China Oilfield Services Ltd

SSE:601808

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, good afternoon. First of all, thanks for joining the 2020 third quarter results conference call of China Oilfield Services Limited. Now please allow me to introduce you the management representatives: Mr. Zheng Yonggang, Chief Financial Officer; and Mrs. Yanyan, Corporate Secretary. At today's presentation, Mr. Zheng Yonggang will walk you through the financial figures and operational review for the first 3 quarters of 2020. After that, we'll open the floor for questions.

Now let me pass it down to Mr. Zheng.

[Yonggang Zheng, executive]

Okay. Ladies and gentlemen, good afternoon. I'm Simon, CFO of COSL. Welcome to the 2020 third quarter results conference call. COSL has just released 2020 third quarterly results.

Firstly, I would like to give you the brief introduction. As of the third quarter of 2020, due to the due impact of COVID-19 pandemic and the priced global oil price, the international oil service market fell into the trough, benefited from the continuous implementation of the domestic 7 years action plan and multiple efforts such as cost reduction as well as efficiency improvement, reasonable allocating resources, increased investment in scientific research.

COSL achieved stable operating results as compared with the same period last year. In the first 3 quarters of 2020, operating income reached RMB 21.45 billion. Net profit reached RMB 2.17 billion. The operation volume of drilling service segment and the main lines in the well service segment has been increased. For the marine support service, stable operation was maintained. The number of operating days for the self-owned fleet was basically flat and the operation of the company's charter vessels increased as compared with the same period of last year. As for the geophysical acquisition survey service segment, the workload for the 2D and 3D survey decreased due to the outbreak of pandemic.

The domestic market remains stable with recovery of the economy and long-term deployment of national anti-security strategy. However, the development and the prevention of pandemic overseas and the trend of oil price still face severe condition.

In response to the macro overall uncertainty such as pandemic and industry challenge, COSL will continue strict implementation of works such as the safe operation and the cost control through multiple measures, striving for stable operation for the year.

This is the operation of COSL for the first 3 quarters. Please feel free to raise questions if you have any. Thank you very much.

[Yanyan Wu, executive]

Thank you, Mr. Zheng. Now we will open the floor for questions. Please note that we will provide consecutive interpretation during the Q&A section.

[Operator]

[Operator Instructions] [Foreign Language]

[Unknown Analyst]

Can you guys hear me? [indiscernible] I have basically 2 questions. First question is regarding the finance cost. We see that there's significant increase in finance cost in the third quarter this year. And we assume partly it's due to the appreciation of renminbi against USD. So can you give us a brief breakdown about how large business is going coming from exchange losses and how large is this recurring finance costs?

And we also see that there's declining utilization rates for the Drilling Services segment. So can we have a forecast or a guidance for the utilization rate going forward moving into fourth quarter this year as well as 2021?

[Yanyan Wu, executive]

[Foreign Language]

[Yonggang Zheng, executive]

[Foreign Language]

[Yanyan Wu, executive]

[Interpreted] I would like to answer your second question first. It is true that comparing with last year for our drilling services, the utilization rate has declined. This is because of the vessel chartering platform. Well, in fact, our workload has increased. However, if you compare our workload with the vessel chartering platform, well, the growth for the external vessel chartering platform is faster than our own workload growth. But then there is no need to worry about this because for the external vessel chartering platform, the arrangement is that of a back to back arrangement in terms of cost and expenses. So when we utilize the platform, then only then will we incur cost.

So if you look at Q4, Q4 is traditionally a slow season and utilization rate is believed to come down further from the current level. So for the whole year, we believe that utilization rates will be a low trend, will be a downward trend. But then when the economy begins to recover and when the pandemic is going to be alleviated, next year, we believe that utilization rates will come back up. And again, we hope that there will also be the opportunities of contracts in the international market. Thank you.

[Yonggang Zheng, executive]

[Foreign Language]

[Yanyan Wu, executive]

[Interpreted] Now let me comment on finance costs. Comparing with last year, there's really a decline in finance costs because at the beginning of the year, we successfully issued a bond in the amount of USD 800 million. The interest rate was actually lower than that in the past, so our finance cost is smaller than of last year. However, you mentioned very rightly that there is an exchange loss, and it is estimated that the exchange loss is around $200 million.

[Operator]

[Operator Instructions] [Foreign Language] The next is from Morgan Stanley.

[Unknown Analyst]

[Foreign Language]

[Yanyan Wu, executive]

[Interpreted] In the third quarter, in terms of your revenue, it is around CNY 6.9 billion to CNY 7 billion. However, if you look at your gross profit margin, it has improved. In the second quarter, gross profit margin was 16%. In the third quarter, it improved to 18%. I would like to know why there is such an improvement in your gross margin. And is the reason because of a change in the split between your Drilling Services and your Well Services segment, or is it the cost of your cost control efforts? In the future, do you think that this increasing trend of your gross profit margin will be sustainable?

[Yonggang Zheng, executive]

[Foreign Language]

[Yanyan Wu, executive]

[Interpreted] There are a couple of reasons behind this. First of all, in the second quarter, there is an increase in our overseas revenue especially because there are a number of high daily rate contracts started in the third quarter. So that's why gross profit increased.

[Yonggang Zheng, executive]

[Foreign Language]

[Yanyan Wu, executive]

[Interpreted] The second reason is that our company actually wants to transform ourselves from a drilling company into a drilling plus well services company. So if you refer to our annual report, you can see that we have actually significantly stepped up our R&D assets. If you compare our R&D expenses between this year and last year, the expenses have increased by more than 50%. So now we are using more of our self-owned technology and self-owned equipment. And we have reduced outsourcing and contracting out our work. And so we have used more of our equipment. So that's the reason why you have seen this change.

[Yonggang Zheng, executive]

[Foreign Language]

[Yanyan Wu, executive]

[Interpreted] Let me supplement. If you look at our Well Services segment, where in the future, it is going to be more significant and the amount of manpower that we are going to use for this segment will decrease. And in terms of the share of use of equipment and human resources, well, the percentage is only 20% to 30%. However, for this particular service segment, our gross profit margin is going to be above 50%. In other words, we are able to use only 20% to 30% of the share of equipment and manpower to generate a gross profit margin of more than 50%. So you can see how efficient our Well Services segment is.

[Operator]

[Foreign Language] [Operator Instructions] [Foreign Language]

[Unknown Analyst]

[Foreign Language]

[Yanyan Wu, executive]

[Interpreted] Comparing the second and the third quarter, we can see that the number of days of utilization has decreased by around 9%. And if you look at your Drilling Services segment, revenue actually should have come down if there is no change to your daily rate. However, looking at the third quarter, the total revenue has increased from the second quarter. So is it because of growth of your Drill services segment? If you compare third quarter and second quarter, how much is the growth of your Well Services segment? And also on a year-on-year basis, how much is the growth? And what about your EBIT margin?

[Yonggang Zheng, executive]

[Foreign Language]

[Yanyan Wu, executive]

[Interpreted] In the third quarter, the utilization rate of the Drilling Services segment has come down. However, as mentioned just now, in the third quarter, there was the beginning and start of some high daily rate contracts. So that's why revenue did not really come down.

For our Well Services segment, it continues to develop. And it is also making a high level of contribution, overall speaking.

In terms of margin, the margin rate of the Well Services segment, it is around 20%. And this year, because of some price fluctuations, there is a decrease. However, it is still the highest among all our business segments.

[Operator]

[Foreign Language]

[Unknown Analyst]

[Foreign Language]

[Yanyan Wu, executive]

[Interpreted] The first question is about your Well Services segment. In terms of your total revenue and profit, Well Services segment accounts for a very big percentage, in fact, 60% of your profit. So I would like to know about future replacement potential of this segment. And what about the future -- its future share of the total -- of your total business. Is there any kind of outlook or estimate or target?

The second question is about oil price fluctuation. So this year, there was oil price -- crude oil price volatility. And what do you think will be your price adjustment trend? Now we are in the fourth quarter already, so do you have any estimate or expectation about price adjustment for next year?

[Yonggang Zheng, executive]

[Foreign Language]

[Yanyan Wu, executive]

[Interpreted] Let me answer your second question first concerning our price arrangement with party A, that is the single largest customer of our company. Well pricing -- the pricing mechanism is based on a market-oriented arrangement. And so -- well, this year, it is true that there is low oil price and also the pandemic. So as a result, our price has come down for both our Drilling Services and Well Services. And this is also reflected in our contract with party A.

And this year, it is true that workload has increased. But then because price came down, so our profit was affected. Now we can see that the oil price is more or less quite stable. It has stabilized at around USD 40. And so far, we have not seen any trend or further decline in price, and so we believe that we have already hit the trough in terms of price.

[Yonggang Zheng, executive]

[Foreign Language]

[Yanyan Wu, executive]

[Interpreted] Let me now comment on the Well Services business segment. If you refer to our financial statements, you can see that there is outsourcing or contracting out operations. And there are 2 types. One is the contracting out of personnel, human resources. The other is the contracting out of business. And the contracting out of business is actually a source of our profitability.

[Yonggang Zheng, executive]

[Foreign Language]

[Yanyan Wu, executive]

[Interpreted] The second factor is about upstream companies including Sinopec and Sinochem. So actually, there is the use of external equipment and technology. And for our company. In fact, we also have some internal conducted operations and business and enterprises. So if you make a comparison, you can see that our technology, our efficiency, our safety, are all on very high level. So in other words, in the future, there will be the opportunity and potential for our products to be able to get into the operations of upstream companies like Sinopec and Sinochem.

[Yonggang Zheng, executive]

[Foreign Language]

[Yanyan Wu, executive]

[Interpreted] The third area or third source of some imagination on your part is that in terms of our high-end well services, well, all along, we have been developing our high-end well services and our technology is already on a very unified status [ end ] level. But then at the same time, we also enjoy cost and efficiency advantage.

So for our Drilling Services segment, we are actually moving together into the international market. And originally, without the pandemic, actually, this year, we planned to promote the expansion of our high-end overseas operations and businesses. However, because of the pandemic, there is actually a suspension of the overseas operations.

[Operator]

[Foreign Language] Thank you, everyone. Due to the time reason, we will take the last question. [Operator Instructions]

[Yanyan Wu, executive]

Thank you. Okay. Thanks for your questions and the management's patient answer. We are pleased to announce that today's conference call is ended. Thanks again for joining us. Goodbye.

[Yonggang Zheng, executive]

[Foreign Language]

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