diversified our more keys and clients. We also promote our technologies and services to high-end clients and our new technology has found the recognition of our clients. So we have improved our NPT management and cost control capability, that's why I believe we can achieve a sustainable development in the future.

[Interpreted] I come from CICC. I have 2 questions about the rigs. Actually, 2 of the 4 rigs have got some new projects. And now all the market, the utilization rate of the jack-up rigs has been decreased. So against that kind of backdrop, how can the management of the company find new opportunities for the other rigs? The second question is about the CapEx and the medium-term capital allocation. COSL has a huge depreciation. The cash flow of the company is quite good. But over the medium and long run, will the company consider to pay out more dividends or try to reduce the debt ratio?

[Interpreted] I'll take the first question. Despite now we have some issues in Saudi Arabia, but 2 of the rigs, the Seeker and the [indiscernible] actually got some new projects, and they will be put into operation today and their day rates have increased as well. As for the other 2 rigs 936 and [indiscernible], actually, we are planning to take [ probably ] some biting. And we believe, in October, there will be huge demand in Southeast Asia countries, Middle East and in some other foreign markets as well. The management of the company will keep the strategy for internationalization. We found that on the market, the supply is not greater than the demand, it's the demand is greater than the supply, especially in the foreign markets. And actually, there are some other opportunities even for 2027. We are trying to find more opportunities in Middle East and Southeast Asia countries and even in Europe.

[Interpreted] I will take the second question about the CapEx. Based on the current situation, I would like to say, actually, we have passed the fees for large investments. Last year, we invested CNY 9 billion, and this year, we will invest [ CNY 17 billion ] in total. In the future, maybe we will continue to invest in rigs and surface vessels and some other kinds of vessels as well, but the investment never -- will not be as high as what we have seen in last year and this year. And for the future investment, actually, we will keep investing in the R&D of technologies. At the same time, we will try to transport our intangible assets, namely the technologies into actual products. And we will try to transform our post investment into actual assets. So it will be a long-term process. As the profitability and cash flow of the company increase, we will consider to optimize the debt ratio and the payout ratio as well, but the 2 aspects will impact each other. Actually, we have made a 3-year plan for the debt optimization, and we will focus on 4 major aspects. The first aspect is the balance of the long-term debt and short-term debts. The second aspect is balance the dollar debts and the RMB debts. And the third part is the balance between the fixed interest debts and floating rate debt, and there's another aspect, but in total, there will be 4. But our overall goal is to reduce the debt ratio and the cost. And after reaching a certain level of debt optimization, we will consider to increase the payout ratio of the dividends. Despite all the turn ups and down in the process, we are moving forward.

[Interpreted] First congratulations on the good performance of the company in the first half of this year, and [ Mr. Shunqiang ] will explain the outlook of the well services segment and some other related details. And I have noticed that the profit rate of the overseas market actually is not as good as that in the domestic market for the reason behind. So will the profit rate for the overseas market to catch up as a level of what we have been seeing here in the domestic market? The second question is about the subcontracting costs. Over the past years, the company have invested to boost its own capability. So what's your take on the future ratio of the subcontracting cost to the overall costs?

[Interpreted] Thank you for the question. For our investors or friends who have been very familiar with the internationalization process of the company might will notice that over the past 20 years of the development, at the very beginning, we mainly focused on the [ drilling ] segment. It was after the 13th 5-year plan the well services segment started to contribute a lot to the value and the profits of the company. That is because of the feature of the well services segment. That segment requires a lot of investment in the R&D, and it will be a long process. And when it comes to the stage of the application of the new technology, we need to wait until the clients accept and recognize our technologies and process. And after that, we will try to use a new technology at a larger scale and create value. So we need to analyze the history at some time looking into the future. In the past 20 years, we can say that segment has gone from 0 to 1 and then they continue to grow and then reached the breakeven point and eventually it could make some profits. As our new products and technologies are accepted by our clients, I believe the future will be much better. I would like to add more information to that question to explain why the profitability of that segment in overseas market is relatively lower. And the prices of the products or technology depends on 3 different kind of things, the first one is our own capability. The second one is whether our clients would like to accept our technology or products. The third reason is about the brand reputation. The well services segment is still at the initial stage of internationalization. At the initial stage of the internationalization of the other 2 segments, for example, the drilling rigs and the support of vessel, at the very beginning, our customers were price sensitive, they were not technology sensitive. So they would not like to pay high prices for our products and services. And we also just exported some conventional technology, that's why we could not achieve high margin in that segment. The third aspect is about the brand reputation, and actually, our brands development on the international market is still at its early stage. We need to improve our performance in the 3 aspects mentioned before, some clients, they need the technology for some difficult operating conditions where sometimes you need advanced technologies. Of course, for those kind of technologies, we can charge higher prices. The second question about the high subcontracting rate and whether there are any improvements for this rate. Actually, in the well services segment, there are different kind of services, for example, logging, directional drilling and the cementing on the completion as well as the completion fluids. We have seen a high subcontracting rate in areas, for example, working and directional drilling, especially directional drilling, which has a subcontracting rate of about 40%. We have 2 measures to lower the subcontracting rate. If the workload increased at an annual rate of 30%, it will be very difficult for us to meet all the market demands just by ourselves with the current capacity. So to address the problem, first, we will try to develop our own capability. At the same time, we will try to seek cooperation with our partners. We believe we will try to meet market demands through subcontracting.

[Interpreted] My question is about the drilling rig segment. And from last year's, the annual and semiannual financial statements, and we can see the day rates of different kind of rigs. In the semiannual financial statements and the annual financial statements of 2023, we can see the day rate of the jack-up was our around CNY 79,000 and that of semi-submersible was around CNY 143,000. However this year, we can see the day rate of the jack-up was lowered to CNY 74,000 and that of the semi-submersible was lower to CNY 134,000. I noticed how you calculate the day rate that is to divide the revenue by the operating days. So the day rate will not be impacted by the nonoperating days of the rigs. Could you please offer the reasons why the day rate of the rigs decreased, and what will take on the future day rates of the rigs?

[Interpreted] The 2 questions you asked are really difficult to answer. I will try my best to answer the questions. And you have noticed the decrease of the jack-up rigs and semi-submersible have decreased. Actually, our workload has not increased yet, but we still keep about this profitability of that segment has increased. There are mainly 2 reasons behind that. One is because we get a good price of the rigs because we do quite a good in cost control. And as for the decrease of the day rate, there must be some other reasons behind that. The first reason, over the past 2 years, there was huge demand for rigs that can work in high temperature and high pressure and rigs that can work in deep water and deep [ strata ]. The rigs that can work in those different kind of difficult condition must have advanced technology, that's why the price for that kind of rigs is high. In the future, we will see greater demand for rigs that can work in high temperature, high-pressure, deepwater and deep strata environment. At the same time, the demand for those conventional rigs, which can work in the normal temperature, normal pressure will decrease.

[Interpreted] Thanks once again for your questions and explanations of the management. I would also like to thank you for your interest in this Board for COSL. Because of the time limit, the conference concludes now. If you still have some other questions, please contact the company at any time. Thank you once again for your participation. That's the end of the meeting. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]