China Oilfield Services Ltd
SSE:601808

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China Oilfield Services Ltd
SSE:601808
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Price: 14.9 CNY -3.87% Market Closed
Market Cap: 44.1B CNY
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Earnings Call Analysis

Q1-2024 Analysis
China Oilfield Services Ltd

COSL Expands Overseas and Increases Well Services Revenue

COSL reported a robust first quarter, highlighting the success of its 1+2+N strategy. Overseas operations contributed significantly, with revenue rising to 26% of the total, up from 21.5% last year. The company’s Well Services also showed impressive growth, making up 57% of total revenue and 87-88% of profits. COSL is confident in reaching 40% of total revenue from overseas by 2030. Investments in R&D have strengthened their market position. The company continues to mitigate regional challenges, such as the halted operations in Saudi Arabia, by seeking new opportunities elsewhere and leveraging its technological advancements.

Introduction to COSL and Q1 Performance

China Oilfield Services Limited (COSL) is one of the world's leading oilfield service providers. They offer a wide range of services across all stages of oil and gas exploration, development, and production. Their business is divided into four main segments: Geophysical Exploration, Drilling Services, Technical Well Services, and Ship Services. In Q1 2024, COSL showed strong operational results, with continued growth driven by their integrated service offerings and strategic market expansions.

Impact of Saudi Aramco's Halting of Rigs

A focal point of the call was the halting of operations by Saudi Aramco, which is expected to temporarily impact COSL’s business in the region. Despite this, the company believes that the influence will be short-term and regional. COSL's entry into new markets and its resilience in the well services sector lessens the overall impact on their international business. The potential revenue loss if suitable alternative work isn't found could be around CNY 650 million, but the likelihood of this worst-case scenario is low.

Overseas Market Expansion Strategy

COSL's international market strategy, termed as 1+2+N, signifies focused growth in one domestic market (China), two substantial overseas markets (Middle East and Southeast Asia), and numerous other international opportunities. This strategy has already shown results; overseas revenue represented 21.5% of total revenue last year and increased to 26% in Q1 of 2024. COSL aims for overseas revenue to make up 40% of total revenue by 2030, demonstrating their commitment to international growth.

Technological Advancements and R&D

COSL has invested significantly in research and development, focusing on self-developed technologies and reducing reliance on subcontracting. This initiative not only enhances profitability but also strengthens their competitive edge. For instance, Q1 2024 saw well services profit margins rise to 87-88%. Additionally, a strategic shift from purely large-scale equipment reliance to integrated services, including advanced well services, has diversified income streams and bolstered profitability.

Guidance and Prospects

For the remainder of 2024, COSL is cautiously optimistic. They anticipate potential challenges in the Middle East due to rig idling but are seeking new opportunities globally to mitigate these effects. The company projects continued strong performance in their well services division, with significant revenue contributions expected from both domestic and international markets. Guidance includes maintaining high levels of profitability for well services domestically (17-18%) despite competitive pressures internationally (6-7%).

Investor Returns and Strategic CapEx

COSL is committed to returning value to shareholders, planning dividends and potential stock buybacks depending on operational performance and market conditions. The planned capital expenditure for 2024 is set at CNY 7 billion, including two new rigs to be operational by August 2024. This strategic investment underscores their focus on expanding operational capacity while ensuring efficient resource allocation to support future growth.

Earnings Call Transcript

Earnings Call Transcript
2024-Q1

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U
Unknown Executive

[Interpreted] Conference call for COSL for the first quarter of 2024 today. And COSL is one of the largest oilfield service providers in the world. Services run through all stages of oil and gas exploration, development, and production. And the businesses are divided into four different categories: Geophysical exploration and engineering surveying services, drilling services oilfields, technical well services, et cetera, and ship services.At the same time, the advantages of integration capabilities are fully utilized to provide the customers and the clients with integrated services for the whole life cycle of oilfields. The company can not only provide the clients with single-business operation services, but also provide clients with integrated and general contracting services, and also provide sales of well services and well-related products.So the Company's business areas include China offshore and onshore specific businesses, Asia Pacific, Middle East, Europe, America, and Africa. So the company aims to build a world-class energy service company with Chinese characteristics in an all-round way. So many well service equipments and technologies are also in the forefront of the industry, and it also has a complete industrial chain of R&D, production, and related services.The company closely follows the development situation of the industry, actively promotes the business development, continuously guarantees the high quality of business operation, and is committed to achieving a win-win situation with clients, employees, partners, and shareholders.[Interpreted] Please allow me to introduce the management present today, Mr. Sun Weizhou, Vice President and Secretary of the Board of Directors. So today's meeting will be divided into 2 parts. The first one, we will invite Mr. Sun to briefly introduce the Company's performance of the Q1 2024, and then we will have the Q&A session after this.Now let me hand over the time to Mr. Sun.

W
Weizhou Sun
executive

[Interpreted] Thank you so much for the management team. And now we will go to the Q&A session in order to have all the investors equal chances to ask questions. Please ask no more than 2 questions. And please also inform your company and the name before asking questions.Please note that you will be provided with interpretation service during the Q&A session, and please leave some time for the interpretation after you ask the questions. So now let's get through the first investor. Thank you.

N
Nai Di Zhao
analyst

[Interpreted] So I am Zhao Nai Di from Everbright Securities. First of all, thank you so much for giving me the opportunity, and I have 2 questions. And before raising the questions, I would like to congratulate on the company's great accomplishment. Congratulations.So the first question is, in the last 2 years, we have seen the company's overall operation being very positive. And at the early days of this year, the President of COSL has also proposed an idea that we want to set up the target as constructing COSL as the world first-class well service company, and no matter it's domestic and international, we hope to have this market share of about 50%. And I also want to know that, what is the future prospect of overseas and domestic markets for COSL? What is our judgment?The second question is about this investor's concern. So in capital market, investors are very interested in the previous stopping of the wells operated in Saudi Arabia. And we have followed up closely with the situation. We have already seen this resumption of the workload gradually recently. We want to know that how do we see the future trend of the overseas operation in the future?And the next thing is, except for the risk, how do we expect the development for the well services in the future? Thank you.

U
Unknown Executive

[Interpreted] Thank you so much for the questions. I would like to first answer the first question. You asked me about the current presence of our business in the overseas market and the trend and how do I think about the future prospects.I would like to say that after COSL being listed in the public market, we have constantly focused on the development of the overseas markets. And especially in the 14th 5-year Plan since 2021, we have confirmed the 5 major strategies of COSL's development. They are technology driven, cost leadership, integrated development, internationalized development, and regional development.So especially in the past 3 years, we have focused on the strategy of 1+2+N, so the 1 means the domestic market; 2 means the years of our development in overseas markets, including Middle East and Southeast Asia, we have already reached scale and stable development there. So the N means our multiple overseas markets available there. And we have seen that with 1+2+N strategy being applied, we have already achieved a lot of accomplishments.For example, last year, the revenue cost from overseas projects has taken up about 21.5% of the total revenue, and the Q1's amount was as high as 26%. It's also the total proportion taken by the overseas revenue versus the total revenue of COSL as a whole.So we have the confidence that with the scaled development, especially with the integrated business and well services attached together with the [indiscernible], our revenue for overseas development would still be optimized constantly. Thank you.[Interpreted] So additionally, we have already got great confidence for our overseas development, because in the past 20 years, we have focused a lot on the optimization of the structure of our overseas business. The early stages of the development for our overseas business, it was mainly focusing on these large-scale rigs. And after we got listed until the 12th 5-year Plan, 90% of the revenue comes from large-scale equipment on the rigs.And it has already reflected, also another point, that our technology was not very advanced. The competitive edge was not very strong. But in the past 20 years, we can already tell that our scale with our international technology and our technology-driven strategy has made a profound improvement.For example, last year, 50% of the revenue of our overseas business comes from the large-scale equipment and the rigs. Another 50% comes from the integrated services like the Well Services. And these changes have been attributed to our speaking to the strategy on technology-driven and the improvement of the competitive edge in the market. We can say that with no longer just independently relying on the large-scale equipment, we have also taken this diversified development, which has got a very good support of our overseas development. Thank you.[Interpreted] The early days of this year, we had also conducted a designated workshop for the discussion of overseas business. We had reached a preliminary consensus that with our 1+2+N strategy being applied, we think the scale and diversification of our business and the clients will definitely be guaranteed. We are very confident that until 2030, the revenue coming from overseas business will reach the total 40% of the entire revenue of COSL as a whole.[Interpreted] So regarding the stopping of the work in Saudi Arabia, we are also actively communicating with the clients to reduce the incidence of the stop of the work. And we are also constantly seeking new job opportunities in domestic market in China, Latin America, and Southeast Asia.[Interpreted] And regarding our Well Service, after the previous years of focusing on the restructuring, and we have already seen great changes, especially in the 14th 5-year Plan period. The -- for example, last year, our Well Service overall revenue has taken about 58% of the entire revenue of the company, and the profit takes about 83%. For Q1, the revenue for Well Service is 57% of the entire revenue. The overall profit is 87% to 88%. So this has already seen this great speed of development. It has also seen there's a great potential of such development.[Interpreted] So we also have paid great attention to the technological department, especially in the past 20 years. We have with respect the strategy of technology-driven to develop the whole company and it can also be told from our significant investment in R&D.In the past few years, we have done a lot of investment in R&D on technology and of other products. So this has also been recognized and is reflected by the market. So it has also increased our market competitiveness. So these have all helped us to improve our international business and international competitiveness.[Interpreted] So for Q1, for our Well Service industry, we have already got a lot of good news. For example, for our Well Service [ BU ], it has no longer just to provide the basic services, but also some high-level technological services. And that we sell not only services, but also the product to the market.Last year, the revenue collected from the selling of the product was 100 million. And this year, in Q1 alone, it has amounted to 240 million. So this change has also reflected that our entire oilfield Well Service BU, has invested a lot in the R&D, and the R&D results together with the product results have been fully recognized by our clients to prove our competitiveness.And then for our entire Well Service chemical BU, it has also got the certification and recognition from the Saudi Arabia, Latin America and Qatar oilfield companies' recognition, getting the qualification to enter the second round bidding of their future products.So this is also like very good news coming from Middle East and other available foreign markets.

U
Unknown Executive

[Foreign Language]

U
Unknown Executive

[Foreign Language]

U
Unknown Analyst

[Interpreted] Thank you so much for the management team to give us the chance to propose the questions. And I have 2 different questions. The first one is about 2024 CapEx. It is about CNY 7 billion. And I have also heard that we are going to buy 2 different rigs. And how is the process of the rig purchasing? When will that be? And there -- will there be some rigs to no longer being rented out? And then we also can see that for the CapEx, we have seen a decline of that. Are there any plans about re-issuing of the dividend? And we also have any plans about this buyback?

U
Unknown Executive

[Interpreted] So there are 2 rigs that are having our CapEx on. So the first rig has already been delivered in February this year, and the second one is going to put in use in August of this year.And about the renting of the [indiscernible] now, we now have 62 rigs being operated in COSL and over 20 are rented. So the overall proportion of the in-house rigs with the rented rig, the proportions are 65% versus 35%. So for our own allocation of the different rigs and the renting and the self-owned proportion, we are hoping on the basis of satisfying the clients' needs and improving the efficiency of the rig operation to dynamically adjust the number of different rigs.So we can see that we will assess the market situation to see that how will we arrange all the different rigs and then how do we rent it and how do we withdraw. Thank you.[Interpreted] So COSL has always give a lot of attention to the payback to the investors and shareholders, so it's all depending on the quality of our operation and the overall business plan. We will definitely give the due payback and return to the investors and shareholders.So about the buyback, we will also consider according to the situation. Thank you.

U
Unknown Executive

[Foreign Language]

U
Unknown Executive

[Foreign Language]

Y
Yiming Wang
analyst

[Interpreted] So thank you so much for giving me this opportunity to propose a question. I'm Wang Yiming, and I have a question following up the previous answer provided by the management team. I would like to probe on this, because for the previous question, I have done my own calculations according to the data provided by the management team. I can say that the overall profit growth of Q1 for Well Service is as high as 20% Y-o-Y. So I would like to say that the profit is actually above 18% compared with before. And I would like to say that the level has already returned to the level of 2022.And previously, we have seen the decline of the revenue because of the certain subcontracting and they have influenced our profit negatively. I would like to know that is it because of this self-developed and self-research technology to be used and then influencing our profit positively? If so will we close -- expect this kind of trend to be continued to maintain at this Q1 level or even higher?

U
Unknown Executive

[Interpreted] Thank you so much for the question. I would like to answer that. And you can see the increase of the profit is actually attributed to several different reasons. There are 2 parts. One is being favorable. One is being not favorable.So for the favorable part, because we have got more self-developed, self-research technology, and they gradually replaced the previous subcontracting technologies with the increase of our profitability as a result. And this is quite favorable to us. But you also have to know that there is a negative impact, because we fully participate in international market with this full participation in international competition. So with that, we will also have a bigger scale of business participating in overseas markets. This will also, in turn, reduce our profit rate because we have fully participated in the overseas competition.So the current profit rate of Well Service in China domestically is about 17% to 18%. It is also because of this bidding process and other arrangements with our strategic partners. But when it comes to overseas markets, with full international market competition, the profit rate is only 6% to 7%. And this is what I want to point out that, with faster overseas market development, with full participation in the international competition in the market, with the increased of scale of our business and expanded revenue collected from the overseas market, the profit rate is also like naturally reduced as a result.So I have to say that they are favoring part and then also disadvantages part of the profit rate when it comes to the international market. Thank you.[Interpreted] What I just said is definitely for this short and mid future, for the near future, in the next, for example, 3 to 5 years. But with our competitive edge of the overall technology being polished, being further optimized, with our R&D, further investment, with improvement of the quality of the product, I expect that we will definitely have a even higher profitability and with a more potential to develop that in the future, but it's in the long run. Thank you.

U
Unknown Executive

[Foreign Language]

U
Unknown Executive

[Foreign Language]

L
Lei Mu
analyst

[Interpreted] Thank you so much, management team. I am Mu Lei from JPMorgan. And I would like to say that, if we compare the utility rate -- utilization rate of Q1 compared with Q1 last year, we will see it is actually quite flat or even with a slight decline. Then with the price remain unchanged, how come we would have like even higher gross margin?And then the second question is about this delayed execution of the contract in Saudi Arabia and Middle East. I would like to say that for the Q1, the utilization rate is about 3,400 days roughly. And no matter we have or have not found out the orders to replace this idled capacity. So what do we expect to see this utilization status quo for Q2 or Q3 or even Q4 for the jackup rigs? Thank you.

U
Unknown Executive

[Interpreted] So for the first question, if we check the utilization rate of the rigs in Q1, we could see that the [indiscernible] rigs in Middle East or the ones in Norway, the jackup ones, and then the semi-submersible ones in the Northern Sea of China, we can see that compared with Q1 last year, they all have seen a significant increase. This is for question 1. Thank you.[Interpreted] So we are actively looking for new job opportunities for the postponed execution for the Saudi Arabia rigs, and then we are actively looking for the market domestically and internationally, but we also have prepared for the worst.So the worst expectation is, if we cannot find a suitable alternative solution for the 4 rigs postponed in Saudi Arabia, we may suffer from the loss of revenue of about CNY 650 million. The profit is CNY 410 million. But we can see the chance of such happening is very, very low.

U
Unknown Executive

[Foreign Language]

U
Unknown Executive

[Foreign Language]

U
Unknown Analyst

So I am [indiscernible] from UBS. Thank you so much for the management team, giving me this opportunity. I have several questions. The first one is about the Norway rigs. We have seen this increase of the daily rate in the Norway rigs, and we are very happy to see that. There is one rig being operated now in Norway and 2 additional rigs now operated in the Northern Sea. And in the future coming years, maybe there are additional 2 to 3 rigs going to be operated in Norway. And how is the progress of the deployment of the 2 to 3 rigs? And then how do we expect the market development in Norway, considering the current status quo? And then what is our expectation of the rate there?And for the Middle East, I also have some questions, because we have already seen that 20-plus rigs are being postponed and are idled here in Saudi Arabia. So this has led to the daily rate in Saudi Arabia and the entire Middle East to have this slight decline, and for the idled rigs will definitely influence the price negatively on a standout. And then with this overall upward cycle of the entire market, how long we expect this idled rigs influence of this downward price situation could be stopped? And how do we think about the future trend? Will this downward price of the daily rate will influence other international markets as well? Thank you so much.

U
Unknown Executive

[Interpreted] So we have altogether 4 different rigs being operated in the Northern Sea and 3 are in operation. So 1 rig has been pulled to Norway in January, and now it's being remodeled in the marine workshop. And it is going to be put in production in about July and August. And the additional 3 rigs, 2 are being operated in U.K. now, 1 is in Norway, and we expect the rest 2 will come to Norway at the end of 2024 or early days of 2025.[Interpreted] So the second question is about the rigs being halted in operation in Saudi Aramco. And there are altogether 7 different companies involved. And I know that all the 7 different companies are actively seeking for new markets internationally. And I believe in H2 2024, there will be some changes of the market, and then especially the jack-up rigs that are idled in Middle East now, they may go to Latin America, Southeast Asia to look for new job opportunities. They will definitely worsen the market competition status quo and then to put pressure on the current daily rate. Thank you.

U
Unknown Executive

[Foreign Language]

U
Unknown Executive

[Foreign Language]

U
Unknown Analyst

[Interpreted] So I'm from Morgan Stanley. And I have a question about these offshore rigs. So in the next 5 years, we have the plan of expansion of the offshore and deep sea rigs. So do we plan to rent them or purchase them? And then what is the cost advantage there? Thank you.

U
Unknown Executive

[Interpreted] Thank you so much for the question. So regarding our deep sea rig development, we are -- the first one is COSL, as a well service provider company, we will be based on our strategic clients overall deepwater strategy to see how we will adapt our strategy of the deepwater development?Second one is, the current rigs and current [indiscernible] COSL, for example, like 981, 982, [indiscernible], and we could all use them to have this deepwater operation. They have the feasibility to be operated there, but it still depends on our overall strategic client development. Thank you.

U
Unknown Analyst

[Interpreted] So the second question is about Saudi Aramco. And then they have already disclosed their halting of expansion of the productivity. So I know that this has got a negative influence on the rigs business. So how it influences the Well Services, do you think there is any influence on that or no influence at all? Thank you.

U
Unknown Executive

[Interpreted] So from the third-party data, we have already seen for the upstream industry of our COSL company, you can already see for 2023, the entire oil and gas industry has increased by 6%. And we also can see the investment for this year is also expected to increase by 7%. This means that the entire market is definitely going upwards with a very positive future.And therefore, the halting of the expansion of Saudi Aramco, I can say that the influence is definitely regional and short term. And it wouldn't influence other well service business internationally. But it will definitely because of the stopping of these 20-some rigs adopted by Saudi Aramco before in a very corresponding rate. But we can see that for the entire global oil field services, the Well Services, it will not have too big influence. This is our understanding. Thank you.[Interpreted] So the additional thing is even if Saudi Aramco has stopped the rigs operation, it only influences the contracts of the existing well service companies cooperating with them. And for COSL, as I said, Saudi Aramco is a new client for us. Although with the last 2 years of efforts, we have successfully entered the shortlist of their qualified bidders for their well service partners. But we think that it doesn't influence our current well service that much, but we are looking forward to winning of the jobs and the contracts in the future, in the next few years. Thank you.

U
Unknown Executive

[Interpreted] So thank you so much for your questions and the detailed answers from the management team and for your concern and support for COSL. Due to the limited time, the event is coming to an end today. If you have any further questions, please feel free to contact the company. So today's session is over. Thank you.[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]

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