China Oilfield Services Ltd

SSE:601808

Earnings Call Transcript 2022-Q2

[Weizhou Sun, executive]

[Interpreted] Good morning, investors and analysts, and welcome to the 2022 interim results presentation of COSL. Today's meeting is held in the form of live video conference and teleconference. Thank you so much for your participation.

First of all, please allow me to introduce the participants from the Board of Directors and management today attending this conference. They are Mr. Zhao Shunqiang, Chairman and CEO; Ms. Chiu Lai Kuen, Independent Non-Executive Director; Ms. Chong Xiaojie, Chief Financial Officer; and I, myself, I'm Sun Weizhou, Secretary of the Board of Directors of the company.

Today's presentation will be divided into 2 parts. First, Madam Chong Xiaojie, Chief Financial Officer, will introduce this interim operating result of 2022, and then we will have the QA session. And next, let's welcome Madam Chong Xiaojie, Chief Financial Officer, to introduce the presentation of the performance, and let's welcome Madam Chong.

[Chong Xiaojie, executive]

Good morning, ladies and gentlemen. Welcome you to attend COSL 2022 interim results announcement conference.

Before the formal introduction, I would like to remind you to pay attention to the disclaimer on the materials of this conference on this page.

Today's presentation will be divided into 2 parts. First is 2022 interim results review. Second is our future prospects.

In the first half of 2022, the global demand for crude oil continued to recover, and the international oil price gradually rose amid the shock, the global upstream exploration and production. Capital expenditure continued to grow, and the oilfield service industry gradually recovered.

The activity of [indiscernible] oilfield service sectors has improved to varying degrees, especially the strong growth for drilling and [ rare ] completion business. The utilization rate of global drilling rigs continues to improve and the situation of equipment surplus gradually improved.

In the first half of the year, the company actively coordinated the [ epidemic ] prevention control and production operations, refined the implementation of cost reduction, quality improvement and efficiency improvement and fully promoted research and the development of key core technologies into the transformation of achievements.

During the period, the company's revenue was RMB 15.19 billion, and profit for the period was [ RMB 1.1 billion ]. The company has always focused on the needs [indiscernible] the development opportunities of the industry and continuously improve the core competitiveness of the technology sector.

In terms of exploration works on deepwater and deep layer, built an integrated exploration technology, ecology and effectively supported the efficient discovery of offshore oil and gas reserves.

In terms of development, the operation scale [ or self-owned ] core technology and the system stability have been further improved.

In the first half of the year, the company obtained 40 invention patents with an increase of 80% year-on-year. Scientific and technologic innovation continues to make breakthroughs and unto high temperature and high-pressure logging technology and equipment supports oil and gas exploration and the production.

High temperature acoustic imaging and high temperature electric large diameter coring instrument have reached the international advanced level.

The company has always taken the self-reliant in science and technology as the strategy base point accelerated the implementation of the technology-driven strategy constantly optimize the science, technology and innovation, ecology, accelerated the efforts to tackle key core technologies and continued to promote the development of overseas market with self-development technologies.

In the first half of the year, the company closed followed the development trend of the industry through continuously improvement of management labor, the quality and quantity of equipment reached a new high and more than 240 large-scale equipment, more than 180 sets of drilling and workover rigs, the 900 sets of core technology equipment were operated and managed safely and effectively. We coordinated 3 drilling rigs and 6 offshore LNG vessels and expanded 17 series of Xuanji systems.

In terms of cost control, the company actively implemented the cost leadership strategy and continue to do a [indiscernible] management through scientific and technology innovation, equipment efficiency creation, material control and other measures. We realized the accumulated cost reduction of RMB 420 million.

The company established an integrated and a new energy business division to promote the transformation of integrated service to strategic. Operation capacity of integrated projects has been significantly improved. The company contracted the service integration project in 8 fields of mud, cementing, directional well, logging and perforation, which [ marked ] the breakthrough of the company's integrated technical service in Mexico onshore oilfield.

In the first half of 2022, over 140 new signed overseas contracts, representing an increase of 180% over the same period last year. The total amount of newly signed overseas contracts was about USD 1.7 billion, representing an increase of 724% over the same period last year. The company's [indiscernible] through in the high end [indiscernible] improvement of the company's international brand image.

The company firmly grasped the rising trend of the industry, continuously optimized the layout of overseas, deeply cultivated regional markets and obtained a number of large-scale, long-term and high-value contracts.

In the second part, let's look forward to the company's development prospects in the second half of 2022 into the next few years. Driven by high oil price and increase in production of oil and gas, the overall scale of global exploration and production investment will be significantly increased. The oilfield service market is expected to further expand while service fee will be gradually raised.

The company will continue to enhance its equipment strengthen, keep promoting scientific and technological innovation and build up integrated service capabilities for the whole oilfield life cycle oriented towards customer demand. The company will be gradually development into a world-class energy service company with Chinese characteristics under the guidance of the new 5 development strategies of technology-driven, cost leadership, integration, internationalization and regional development.

The company will continue to adhere to technology-driven strategy as the core. Increased scientific research inputs will promote key technology research, improve the company's competitiveness, both China's oil and gas reserves and production and [indiscernible].

In the second half of the year, the company's key projects accelerated the efforts to core technologies and improved the profit contribution of the technology segment. The company were focused on deepwater, deep well, [indiscernible], high temperature and high pressure [indiscernible] integration and other industry needs, and it persisted in technology-driven strategy.

The company will continue to focus on the value management or full life cycle and go all out to promote the value of large equipment through scientific allocation of large equipment resources, strengthening the evaluation and monitoring of the effectiveness of large-scale equipment, establishing an exit mechanism for the transformation of old equipment and the continued optimization of equipment structure.

In terms of green and low-carbon development, we will continue to promote industrial transformation and upgrading and [indiscernible] quality development. We were actively developed the CCUS industry. We realize the [indiscernible] for efficient development on new energy and traditional oil and gas fields from an integrated service capacity for offshore wind power and to keep a differentiated layout of hydrogen energy and hydrate mining technology.

Within the new [ change user ] industrial situation, the company will continue to refine cost control, accelerate the construction of a systematic structure and long-term cost reduction [indiscernible] advantages for cost leadership, the company will continue to improve cost leadership labor, both the market [indiscernible] strengthening the cost leadership advantages, optimize the cost and expense structure and improve long-term cost reduction mechanism.

The company will adhere to the needs of customers, accelerate the integration of geological engineering, geophysical exploration, drilling and completion and the disposal engineering will release the efficiency of integrated cost reduction, innovate technology and management [indiscernible] and actively prevent low-cost comprehensive solutions to all companies.

In the overseas market, we will continue to give play to the company's competitive advantages in the industry at Iraq, Indonesia, Mexico and other overseas regions as representative to continuously stabilize overseas traditional customers. Constantly develop new customers gradually gave play to the [ scale ] efforts of overseas markets and achieve the goal of expanding overseas revenue scheme.

We will continue to promote the regional development strategy that adhere to the domestic and international market, and domestic circulation placed [indiscernible]. The company has always worked on increasing storage and production and continues to improve its leading position in the domestic market.

Overseas development will [ elect few ] customers based on regional characteristics, [ works on ] customer needs, adopt different strategies in different regions and gradually realize regional scale development.

The offshore market of China is the company's current core market, and CNOOC Ltd. is the company's core customer in the offshore [indiscernible]. We will further expand project cooperation with core customers and closely strengthen the potential workload on new blocks of CNOOC Ltd. The company receives the development opportunities in industry, reached the service content of domestic market, adapt to the change of the new global [indiscernible] increase the income scale of the domestic market.

The company always adheres to the concept of safety first, fulfilled social responsibility and [ actively ] participates in public welfare and build safety control activities with customers. The company continues to do a good job in production and management and normalize pandemic prevention and control and strictly adhered to the bottom line for our 0 infection.

Based on the company's business integration advantages, [ favorable ] financial structure, high-quality and efficient operation team under the guidance of technology-driven, cost leadership, integration, internationalization and regional development, [indiscernible] great, more valuable returns for shareholders, customers and all parties.

Thanks again to all the shareholders and to investors present for your support and understanding of COSL. Now we are happy to take your questions.

[Weizhou Sun, executive]

[Interpreted]

Thank you, Madam Chong. Now let's go to the QA session. [Operator Instructions] Now I will give the floor to the host of the conference call to host the session.

[Operator]

[Foreign Language] [Operator Instructions]

[Unknown Analyst]

[Interpreted] I have 2 questions. The first one is if we look at the peak of the last cycle until now, the whole industry has already experienced a long term of adjustment. And I have already seen this, the leverage ratio of the company continues to decrease. And it has already dropped to about 30% compared with the peak time of last period or compared with our counterparty in this industry. It's all quite low. And I'm wondering about this dividend payout. So I want to know that considering such good cash flow of the company, do we plan to increase our dividend payout ratio for this medium-, long-term shareholders as we pay for their long-term support.

The second question is about the planning of the technology. I know that [indiscernible] no matter for this offshore shale gas or nonconventional development or the planning of this technology or the onshore one. We all have made our own breakthrough development. So I want to know that what are the differences of our, for example, technology, the service model of all these?

[Chong Xiaojie, executive]

[Interpreted] Thank you so much for the question. And indeed, because of the recovery of the industry, the cash flow of the company has been constantly optimized. And according to the charter of the company, we indeed have to give the shareholders the dividend payout ratio no less than 20% of our net profit this year. And since the 2002, our dividend payout ratio is definitely above 30%. Especially since 2002, we have [indiscernible], our total payout of the dividend has already amounted to RMB 12.89 billion. And I have to say that because of the investors' and shareholders' long-term support, we have made this a sound and healthy performance and development that we will still carry out with the dividend payout to [indiscernible] support of our shareholders and investors.

[Unknown Executive]

[Interpreted] [indiscernible] to answer the second question. After this period of the low oil product price in the previous cycle, indeed have seen a good performance and good picking up of the industry and leading to a lot of changes of the oil industry, and the trend is more and more obvious. First thing is the diversification of the customers, which has led to the diversification of the need, except for the traditional ones, and we all have seen this diversification of these nontraditional demands unlocked. And even for traditional oil companies, there are emerging range of diversified new demand. So from land development to offshore development, the increasing difficulty of the development and exploration, it also requires more demand in technology and different service models.

So in COSL, we also have intense -- the synergy of different parts of optionality within our [ COSL ]. So no matter if our own service or our own business or the traditional business, they are all picking up, and we also have seen this trend of diversification coming within our own company. So for those companies, I have to say that no matter important the working methods, the operation methods, the oilfield technology, the development technology, we all have different diversification to satisfy the diversified needs and to support the whole development of the trend. And we all have to say that the trend of this changing and more diversified industry is more and more visible and obvious, which requires our own service model to be more flexible as well to prepare for better profitability in the future.

[Operator]

[Foreign Language]

[Unknown Analyst]

[Interpreted] And I would like to ask 2 questions. The first one is for the oilfield service industry, it is picking up the recovery fastly. And I know that we are going to resign the framework agreement for 3 years with CNOOC this year. So what about this [ daily fee ]? So how do the leaders feel about the [ daily fees ]? Can it be improved?

The second thing is the number of idle jack-up rig platform in shipyards have dropped significantly, and the speed is really fast. So basically, for the jack-up rigs, we mainly maintained [indiscernible] model. So how long does the company [indiscernible]?

[Unknown Executive]

[Interpreted] So I would like to try to answer the 2 questions. The first one is, every year, this time, we are going to renew this framework agreement with CNOOC for the next [indiscernible]. And this year, it is going to be discussed for the future 2 to 3 years, and we will say that the CNOOC investments and the willingness to develop will definitely guarantee the development of COSL and provide solid demand for COSL.

On the [indiscernible], our business, our service, our price will definitely be able to match the demand for CNOOC. So for the [ daily fee ], COSL will definitely use our increase in equipment and our ever-developed technology to try to get a better [ daily fees ]. And with this rising difficulty of development and exploration of CNOOC, they also require a better service and equipment and support from COSL.

So I have to say that for a lot of utilization and the technology, especially the later stage of the oilfield services like the reservoir rate [ increasement ] and also this acquisition rate of the improvement, it all requires our support to have the synergies with CNOOC. And we also hope that these joint efforts, the better results and optimization, we could also transfer this to other international overseas markets.

And for current plan in CNOOC is where we would trade our large-scale platforms and use our large-scale platforms and disciplines as well as test and improve our cutting-edge technology. So for the [ daily fee ], it's not our priority when we discussed the framework agreement with CNOOC. However, I know this is definitely a focus on priority for [ investors ], and we will try our best to have a better [ daily fee ] to also lower the cost and improve the profitability of ours.

So I have something to add that for one project recently, we have used this integrated management. We have included our cutting-edge rigs, our completion rig. And for all the different technologies have all been integrated [indiscernible] oilfield, I have to say that the overall results are good.

So for the second question, indeed we have seen the demand and the supply of the jack-up rigs is on the decline, and we have already solved that. So for the oilfield exploration and development, the recovering and the picking up of the market is very obvious. However, I think this kind of recovery is still different region by region. In certain region, for example, in Middle East, the recovery rate is quite good. However, for other regions, it's not that obvious, for example, our domestic results. And for other different parts, there are regional clashes and conflicts. It has influenced the demand for cost of fuel and also the cost of replacement with the new energy, also has cost of some negative impact. So I think the decline of the jack-up rig is very obvious. And I have to say that for the picking up of the industry, we are still quite positive but in a cautious way.

[Operator]

[Foreign Language]

[Unknown Analyst]

[Interpreted] I would like to take the question opportunity. So I have 2 questions. The first question is the current utilization rate and the [ daily fee ] of the offshore platform, especially for the one with CNOOC. And as we discussed before, as the prospect of the H2 this year and next year. The second thing is the growth of international business in H2, which regions would have a faster growth. And the overall -- overseas and follow-up outlook would be how?

[Unknown Executive]

[Interpreted] So thank you so much. I would like to say that overall, this offshore rig utilization rate is still quite low compared with our overall [indiscernible] number. It is about 70% to 75%, and the demand from CNOOC is on the right. Frankly, the domestic utilization rate is about 85%, and is still on the right. And I have to say the low utilization rate is also positively attributed to our newly signed contracts, and we are still preparing for some contracts, and some are under adaptability preparation. So this kind of low utilization rate is also to prepare better development and better profitability later.

So I would like to answer the second question. Our overseas orders are on the quick increase recently. So some parts like Middle East and Iraq, these orders are booming, and the trend of diversification is more obvious. And I have to say that we also have a better demand and the improvement of the high-quality services and equipments there. So the second one is for APAC. So except for these main oil industries, companies and players, they're also [indiscernible] major ones as well. So overall, this overseas market [indiscernible].

[Operator]

[Foreign Language]

[Unknown Analyst]

[Interpreted] I have 2 questions. The first one is about our oilfield technology aspect. I want to know what is the process of our revenue and the profitability? And what are the major tools and what are transformation rate of all those tool for our main business.

The second one is for the profit outlook of the whole year.

[Chong Xiaojie, executive]

[Interpreted] So I would like to answer second question. For H1 this year for oilfield technology, our business is definitely booming, and we can also see the demand is also on the right domestically in China with more work orders and demand for this oilfield industry. So [indiscernible] completions, cementing and the slurry, we have all seen very good growth. This has all increased at least 30% regarding our revenue, and the profitability is also very positive. And for some high-end cutting-edge equipment and technology, we have already utilized some [ domestification ] technology and the localized equipments. It has made our 70% of our high-end equipments localized. It also made better contributes to our overall development.

[Unknown Executive]

[Interpreted] So for the second question, for this year, all year round, I have to say that generally speaking, this large-scale equipments and devices with booming demand for that. And also for different oilfield services and for this large-scale equipments, we are also demonstrating to different customers and clients.

For our performance, we are still quite confident with a promising outlook, and there are also some pressures that I think is very obvious for COSL, especially the rising cost of a lot of [indiscernible] commodity resources. Although the price increase has slowed down, but it's still on the upward trend. And the second one is we have to consider that with the Chinese government paying more attention to people's health, employment and the quality of their lives. So people pay more attention to their own interest and lives, the labor cost is definitely on the rise. So these are the 2 aspects that we have to overcome, especially with the rising positive trend of the industry. This is what we have to compensate and mitigate the cost rising front.

[Operator]

[Foreign Language]

[Unknown Analyst]

[Interpreted] I have 2 questions. The first one is I have heard the news from the media saying that recently we have got 3 jack-up rig long-term contracts with Saudi Arabia, and the daily rate also from the media saying that we have 20% to 30% of increase compared with the average of the [ daily fee ]. And when will we start the working of the 3 high-end jack-up rigs? So what about the profitability of these 3 different lines?

And the next part, I would say, is in [ Iraq ] and other Asian areas, we have -- have we got any new orders, especially about drilling or Well Services?

The second question is for Well Services, we have already got a record low profitability and as well as this 2018 low point. And you also have mentioned it's because of the rise of raw material of different bulk commodities and the rising labor costs. So in H2, how do we predict the profitability? And I have to say that 80% of this service is serving this private company of ours, CNOOC. And will this high oil price set us for CNOOC's profitability really high. So can we just shift to this part of the cost increase to CNOOC?

[Unknown Executive]

[Interpreted] So overall, we have to say that the overseas market this year is developing very fast, especially in Middle East. We have newly signed the 3 contracts with Saudi Arabia about jack-up rigs and the [ daily fee ] compared with the bottom of the market indeed having a 5-day optimization. And we hope to control the costs and improve the profitability to better return investors and our capital margin. So for other different regions except for this near leasing of the equipments and devices, we mainly use this integration of the projects as the main way of participating in the markets. For example, we help them to boost their capacity and production. For example, using our Well Services, the construction of the wells, the prevention of the structuring, indeed, we use all these integrated technology and methods to boost our service and revenue-making. And with this integrated project, we are also bringing our devices and technology [indiscernible] to boost our participation and our team and our footprint in this market.

[Unknown Executive]

[Foreign Language]

[Unknown Analyst]

[Foreign Language]

[Unknown Executive]

[Foreign Language]

[Unknown Analyst]

[Foreign Language]

[Unknown Executive]

[Interpreted] For the answering of the previous question, our Well Service industry, indeed, the profitability has been compensated on the negative impact because of the rise of the bulk commodities and this labor cost, and it is indeed lower than before. And on the other hand, you have to know that recently, we have invested more in our R&D for this Well Services, and we have invested more money and give it higher priority. Recently, we also reviewed our technology system. So we have increased our typical technology and make it a higher number.

And the second thing you asked whether we can just transfer this cost increase to CNOOC because they have higher profitability, you have to know that although we are brother company, we are 2 independent companies. And for CNOOC, they are mainly doing this upstream exploration and development. For us, we are mainly doing this oilfield and Well Services. And when we discuss with them, we could say that, okay, we have a higher cost [ so could you ] increase the price for that. We could also say that a large demand of your business comes from ours.

So what about you give us a discount? These are the questions that we will propose to each other during negotiation. And normally, you have to know that in this whole industry, for the upstream exploration and development company globally, they have all got various good profitability this year nationwide or global wide. And [indiscernible] has also just said that for Well Services, our profitability would maintain similar with the same level of last year, trying to compensate the increase of the cost.

[Operator]

[Foreign Language]

[Unknown Analyst]

[Interpreted] So I have 2 questions. The first question is, from the perspective of the whole industry, how does COSL view the future oil price? What is the trend for that? And the second thing is we really have put a lot of attention to this overseas market of COSL. So how do you think Uganda project would contribute to this profit?

[Unknown Executive]

[Interpreted] It is really hard and sensitive for me to answer your question about the oil price prospects. I would only say that I would use my personal experiences and my own ideas to answer you this.

In general speaking, the oil price increase of this round is mainly due to -- in the past few years, we have seen this oil price plunge and the development and investment of this industry is not sufficient. So with not enough development, not enough exploration with true small scale offer, we have led to this current price increase.

So with the price increase just around oil company investment exploration, it's mainly on this low-cost conventional investment, the deepwater investment is still [indiscernible].

So generally speaking, from the overall domestic oil companies and international oil companies, we have to say that the capacity is still quite abundant. So that is to say that the situation of supply bigger than demand is still unchanged.

So this round of skyrocketed oil price should be attributed to the geopolitical conflicts. This has led to this tension for the demand and supply.

We expect in the next 2 to 3 years, this tension between supply and demand will not be broken, but we will not exclude this short period of surplus of supply because of the economic depression. However, recently, different countries are having a tighter control on the proper management of the economy. When they see [indiscernible] of this economic cycle, they will immediately take in time and appropriate measures to correct that. However, [indiscernible] say that in a short period of time, such tension will not be easily broken.

For this Uganda project, we cooperated with our partner, CNOOC. And currently, our negotiations are all based on the schedule that at the end of this year, we will have the working of that target. And I hope that after this being started, in H2 next year or the end of next year, we will have this normal process of the report, and we could see the profitability from this Uganda project.

[Weizhou Sun, executive]

[Interpreted] So COSL has already used our different channels, online and off-line to collect the feedback and questions and inquiries from different sources. And from the previous interactions, we have already seen this fully respondent and the current reflection of that.

So I would like to thank you one more time for your participation in this 2022 interim results presentation of COSL, and COSL will continue to communicate with investors and friends in various ways. This is the end of today's communication. Thank you.

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