China Oilfield Services Ltd

SSE:601808

Earnings Call Analysis

COSL Reports Stable Profit, Eyes Growth Amid Exchange Challenges

COSL's Q3 results showed stable profits despite challenges from exchange rate fluctuations, costing around CNY 200 million. The company anticipates increased utilization rates moving into Q4 as operational interruptions due to typhoons ease. Well services, contributing 56% of revenue and nearly 80% of profits, are expected to maintain their growth trajectory. Management is optimistic about the next fiscal year, projecting improved margins and revenues from high daily lease rates in the North Sea and new projects in Brazil. The focus on R&D remains strong, with investments rising to CNY 2 billion this year.

Overview of COSL's Third Quarter Performance

During the third quarter of 2024, COSL experienced stable profits despite challenges posed by external factors, particularly weather disruptions including typhoons. The company's operational focus spanned across oil and gas exploration, development, and production services, emphasizing a technology-driven strategy. Notably, operational profits showcased resilience even as foreign exchange fluctuations impacted financial results, resulting in an estimated loss of CNY 200 million due to currency exchanges between the Chinese yuan and the U.S. dollar.

Rig Utilization and Future Prospects

The utilization rate of COSL's semi-submersible rigs dipped during Q3, significantly influenced by weather conditions and ongoing preparations for upcoming projects in Brazil. In response to these challenges, management anticipates improvement in utilization rates as conditions stabilize, potentially boosting performance in Q4. Looking ahead, the operational landscape is expected to enhance, with management projecting an increase in workload and revenue growth across various markets including the North Sea and Saudi Arabia.

Well Services and Financial Contributions

Well services remained a cornerstone of COSL's performance, accounting for approximately 56% of revenue and nearly 80% of gross profits in Q3. This segment demonstrated consistent growth, highlighting the firm's strategic commitment to technology and R&D investments that have increased from CNY 1.7 billion to nearly CNY 2 billion over the past three years. The forthcoming quarters are expected to sustain this growth trajectory, driven by the company’s ongoing commitment to innovation and market expansion.

Guidance on Future Growth and Margins

COSL is optimistic about revenue and margin growth in overseas markets for 2025, especially in light of contracts extending to 2026 and 2027. The management's outlook suggests that international operations will be increasingly fruitful, with assurances of compensation in case of operational halts, particularly concerning the rigs in Saudi Arabia. Additionally, a new project is set to launch in Brazil, further bolstering the company’s portfolio and revenue potential.

Financial Strategy and Shareholder Returns

In response to changing market conditions and recommendations from national policies, COSL is contemplating strategic maneuvers regarding stock buybacks and dividend plans. Although no specific buyback programs have been solidified, discussions are underway concerning shareholder returns based on overall operational performance and financial stability. The management emphasized controlling and optimizing the company’s debt structure, weighing various options on capital allocation while being keenly aware of market dynamics.

Earnings Call Transcript 2024-Q3

[Operator]

[Interpreted] Dear leaders, investors and analysts, good afternoon. Thank you for attending the Third Quarter 2024 Performance Conference of COSL. COSL services run through all stages of oil and gas exploration, development and production, and its main businesses included geophysical exploration and engineering [indiscernible], drilling services, well technology and ship services and marine services.

So the complete service areas include the China and offshore market, Asia Pacific, Middle East, Europe, America and Africa. They seem complicated in the fierce market competition environment. COSL [ insists ] [indiscernible] reform as the driving force and solidly promotes the development strategies of technology-driven, cost-leading, integration, internationalization and regional developments and continuously achieve new results.

With that, the company, COSL, constantly sees development opportunities that accelerates the cultivation of new quality, productivity of energy services due to its world-class core competitiveness in all [ around the warships ] and new kinetic energy for high-quality development with continuous improvement of scientific and technological innovation, industrial control, safety support, international influence and the modern governance capacity.

First of all, please allow me to introduce the management present today. They are Mr. Sun Weizhou, Vice President and Secretary of the Board of Directors; CFO of COSL, Mr. Ji Qie. Today, we will have 2 parts of the conference. First of all, Mr. Ji Qie will lead you to understand COSL's third quarter development in 2024. And after that, we will also open the QA session. Now let's first welcome Mr. Ji Qie.

[Ji Qie, executive]

[Foreign Language]

[Operator]

[Interpreted] Thank you for your introduction. Mr. Qie. [Operator Instructions]

[Unknown Analyst]

[Interpreted] Thank you, Mr. Sun and Mr. Qie. And I first have to congratulate COSL on a stable profit despite the influence from the weather. And I have already seen that after calculating the operating profit, we still have seen some interest from the financial cost. Is it because of some exchange problems? Exchange rate? And the second thing is about our daily rate. I've already heard that previously, we had the plan of have some high daily rate operations and project in the North Sea. I want to know how they put them in operation. And for the further development of our jack-up rigs and semicon -- submersible rigs, how about their daily rates?

[Unknown Executive]

[Interpreted] I'll first answer the first question. So for the third quarter, indeed, we have been influenced by the exchange rate fluctuation between Chinese yuan and the U.S. dollars. It's because of the appreciation of the Chinese yuan from 7.1 to about 7.0 and we have already calculated for Q3. The loss of the exchange rate fluctuation is about CNY 200 million. And I also think that this is actually quite stable in H1.

For COSL, we just hope to better manage the different currencies. And for our collection and payments, we have to check the different paces and then to try to have the perfect timing and the [ back ] alignment of the different exchanges. And especially for our assets calculated in foreign policies, we have to try to even out the fluctuation caused by the exchange rate.

For the utility rate, I also have to say that for the utilization for the -- especially the semi-submersible rigs in Q3, it is actually lowered. And I have to say that in China domestically, it is influenced by the typhoons.

And for [ Nanhai ], this is actually because next year, we are going to use that in Brazil, so we are doing some remodeling to better adapt to the local market there, and it also have influenced our overall utilization rate. And the next thing is about our [indiscernible] is just started to operate on the 7th of October in Norway. It also hasn't got any utilization in the past.

We also considered that in Q4 with the alleviation and the [ stop ] of all the different aforementioned things, I think the utilization rate will definitely be increased. And we also have some other different rigs will be operated in like Saudi Arabia area. So it would also have a better utilization rate in Q4.

[Unknown Analyst]

[Interpreted] I would like to ask something about the well service. We already know that in the past, the growth of all the well service business is very good in Q3 and in the past. I also would like to know about the gross margin of the well service in Q3. And what about into Q4 or even next year? What is our prospect? And the second thing is about the rig operation in Saudi Arabia. We also have already known that 2 rigs already got the contract signed, and I already heard that the additional 2 are still in the bidding process. I wonder now, what is the process now? And when will we expect them to be putting operation now?

[Unknown Executive]

[Interpreted] I will try to answer the first question. For Q3, the revenue percentage taken by the well service is about 56%. And for the profit is about 76% to 77%, almost 80%. And I think for the previous 3 quarters, [ the matters ] from the revenue from the profit well service have all been very good as a leading business of ours.

So in the past, we have the ability to achieve such great accomplishments cannot be separated with [ cost ] of inherence the insistence of the strategy of sticking to technology-driven development and the constant investment in R&D. So in the past 3 years, our investment in R&D has increased gradually from CNY 1.7 billion to CNY 1.8 billion to almost CNY 2 billion last year. And this year, we expect to further increase that.

But we have about 4% of our revenue invested in technology development. And I think such development cannot be separated with our continuous investments in technology. With our continuous investment and the conversion of the results into the actual application and our investment in technology and devices at the same time with the replacement of these high-cost imported equipment with expanded and diversified application market. We believe in the future, no matter about the revenue, profit or value creation, we all will have greater development.

As for the 4 rigs that are stopping Saudi Arabia now, one is actually participating in the bidding of Southeast Asia project. And we expect to maybe hear from them on November or late December to see whether we could win that. And for other rigs, we are also like trying to bid for some projects in different areas. And we expect at the end of this year, we may have some market feedback.

[Nai Di Zhao, analyst]

[Interpreted] Hello, I'm Zhao Nai Di from Everbright Securities. I have several questions. The first one is for Q4, what is our prospect for overseas market and the development opportunities and the overall industrial situation? Second one is about the market share management. We also can see that for the market value, a lot of essential enterprises recently have also used the bank loans try to do some management of the market value, the buyback and et cetera and repurchase. I also want to know what about us? Do we have some other different plans for dividends for repurchase?

[Unknown Executive]

[Interpreted] I will first would like to talk about my prospects about the future for market next year. So according to third-party organization, we think that the oil gas industry for the geographical exploration and development will still remain stable while having some increase.

From internal analysis, I would like to tell you that ForEx in the North Sea in Norway, we will start a high day lease rate operation. And the second one, the stock of 4 rigs in Saudi Arabia is also basically no longer existing anymore. And the third thing is next year, we will launch a new project in Brazil. I think that with the positive news of our internal operations with the positive development of the whole industry, I'm very confident that next year, the overall margin in overseas market will be quite good. No matter its revenue or the profit. I'm quite confident it will be higher than this year.

For the second question, I would like to answer this because this is actually quite general, quite hard to answer this question. So I have to try to say it more clearly. Indeed, I recently have already got some news about the national policies encouraging the organization, the central enterprises to do the repurchasing or to buy out more of their own stake and their own stock market. So I have already noticed that to the overweight. The next thing is every year, we will offer from permission and authorization from the shareholders to see whether we will do the repurchase or the issue of new stock in the market. And it's also based on the margin and from overall operation. We will decide whether we will practice this authorization or not.

And according to the announcement, after the policy has been issued from the Shanghai Stock Exchange or Shenzhen Stock Exchange, we have seen that about 20-some companies declaring their actions. So if I remember right, 16 declaring the repurchasing of the stock and 7 declaring their issuing of this additional stock after purchase.

So after I have analyzed the data, I found that the amount of them declaring to do the repurchase or the rebuying of the additional shares, it will only take about less than the 1% of the overall circulating market value. And I don't know the money they spend on doing that are from the loans or from other different benefits they get for doing such thing.

I think for this time, COSL wants to focus on choosing especially for first half of the year. From the business perspective, we hope to optimize our debt. We hope to control and optimize our debt structure. The second thing is we will also follow and check the implementation of the policy. For example, the loans. Whether when we are doing it in the Hong Kong Stock Exchange, is it also possible for us to have the same loan from the Mainland Chinese banks? And whether the money we get from the loans could be circulated from there because of the situation of the Hong Kong Stock Exchange is actually greater than that of the domestic Mainland Chinese one?

[Unknown Analyst]

[Interpreted] I have 2 questions. The first one is just now, the leaders have introduced that in Q3 because of the weather, the semi-submersible rigs have not got very good utilization rate. So it's actually because of the typhoon in China domestically. And I would like to hear more details about how many rigs have been stopped and for how many days? The second one is for the semi-submersible rig that you said you will be used in Brazil for a new project. I want to know that is this [indiscernible]?

[Unknown Executive]

[Interpreted] I would like to first answer the first question. So for the semisubmersibles, for the 3 quarters until now, the average -- the total working days for the semisubmersible rig is 2,571 days. And the Q3, working days are [ 650 ] days. So if we compare with the average H1 level, it is about 300 days worth. So for the company, Q3, we can see the overall [indiscernible] influence will be about 10 rigs roughly. And for the influence of the typhoon [indiscernible]n different rigs suffer differently. So I think altogether is about like 100 days, but I'm not sure whether it's exact number or not.

And the next thing is for Nanhai. It is now preparing for the work in Brazil and for the 3 quarters in this year, it has not worked at all. But for last year, the average working time is about 192 days. So this is also another reason for the significant decline. Now let me answer you the second question. So this is actually not a [indiscernible] for the company, especially the company that is Petrobras.

[Unknown Analyst]

[Interpreted] I would like to also ask a question about the overseas business because we have already known that in the Latin American area, [indiscernible] has also got 4 different projects. And then you can also say that one project, they even want to do the operation by themselves. When the rest are starting their exploration and whether we could also have some opportunities to do some rig and well service with them. And we all know that this is a major development area for the Southern sea.

[Unknown Executive]

[Interpreted] So thank you. So with this internationalization of [indiscernible], it will definitely create more opportunities for COSL for our services, and that's actually for sure. But you can see that for the overseas market for their business, they are all done through open bidding. And I think that they only would choose the successful qualified supplier to the open bidding. But as a joint company, I would like to say that is under the circumstances of compliance to the local law and local regulation. We definitely also hope to get this opportunity. So the senior development will definitely give more opportunities for COSL's development for sure.

[Unknown Analyst]

[Interpreted] Hello, I am from Citic Securities. I would first like to ask that recently, we have already known that the development of CNOOC will also be depending on the growth of natural gas significantly in the future. So what about COSL's technological reserve of natural gas and compared with the traditional oilfield and rig services? What about the profit rate for that? And the second thing is for Q4, even next year, we really care a lot about 4 rigs operations in Norway. And I wonder that we lock the price and lock the working quantity? Or is also like Saudi Arabia, when you have the possibility of nonsatisfactory results. And we also can see that recently, the oil price is fluctuating significantly, and we are actually quite concerned about that.

[Unknown Executive]

[Interpreted] So thank you for the question. For the first question for well service, you can see that no matter is the crude oil or the natural gas, our exploration development technology is actually quite similar, almost the same. So it doesn't have any challenge or problem for us.

Now the first thing is actually for the semisbumersibles. We can see that for the future or next year, we are actually quite confident about the revenue and about the workload there. And our contract has also specifically mentioned that particularly articulated that as well. And for the for working there, we will actually have much better guarantee of the workload compared with the ones in Saudi Arabia. And the agreement terms are also different. So we can see that if the 4 rigs there have also got some like a stopping of the business or stopping of the operation, we will get compensation for that.

[Unknown Analyst]

[Interpreted] I'm from the [ Tianfeng Securities ]. I have 2 questions. The first one is we already mentioned that for next year, most of our rigs will be put in use. This is where we have the majority of the growth from. And I wonder that for the rigs operations for 2026 or 2027, how would that be? And what kind of growth we expect to have and where will the growth be coming from? The second this is our well service. We have already seen that for our revenue and our profits are mainly coming from there. I want to say that how are they break down into different regions and the different businesses? Can you give us a detailed explanation?

[Unknown Executive]

[Interpreted] For the first question you asked about our expectation for 2026 to 2027. I have to say that 2025 will be the last year of the 14 5-year plan. And we think that the amount of the development will definitely be stable and with certain increase [indiscernible] in 2026 and 2027. And we also can see them domestically on the scale of investment or overseas, investment of oil and gas industry will all be stably increasing. And we also can see that the overseas rig contract terms will all cover at least 2026 to 2027. So for the next 2 years, I believe the overseas contract utilization, we will not be low.

As we also mentioned that for the second question, I would like to answer this. For well service, as we said before, the contribution to our revenue is about 56% to 57%. The profit contribution of almost 80%. So in the past few years, it is indeed has got a significant increase of the contribution to our overall business. We also can see that the [indiscernible] offered significant rate in our R&D. We have invested about CNY 2 billion to have invested on the technology. We also have a lot of brands for the rotary device like [indiscernible], we also have the completion fluid through its platform and for the [indiscernible].

We have seen that your revenue and profit are mainly coming from domestic market in China. It's about high difficulty and the conversion of our self-study self research devices. And we also can see that at the same time for the well service business, we try to execute the strategy of following the big rigs to go global. And for our different technologies like for treating slurry and cementing and prospecting, we have also got this market technology entrance from the Saudi America or POC.

[Operator]

[Interpreted] Because of the limited time, we will have the last investor to propose the questions. Please get connected. Thank you.

[Unknown Analyst]

[Interpreted] So hello, I am from Macquarie, and I also would like to note that for semi-submersibles, we all have known that for next year, the workflow will be quite good. And I want to know that for the course, what will be the range considering this market? And what about the gross margin? The gross margin, will there be a range, if we will have a variation addition rate? For domestic market for well services, we can see that the growth has actually always been very good. I want to know for Q3, what is the growth for the well service and what about the gross margin for that?

[Unknown Executive]

[Interpreted] I would like to try to answer this question. You can see that for the cost of different markets, this is actually -- I cannot run away from this question because we can see the cost of the overseas market, will-- definitely the higher than the domestic one. So for that, we will definitely try different methods for different markets to control and manage the cost and the next thing is we will try to utilize our local response as much as possible. So we also consider for the market that is still being developed. We will also try to build up the supply chain there in the local region. The second thing is we also will try to negotiate with the owner to see whether we will have certain compensation and guarantee for that.

And we also can see that generally speaking, the rig cost will only be subject to depreciation and the labor. So without the 2 big changes, it will remain stable. And for the changes, just like the structural differences of different jobs.

And for the second question for Q3 or H1, the gross margin of well service is actually quite stable with no big difference. And we will also update the investors timely about the contribution, about the growth of the market and the revenue. We will have very good communication with all the investors. As we also said in the semi-annual conference before, and we will definitely go global, and this is already a key stage of our going global strategy for the well service. But I can say that despite the vast margin overseas, we still need time and investment to realize that. That's all for my answer. Thank you.

[Operator]

[Interpreted] Thank you so much for your questions and the detailed answers from the management team and for your concerns and support for COSL. Due to the time limit, the call meeting today will be over. If you have some more questions or concerns, please feel free to contact the company. Thank you.

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