China Oilfield Services Ltd

SSE:601808

Earnings Call Analysis

Stellar Q3 Paves Way for Profitable Q4 and 2023

The company's performance in the first three quarters was exceptional, driven by robust overseas contracts, leading to high revenues and profits. Q4 is expected to continue this momentum due to strong overseas orders, mainly from Middle East and Saudi Arabia rigs, despite anticipated negative impacts from R&D and repair costs. The profitability outlook remains brighter than before, and 2023 is set to reach new heights with current overseas orders totaling USD 4 billion. Exchange rate fluctuations positively influenced net profit by CNY 440 million, contributing to a significant operating profit increase of 50% year-over-year, higher than the reported 15%. Framework negotiations with Sino are ongoing, with prices likely to maintain relative stability while pursuing increases in workload both domestically and overseas. Well service utility rates stood at 83% by the end of Q3.

Revenue from Overseas Contracts

The company successfully obtained overseas contracts with a cumulative value of USD 1.5 billion, including rig services in the Norway sea area estimated at RMB 4.7 billion, between January and September.

Capital Expenditure for 2023 and Rig Acquisition

The capital expenditure (CapEx) planned for 2023 is substantial, totaling RMB 9.3 billion. The company has signed contracts for 4 rigs, already anticipating the delivery of two rigs soon, with the remaining two expected before August 2024.

Dividend Issuance Strategy

One of the key aspects for investors is the assurance of dividends. The company maintains a dividend issuance policy, with plans to distribute not less than 30% of profits. This represents a commitment to providing consistent shareholder value.

Strong Cash Flow Performance

Q3 cash flow showed a significant increase to about CNY 4.3 billion, notably higher than in Q1 and Q2. The cash flow accounts reflect an improvement of about 14% compared to the previous year, which management attributes mainly to heightened activity in the overseas market, particularly in the Middle East.

Effective Cash Flow Management

The company has made strides in managing cash flow by accelerating collections and employing multiple expense management methods. This proactive cash management is slated to continue in alignment with the company's CapEx plans and future financial commitments.

Rig Fleet Composition

As of the reporting period, the company owns 37 rigs and rents 24, resulting in an ownership ratio where 60% of rigs are company-owned, while the remaining 40% are rented. Significantly, rental fees are on an upward trend due to market recovery, which the company aims to mitigate through strategic negotiations with rig owners and clients.

Foreign Exchange Impact and Semisubmersible Rigs

The company reported an exchange-rate-induced impact on revenue of CNY 120 million from January to September for the year 2023. In comparison, the impact for the same period last year was CNY 550 million. This shows that while the company faced losses due to exchange rate fluctuations, this year's losses have been reduced. Additionally, the fleet's semisubmersible rigs experienced changed utility rates, potentially affecting revenue figures.

Outlook for Semisubmersible Utilization and Cost Reduction

Looking ahead to Q4, the company expects an increase in utilization of semisubmersible rigs, bolstered by new contracts in the North Sea. Moreover, modifications to rigs per Middle Eastern contracts are expected to lead to decreased costs, with an anticipated savings of around RMB 50 million.

Earnings Call Transcript 2023-Q3

[Chong Xiaojie, executive]

[Foreign Language]

[Unknown Executive]

[Foreign Language]

[Chong Xiaojie, executive]

[Foreign Language]

[Interpreted] Thank you, Mr. Hang Wei, for introducing the company's operation and performance in Q3. And next, we will communicate and discuss with you about the company's operational performance in Q3 of 2023, and other concerning issues of the investors within the scope of information and disclosure and the permission.

[Chong Xiaojie, executive]

[Operator Instructions] Now we will have the moderator to connect to the first investor. Thank you.

[Nai Di Zhao, analyst]

[Foreign Language]

[Interpreted] I have 3 different -- I have 2 different questions. But first of all, I would like to congratulate you on this good performance. The first one is since this year, we have already seen a very good workload and the business as well as the performance of COSL. And we also have seen this order of overseas markets have already been implemented gradually. And we would like to ask what is the prospect in Q4 and for next year? This is the first question.

The second question is, we also have recently heard from Sino's press release about their CapEx increasing from the original plan of CNY 100 billion to CNY 120 billion to CNY 130 billion. And now we would like to know that for this CapEx increase, will this influence the cost of business as well?

[Chong Xiaojie, executive]

[Foreign Language]

[Interpreted] So thank you so much for Zhao Nai Di from Everbright Securities. I would really like to say that for the first 3 quarters of this year, the performance has been really good, especially for the overseas contracts and for the order. And no matter it's about the revenue or about the profit, they have all been very good.

Currently, we expect that Q4, we will still keep this upward trend, especially about the revenue and the profit of overseas orders. And we think the Q3 compared with Q4, we will see another increase of Q4, it is mainly coming from Middle East and Saudi Arabia rigs. And for overseas, we also think that the overall development and the order will still be in this quite high level.

So the revenue of the whole company of COSL in Q4 will still keep at this at a very high level. And we also can see that based on the previous experiences, Q4 has always been the highest in terms of revenue. However, for R&D and repair and for this accumulated expenditure in Q4, it will influence negatively about our profit to a certain extent. However, since this year, we have taken this balance cost and expenditure. So in Q4, we think compared with before, we still have a better profitability.

And for next year, our overseas orders, we will still expect quite good quite positive increase because since 2022, our order with overseas markets have already reached at USD 3.5 billion. And we also have newly signed USD 1.5 billion. So now what we have in total volume about overseas order is USD 4 billion. So these would all be embodied and shown in next year. So for next year, we still think it will come to another height.

[Foreign Language]

[Interpreted] So now I would like to answer the second question. Indeed, after listening to Sino's Q3 CapEx report, we have already known about this increase of CNY 20 billion, and for the Sino's CapEx interest, it will definitely be a very good news for our well service aspect. However, we have to say that this is already being a more opportunity for us, especially to provide more well services for [indiscernible]. It will benefit us in terms of revenue, workload and profitability at the same time. And for this USD 20 billion -- for the RMB 20 billion of the increase, we are not sure whether it will be spent domestically or overseas, will it be spent on completion or rigs. And we are still discussing with Sino about that.

However, we are still quite positive about it post the positive growth of the well service business for COSL. We think it will also have a positive influence for the revenue, for the workload and for the profitability of the COSL of this year. However, we are still not sure about the specific amount of increase or this area of the final influence. Thank you.

[Amily Guo, analyst]

[Foreign Language]

[Interpreted] Madam Chong, Mr. Huang, I have 2 questions. The first one, I would like to know how is the interest of this exchange currency of our overall business influence in Q3 compared with Q2 of this change to currency rate.

And the second one is about our rate for the domestic rigs because in the end of this year, we will renew a framework agreement with Sino. I also would like to know for these 4 new devices, how will we renew the price with Sino? Will it be like an increase in next year?

[Chong Xiaojie, executive]

[Foreign Language]

[Interpreted] So thank you, UBS, for the question. The first one is about the exchange rate influence of Q3. And I would like to say for this quarter, the influence cost by the exchange rate is about CNY 120 million. For the same period of last year it's CNY 560 million. So it's leading to this increase of our net profit by CNY 440 million in total. So although we have disclosed that our net profit increase of this year is 15%. However, if we exclude the influence of this exchange rate and -- which is smaller compared to like much bigger last year. So our operating profit compared with last year Y-o-Y, is 50%. So if we don't take into consideration the exchange rate, our profit increase is much, much higher than what we have already disclosed in our official report that is 16%. Thank you.

[Foreign Language]

[Interpreted] So thank you for the second question. And this question is actually what a lot of investors are really concerned about. So for our framework agreement with Sino, we are still discussing, and we haven't got a very clear result yet. However, I would like to say that we will still keep the trend of this year, and the price will still maintain this relative stability. And to a certain extent, at certain different levels of certain different areas, we may have some increase.

And I also would like to say that domestically speaking, as we have repeatedly told our investors, we would like to have this increase of the workload because we hope to achieve this scale effect. And for overseas market, we hope to increase both our workload and our daily rate at the same time. Thank you.

[Operator]

[Foreign Language]

[Jack Lu, analyst]

[Foreign Language]

[Interpreted] I'm from Morgan Stanley. And I have 2 questions. The first question is about this semisubmersible rigs, and I have to ask about this reason why the utilization rate is still quite low. And we can also see since last year, CNX CapEx has already had a very fast growth. And we still have seen this year of utilization rate of the semisubmersibles are not very high. Why is that? And if the workload has always been low like that and what about we stop 1 to 2 rigs and then to lower the cost, have the COSL considered about that?

And then the second one is about the submersible rigs as well. And what is the cost per day of the operation now in U.S. dollars? And what is the price range on different types of the floating rigs of the semisubmersibles?

[Chong Xiaojie, executive]

[Foreign Language]

[Interpreted] So I'll first answer the questions about the semisubmersibles and about the utility rate and about why we don't stop the usage of that. So as we all know, for this recovery of this oil service industry, the rule is we first start from this offshore market that is not very deep in depth. And then it's actually first having a jack-up rig to recover first. So they have seen the first wave of growth. And then it will come to the deeper sea, you will have this utilization of the semisubmersibles.

So it is actually less lower stack than the jack-up recovery. So we also have already some global data from third-party companies. So there's a global release rate of jack-up rigs are all higher than the semisubmersibles. So according to the global report, it's only about 60% of that on the jack-up one. So this is the rule, not only for the industry, but also for the global players.

And the next one is about the well service. So for the end of Q3, about 83% of our utility base have already been rented. So this is already like a record high in the past few years, and it has already got this increase for 15% Y-o-Y. So for this year, we will still see more development of this jack-up industry as well as the semisubmersible. We hope to have this higher utility rate of the semisubmersibles.

And for next year, we think that the semisubmersible utility rate will definitely come to an increase. And for COSL currently, have no short-term plan about shutting it down or something because we think that it takes time to recover for this whole industry. And then for semisubmersibles, we just have to be patient about it.

So if we talk about -- if we already decided to stop it like completely or like COSL stop it, so you will actually ask us to spend much more money if we want to restart that. So the company is also considering and weighing all the costs than about possible risks. And what we are deciding now is in a short period of time, we will explore more markets about semisubmersible rigs and then we hope to have better utility rates in next year. Thank you.

[Foreign Language]

[Interpreted] So for the second question is still about the semisubmersible but it's about the corporation cost, the OpEx, but I can actually analyze according to different categories. So for the OpEx of semisubmersibles has always been much, much higher than that of the jack-up ones. And then in this area of Norway and the cost of semisubmersible rigs have also been much higher than the OpEx of the domestic counterpart.

So we also can see that, generally speaking, this operation idea about some semisubmersible risks in COSL now is still trying to increase its utility rate. And we also hope to lower the cost by various methods like the strategic alliance and partnership or like try to reduce the cost of the whole supply chain. And we also hope to reduce the amount of spend for maintenance or repair to try to utilize and off-premise the days that could be used as utility base. And we also would try to increase our quality management and our security management to try to have more billable days.

So for next year, we expect this utility rate of overseas market of semisubmersibles will also be on the rise with a high increase of this profitability as well for overseas market for semisubmersibles.

[Operator]

[Foreign Language]

[Unknown Analyst]

[Foreign Language]

[Interpreted] So I actually have several questions. The first one is we have already heard from other reports saying that in the North Sea, and we have already seen this 3 new submersible contracts being added. I also would like to say that are they included in this newly signed contract between January to September?

The next one is actually about the CapEx. And we can also see the rigs now recently are actually quite sought after. So are we considering especially with the increase of this operation cash flow? Can we just consider about the increase of the RAM? And the next thing is about the dividend issuance.

[Chong Xiaojie, executive]

[Foreign Language]

[Interpreted] So for the first for the first question from January to September for overseas contracts with the total value of USD 1.5 billion. It has already included this rig service in this Norway sea area. It has already included that. I have already disclosed it before in a previous press conference. It is in a value of RMB 4.7 billion. Thank you.

[Foreign Language]

[Interpreted] So now it comes to the CapEx question. This year, for 2023, our CapEx plan is RMB 9.3 billion, and we have already signed a contract for 4 rigs and 2 will be delivered very soon. And the rest 2 will be delivered before August 2024. So the CapEx will consider the entire cash flow for also the market research demands and also about this durability and the years of service of our rigs.

So we also can see that with this increase of demand and the industrial recovery, we have already considered about the shortage of the possible available rigs. And we will evaluate this based on this CapEx and about the following results. So generally speaking, the CapEx will consider the overall cash flow. And as I mentioned before, about our fleet structure, market demand and a cash flow, et cetera.

[Foreign Language]

[Interpreted] So about this dividend issuance, I also would like to know that it's still according to our plan is no less than 30%.

[Operator]

[Foreign Language]

[Huaxin Miao, analyst]

[Foreign Language]

[Interpreted] So I have 2 different questions. The first one is about the cash flow of Q3 is about CNY 4.3 billion, and it's much higher than Q2, Q1. So I think it's definitely because we have done a lot of jobs about cash flow management of COSL. So I would like to know that how did you do that?

And the second one is about the rigs. I have already known that COSL has acquired 4 different rigs. And I also would like to know that what is the proportion of this in-house owned -- self-owned rigs compared with the own -- the rigs that we are renting from others? And what is the rental fee?

[Chong Xiaojie, executive]

[Foreign Language]

[Interpreted] So thank you, Macquarie, for your question. And it is actually about this cash flow question. Indeed, we have done 2 major aspects. The first one is we have fastened our collection of the collectibles. And the second one is we have used multiple methods to try to manage our expenditures.

So you can also see from our report about the performance and our cash flow. So here, it is about CNY 4 billion of cash flow and it is up by 14% of last year. So I have to say that this is mainly attributed to the increase of overseas market, especially about Middle East. And then the cash flow is actually having a higher level is because of them and because of the high increase.

And for domestic market, we also have communicated with CN, and we have accelerated the confirmation of the workload and the approval of the workload. So generally speaking, we will still continue the cash flow management as what we have done in the past 3 quarters. And we also will try to manage the cash flow in order to meet our future expenditure for our CapEx plan. So we will try our best to guarantee the security of the cash flow. Thank you.

[Foreign Language]

[Interpreted] So now it's about the second question, about the amount of rigs that we own and the amount of rigs that we rent. So until the end of September, we altogether had 60 rigs. And among them, 24 our rented and 36 are owned by ourselves. In October, for the 4 rigs that we have already bought, one has already been delivered. So that is to say yet until now, we have 24 that is rented and 37 that is owned by us. So roughly in proportion perspective, 40% is rented and 60% is owned by ourselves.

So for the rental fee, I have to say that previously, the whole industry was actually in the low tide. So the rent was quite low. But this year, because of the picking up of the market and the demand is also increasing. So we indeed have faced some pressure about the rent increase.

However, we are still communicating with the rig owners and try to negotiate them about the rent price. And if we indeed will suffer from this rent increase, we also will pass the pressure to the clients and try to communicate with them and negotiate with them about this possible increase.

[Operator]

[Foreign Language]

[Toby Shek, analyst]

[Foreign Language]

[Interpreted] Madam Chong and the management team, I'm Toby from Citi. I have the first question I just want to confirm because just now you said for the RMB 120 million for this exchange rate led to this amount of the revenue. I would like to say, is this just for the whole year or like from January to September? Is it just is about Q3 or is it like [indiscernible] for this year and another CNY 550 million. I just like to confirm those 2 numbers. If it's just that for Q3, then the loss is actually quite minimum.

And the second question is about the semisubmersibles. If we compare with last year Y-o-Y, indeed, it's actually quite pleasing. The second one is, if we compare with Q2, and we have seen this decrease amount of utility rates of the semisubmersible, is it because of like the Deep Blue exploration project has been finished? So this rig is coming to China domestically? And why is that?

And then we also can see that recently with the new contract of the Middle East is starting to operate. It is already having this high billing rate come into play. So why we have seen that compared with Q2, Q3, the revenue is still quite stable. Is it because of this increase of the jack-up utility fee and -- utility rate and this higher daily rates have been compensated by the loss of the utility days of the semisubmersibles?

[Chong Xiaojie, executive]

[Foreign Language]

[Interpreted] So first, thank you, Toby. I will first answer the first question about exchange rate. For this CNY 120 million is for this year 2023 from January to September. The CNY 550 million for last year is also for the same period of time from January to September. So it's not just for Q3.

[Foreign Language]

[Interpreted] So the second question is about the semisubmersibles. Indeed, at early days for Q3, the Deep Blue exploration with the semisubmersible one has already been shifted from Myanmar to come back to China domestically. And the next thing is for our Xinwang rig of semisubmersible has already won the project contract of North Sea. So we are actually having this process of molding and demolding. So this is the reason why Q3, we have already seen some changes of the resource allocation.

So maybe to a center extent, this has already influenced our utility base of all those semisubmersible rigs.

[Foreign Language]

[Operator]

[Foreign Language]

[Lawrence Lau, analyst]

[Foreign Language]

[Unknown Executive]

[Foreign Language]

[Lawrence Lau, analyst]

[Foreign Language]

[Interpreted] I'm Lawrence from BOCI. And I have 2 questions. The first one is, I would like to know still about the semisubmersibles, compared with Q3. Do you expect that you will have this increase of this like semisubmersible utilization in the future. And now the second thing is actually about this modification of out the rigs and about these devices. Any plans about that?

[Chong Xiaojie, executive]

[Foreign Language]

[Interpreted] So first, to answer the first question is about the semisubmersible because we have already relocated this deep blue exploration coming to China. So in Q4, we will definitely see the increase of that. And then we also have seen that Sino will also start the work of this North Sea. So in Q4, it will also have the increased workload of that.

[Foreign Language]

[Interpreted] So in Q4, we will still have some modifications of the rigs based on the contract with Middle East clients, and we will have a much big decrease compared to Q2 and Q3 of the cost. So it will be about RMB 50 million.

[Foreign Language]

[Interpreted] Thank you so much for your active participation and your concern and support for COSL. So due to time constraints, we will come to an end for today's meeting. Thank you.

[Foreign Language]

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