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Edited Transcript of 601808.SS earnings conference call or presentation 27-Aug-20 2:00am GMT

Half Year 2020 China Oilfield Services Ltd Earnings Call (Chinese, English)

Tianjin Aug 29, 2020 (Thomson StreetEvents) -- Edited Transcript of China Oilfield Services Ltd earnings conference call or presentation Thursday, August 27, 2020 at 2:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Meisheng Qi

China Oilfield Services Limited - Executive Chairman & CEO

* Yanyan Wu

China Oilfield Services Limited - Company Secretary

* Yonggang Zheng

China Oilfield Services Limited - CFO

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Conference Call Participants

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* Andy Meng

Morgan Stanley, Research Division - Executive Director of China Energy and Chemical Research Team

* Cho Ming Lau

BOCI Research Limited - Equity Analyst

* Lei Mu

JPMorgan Chase & Co, Research Division - Analyst

* Tingting Si

BofA Merrill Lynch, Research Division - Analyst

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Presentation

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Yanyan Wu, China Oilfield Services Limited - Company Secretary [1]

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[Interpreted] Good morning, everyone. I am Wu Yanyan, the Board Secretary. Welcome to our virtual interim results announcement for the year 2020. We have to skip the face-to-face meeting, but to move it online. Thank you very much for your understanding and support.

The interim results was published last night. Due to the pandemic and low oil price in the market, the oil service sector has been facing with serious challenges. However, we have managed to deliver even better performance than before. We have received great attention and support from all of you while we grow our business. So the Board and the management will be happy to have more interactions with you today.

So before we start, shall I introduce the management to you? They are Mr. Qi Meisheng, the Chairman and Executive Director and CEO. Mr. Zhao Shunqiang, President; and Mr. Zheng Yonggang, our CFO; and me, myself, the Board Secretary. So I would like to invite Mr. Zheng Yonggang, our CFO, to walk you through our business performance. Mr. Zheng, please?

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Yonggang Zheng, China Oilfield Services Limited - CFO [2]

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Good morning, ladies and gentlemen. Welcome you to attend COSL 2020 interim results announcement conference. Before the formal introduction, I would like to remind you to pay attention to the disclaimer. Today's presentation will be divided into 2 parts: first is 2020 interim results review; second is our future prospects.

In the first half of 2020, under the dual impact of the pandemic and the drop in the oil price, I believe many of us is our first time to see the negative number of oil price. Of course, we hope this is the last time. CapEx of global oil and gas companies reduced, and the global oilfield service market was seriously impacted and challenged. The competition in the oilfield service industry become intensified, leading to more or less decline in the equipment utilization rate and operating price. COSL has proactively responded to the industry challenge with an eye on medium and long-term strategic layout. Starting from the 4 aspects: first, strengthen market development and customer maintenance; second, continue to conduct R&D and results allocation. In the 2019, the contribution of our technical service already near -- reached nearly 50%. In this year, we'll be ranging from 40 to 50. Third, carry out fine management and strict cost control; further optimize our financial structure.

Although affected by the macro industry, the company's profitability indicators, including revenue and profit improved. In the first half of the year, it recorded operating revenue of RMB 14.5 billion, an increase rate of 7%. Net profit of RMB 1.72 billion, an increase of RMB 736 million with an increased rate of 74.6%. Revenue and net profit showed outperformance in large international drilling and oilfield service companies.

As shown in the above figure, the utilization rate of the company's drilling rigs, vessels and seismic vessels were above the average levels of international peers in the first half of 2020. The company was ranked among the top international peers in terms of both its equipment and the technical service. For example, our drilling, ranking #2; our cementing, ranking #3; our wireline logging, ranking #4; our directional drilling, ranking #4; our supply vessel is globally ranking #5; and drilling and completion fluid, ranking #7.

At the same time, the COSL has achieved outstanding results in strengthen market development and customer maintenance. First, COSL further consolidated its leading position in the core offshore China -- market in China. And the market share of some business continue to grow. Second, after continuously and steadily promoting the development of the international market, the company's image as an international oilfield service contractor has become more obvious. In the past, for the most global company, oil and gas company, COSL's image, just like drilling company. Now I believe that for the most oil and gas company, COSL not just a drilling company, but also the technical service company.

The company's global market capabilities have been further strengthened. The company has coordinated the allocation of resources in the domestic and overseas market to make a positive contribution to the expansion of domestic exploration and development efforts. On the basis of consolidating the existing market, the Indonesian market has developed into the 2 new markets to provide large-scale equipment and the technical service. As you know, due to the pandemic and the drop of oil price, the global market declined. But for our some core overseas market, due to the past outstanding operational performance and safety record, the market shares for some of our core overseas market continued to grow. Indonesian market, just an illustration. For example, in the first half 2020, in our Indonesia market, signed a large-scale business contract, workover, barge support service. And also, we entered new market. For example, entering 2 new markets for the first time, secured a 3-year service contract, drilling and completion fluids service.

Okay. Go to the next page. After introducing the company's market development achievement, we will continue to demonstrate the profitability improvement brought by the technical upgrading. In recent years, the company has continuously increased investment in R&D, paid attention to the strengthening the management of technical service. Accordingly, the company has made frequent breakthroughs in R&D of its new technology service and further improved efficiency and the profitability of the technical service.

The company fully enhanced the efficiency of the operation and improved the quality and efficiency by taking advantage of the integrated technology of research, production and application. Technical upgrading not only improve the profitability of our company, but also effectively help our customer, our clients to increase reserve, to increase production and save cost.

This page, just for some illustration to show how COSL to help our clients to improve the efficiency in the different phases, exploration, development, production, and how to help our clients to save cost in OpEx and CapEx.

In the first half of 2020, while strengthen market development, sustainable technology R&D and application of achievement, the company continued to well complete the refined cost management by focus on the goals of reducing cost and increasing efficiency. In the first half of 2020, by reducing the material consumption, repair and maintenance cost, subcontracting fees and leasing fee, the company reduced a total of RMB 844 million in variable cost. Here, just some explanation, for example, if the workload, for example, maybe increased 3%. If material consumption remained the same, which means the same maybe, say, the 3% in the material consumption. And in the past, for example, the subcontracting fee, if we have 100, and the subcontract, maybe 20 to our subcontractor. And now we subcontract maybe just 15, which means save $5. So in the first half of 2020, we totally saved RMB 844 million in cost.

The pandemic is the world's worst public health crisis in the century. The company made every effort to prevent COVID-19, to maintain the safe and stable production and operation. So the impact of pandemic is not shown in the company's production and operations. And no suspected or confirmed case confirmed by the medical institution has been found at home and abroad. COSL, not just care our business production and operation, but also -- we also care every our stakeholder, including our employees in China and also in the overseas, and also their family members.

Go to the next page, our QHSE. COSL continued to consolidate our QHSE management, persistently promoting the concept of green production and strengthened safety culture exchange. During the period, the company's safety production situation were generally stable. As always, the company paid close attention to the corporate governance, promote and maintain the interest of investors. During the period, the company was awarded with such honor. For example, the best investor relationship award, best new media operation, et cetera.

Okay. Now we go to the second part. Let's look forward to the company's development prospect in the second half of 2020 and also the next few years. According to the latest forecast of IHS report, the Brent average oil price in 2020 is around $42.50, and it's expected to rise slightly in 2021. In the future, international oil price may run at low levels. Global upstream capital expenditure in 2020 will remain stable or decrease slightly compared to 2020. The oilfield service industry will still face fierce market competition.

Oil and gas energies continue to occupy an important position in China energy consumption structure. In addition, the Seven-Year Action Plan of the domestic oil and gas companies will provide prosperity for the oilfield service industry for a certain period. CNOOC is our important customer. According to the latest data published, although its capital expenditure dropped to a certain extent in 2020, the investment in the domestic core market remained unchanged -- basically unchanged.

Benefit from this is expected, the domestic workload of the company will be stable in the second half of 2020.

In 2020, the company will focus on the 5 aspects of the innovation drilling, overseas development, green and low-carbon, market leadership and talent-based development of enterprise, build capability respected by the industry in the following field such as operation performance and operation team, the best technological innovation and equipment management, the most competitive operational cost advantage, the world-class management and safety culture and realize the strategy of technical development and international development with 4 segments. Thus, gradually developing itself into an integrated oilfield service provider, covering multiple energy fields and bring international competitive.

Next, I will elaborate on company's development ideas in several aspects. As we introduced above the company's operational capability in the equipment segment or the development advantage of the technical segment have laid the foundation for achieving its strategic goals of technological development and international development. The company's current market is offshore China market, and CNOOC is the company's core customer in the offshore China market. This is also one of the company's unique advantage compared to the other our competitor. For other oil companies, which are active in the offshore China market, we will continue to maintain a good, cooperative relationship with them and, of course, consolidate the company's leading market shares in the offshore China market. The company will build new growth momentum, focused on the 4 major leaves: from conventional to unconventional, for example, heavy oil; from the traditional to new; and from offshore to onshore; from traditional to modernization and digitalization.

Based on the domestic market situation. We have prepared a slide to introduce contracts signed of 31 jack-up drilling rigs and 9 semi-sub drilling rigs currently operated and managed by the company. As some contracts are still in the bidding and the negotiation process, it's likely the above information may change.

In the future, the company will continue to implement the international development strategy and continuously expand the market scale. We will also gradually bring into place the scale effect of the overseas market, further increase the contribution ratio of the technological sector, accelerate serialization and the industrialization of technology products, give play to the synergy and the cost advantage between segments and increase the scale of key markets such as market in Asia Pacific, Africa, the Middle East. Thus, making the company enjoy more opportunity to obtain service contracts in exploration, development and production, the different space of oil and gas company.

For the operation status of drillings rigs in the overseas market, there other contracts signed 11 jack-up drilling rigs and 5 semi-sub rigs currently operated and managed by the company. And some are still in the bidding and the negotiating process so I think it's likely to be changed.

The company actively responded to the national call, in the green -- the development green and environmental protection industries such as EPS waste treatment. Currently, with years of service experience and an operation team of more than 100, the company has accumulated EPS environment service experience for more than 230 wells, all of which has a very good safety and environmental results. The scale of drilling waste management market continue to improve with huge market potential in the future. The operation volume is expected to continue to increase.

The company will further accelerate the development process of modernization, digitalization. In the second half of the year, the company will implement the digital transformation plan as soon as possible. From the digital transformation path for each professional segment, building a digital talent pool and expert pool, complete the construction of the industrial Internet infrastructure platform and build a global intelligent supply chain, the company will gradually build itself into a technology-led global and digital oilfield service company.

The competitive advantage of COSL is also reflected in the healthy financial structure. Abundant cash flow and good liquidity enables the company to have greater financial flexibility in the environment of low oil price. Based on the company's good operating performance and excellent financial indicator, the international credit rating agency recently gave the company a better rating. In June 2020, the company successfully issued senior bonds, was USD 800 million. Wholesale insurance cost treated the lost yield of USD bonds in the global oil service industry at that time. Thus, secures long-term funds with low cost, effectively protecting the cash flow in U.S. dollars, significantly optimizing and improving the comprehensive debt cost term structure and further enhance the company's financial flexibility.

The recent international macroeconomic situation and the major change in the commodity price have brought new challenge to the company's operations. Following the technical development and international development of those, the company will further transform cost advantage into core competitive needs. Based on its unique integrated advantage, stable financial structure and a team with rich management and operation experience, the company will create higher-value return for our shareholders, customers and all parties in the society.

Thanks again to all the stakeholders and investors for your continued support and understanding of the company.

Okay. That's all for today's introduction presentation. Your questions are welcome. Thank you.

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Yanyan Wu, China Oilfield Services Limited - Company Secretary [3]

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[Interpreted] Thank you very much, Mr. Zheng for your presentation. Now I would like to open the floor for questions. (Operator Instructions)

Please be reminded that we have a translator here with us, and all questions and answers will be translated.

Now I would like to pass the time to the operator and invite the first question.

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Questions and Answers

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Operator [1]

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(foreign language) (Operator Instructions)

(foreign language)

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Cho Ming Lau, BOCI Research Limited - Equity Analyst [2]

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[Interpreted] This is Mr. Lau from BOCI, 2 questions. The first question is that in the report that you published last night, we noticed that you said you have price pressure in the drilling sector as well as the technology sector. I just want to understand why. And do you see any signs of pricing up in the near future?

The second question is that in the drilling sector, the revenue declined. It has been a growing point in the last few years. I just want to understand why. And do you think it will come back again?

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Meisheng Qi, China Oilfield Services Limited - Executive Chairman & CEO [3]

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[Interpreted] Thank you for your questions. I would like to take your first question about the service price pressure. It's true that in the first half, all the contracts that we were doing were basically extensions from some midterm to long-term contracts from last year, and some of the contracts will complete in the second half. And after that, we will kick off the explanation -- the execution of new contracts, which were acquired based on new market price.

So in the first half, because of the pandemic as well as the down-going oil price in the market, we did see the price pressure in the market. And the price was going down. In the second half, in the implementation of existing contracts as well as new contracts, there will still be price pressure.

For your second question, in the technical sector, as you can see that in our financial report, the proportion for the technical sector did decline because in the first half, we resolved some disputes with our European funds, and we received compensation for the contracts with that client. Therefore, we allocated more resources to the equipment sector. Therefore, the technical sector appears to be less. And there's another reason. In the technical sector, you also see that the revenue declined by 5 -- RMB 500 million or so. And this is because that in the first half, during the pandemic period, a lot of restrictions on either personnel or resources. In the second half, I believe the situation will improve. I hope I have answered your questions.

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Operator [4]

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(foreign language)

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Tingting Si, BofA Merrill Lynch, Research Division - Analyst [5]

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[Interpreted] so this is Si Tingting from Merrill Lynch, 2 questions. The first question about cost control. And we read in the report that there has been over RMB 800 million cost control in the first half. I just want to understand which costs are involved and which costs are sustainable and which costs will come back when the oil price and the daily rates would go up again in the second half?

The second question is about -- just you mentioned that you've got the dispute resolved with the Norwegian plant and you got compensation. I just want to understand, in the second half, the technical sector -- what will be your plan for the technical sector?

So my question is actually regarding to the jack-up and the semi-sub day rates, how much it declined on a year-on-year basis if taking out the impact from the Norwegian settlement.

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Meisheng Qi, China Oilfield Services Limited - Executive Chairman & CEO [6]

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[Interpreted] So first of all, thank you for your questions, and thank you for your recognition of our performance in the first half. Regarding your first question about cost control, if you can refer to Slide 12, we talked about the RMB 844 million cost reduction in the first half. That is the result of our great efforts in the first half. And this figure is quite outstanding in the report.

Talking about the composition of such costs. They involve the material costs, the outsourcing cost, maintenance cost as well as the staff cost, in which the material costs and outsourcing costs are the 2 major contributors. All these control measures will continue in the second half. Some of the costs are oil price-related, for example, the chemicals, as consumption materials, the price may go up when the oil price goes up again. For other materials, they are not that oil price-related, and we will continue with our control measures.

As for the outsourcing cost and the leasing cost, we have been working together with our suppliers and partners in order to further reduce the cost. And we are also going to undertake the risks in the market together. So that is also part of our combined efforts. Thank you.

So as for your second question about the types -- about the different rigs, whether the daily price, daily rate will continue to go on, how much it will be. Putting aside the settlement of the dispute with our European client that we got the compensation for that settlement, if you look at the whole industry in China, horizontally, in the first half, there weren't so many contracts being signed in the first half. The quiet -- the market was quiet, was very quiet because a lot of companies, a lot of our competitors either suspended or just stopped the exploration and the development activities. So there weren't so many rates, new rates being signed in the first half.

However, for COSL, we were lucky because we were able to guarantee the workload in the domestic market. And so therefore, we were able to deliver our performance. So domestically, when we talk about the price with our clients, we also adjusted about 10% to 15% of the daily rates, depending on different rigs. So this price will continue to be in our execution for all our contracts in the second half.

One quick comment I want to add to what I said before regarding your second question. So for all the investors and analysts, you may have already seen very clearly that in the whole market, our peers, our competitors and our friends, they were actually suffering through all the hard market. And some of them just went bankrupted, and some of them just in insolvency or other in restructuring. And they tried everything to manage the operating cost. Some of them have to lay off people or selling part of their business. So it was very painful for them in the daily operations. So I have to say that we were lucky. We were able to maintain some workload in the domestic market, and at least we delivered our profit. Thank you.

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Operator [7]

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(foreign language)

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Lei Mu, JPMorgan Chase & Co, Research Division - Analyst [8]

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[Interpreted] This is Mu Lei, 2 questions from him. The first question is about the workload. We noticed that there is an increase in the workload, for example, in the drilling sector, in the first half. However, if you look at each quarter, in quarter 2, there is a very slight decrease in the workload. So I just want to understand why. And do you think that this decline will continue? Or will it go up in the second half? So this is about the workload. Because Sino already said, they have got a goal, which is by 2025, they are going to provide 2 million barrels of oil each day. So how do you think about you improve your service capability in order to match your financial requirements? Besides you have you have 12 vessels now waiting to work. So this is about workload.

The second question is about daily rate, as you mentioned before, your daily rates. Because of the oil price, now it seems to be bouncing back. And therefore, the daily rate also starts going up. For example, the semi-subs, the daily rates already started to come back. So how do you think about the delay rates in the second half this year, next year and the year after next year?

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Meisheng Qi, China Oilfield Services Limited - Executive Chairman & CEO [9]

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[Interpreted] So thank you for your questions. The first question about the workload. As you can see that usually, Q2 and Q3, these 2 quarters are the best ones out of the 4 quarters in the year in terms of our workload. And 2 reasons accounting for the slight drop in Q2. The first reason is that some of the contracts just come to the end with overseas customers, and therefore, we need new contracts. The second reason is because of the pandemic. The COVID-19 virus still spread and lot of overseas clients had to delay the operations track. So therefore, our workload was also delayed accordingly. So Q3, if you look at this year, our workload will increase, but not in Q4. Usually in Q4, that is the last quarter for our clients as well. When they finish the annual budget, usually for all the oil service suppliers, their workload will also drop in Q4.

So as for the second part, to your first question, how to match with our key customers in terms of our own service capabilities. It really depends on which market segment you're talking about. For example, for the same semi-subs and the jack-ups, we have the high-end ones, we have the regular ones. And besides we have the vessels. So as your peak season, usually, we have over 10 vessels waiting. It is true, and it is also normal because depending on the time, different clients, different markets and different plans -- exploration plans. So all these are the external factors that may influence how we operate our own vessels and match our capabilities. So in different geos, different clients, they may need different periods of time to getting the license or the permit for environment protection, for approvals and so forth. So there may be such window, a period of time for our vessels to keep waiting. It is also acceptable and normal.

In the second half, in order to match our capabilities with our key clients to help them finish the plan, we have to keep some spare resources, including our vessels, available. Because once there is opportunity, we must be able to catch-up that opportunity. Otherwise, we will have to miss it. So this is also something that we do usually to keep -- always keep available resources for our clients.

As for your second question about the daily rate. As you can see that recently, the oil price began to go up. So we believe that there are 2 reasons accounting for this. The first reason is that this pricing up is not because of the demand/supply relationship. But rather, it is because of the people or the human reason, serious oversupply of crude oil. So as for how long this pricing going up situation will continue, we don't know. It really depends on organizations such as OPEC.

The second reason is because of COVID-19. So depending on how this pandemic will go, we don't know how well or how much the oil price will go up continuously. So overall, 2 reasons accounting for this price going up situation you can see in the market now. The oil price, how will the oil price will go in the future, we don't know. How will the pandemic will influence the exploration and development activities in the future, we don't know. So therefore, we are not so sure about this strong co-relationship between oil price and daily rate.

As for how the daily rate will go in the second half next year and the year after next year, it's really hard to give you a very precise forecast on that. But one thing we can say is that after 2 to 3 years, the past 2 to 3 years and the first half, we believe that the worst situation has already gone. And this situation in the future will not be worse than what we experienced in the past 2, 3 years or in the first half. So what I want to say is that no matter how the daily rate will change, next year or the year after next year, we will have confidence to maintain our operations and because we are also confident about the China situation with the strong support from the domestic market.

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Operator [10]

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(foreign language)

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Andy Meng, Morgan Stanley, Research Division - Executive Director of China Energy and Chemical Research Team [11]

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[Interpreted] So this is Andy from Morgan Stanley. 2 questions, both are related to the technical oil service sector. So the first question is that -- so your report, you mentioned that you realized the breakthroughs in their technical services, for example, to replace some services from the overseas suppliers. What do you think about the market size will be in this regard? For example, for the Sino, they have been using the overseas suppliers for their oil services. So how much business that you will get or you will replace from those overseas suppliers? So this is about the market size of technical oil services.

The second question is about your future plan. So in the international market, how do you foresee the growth of your own competitiveness in the oil service sector? So you mentioned that the overall market environment, the potential for the suppliers, the -- it was not a very promising market, and the competition has been very fierce. So how do you foresee your own capabilities to compete with the international players? And for example, in the next 3, 5 or 10 years, do you think that it's possible for you to become #1 or #2 in the international market, in the technical oil service sector?

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Meisheng Qi, China Oilfield Services Limited - Executive Chairman & CEO [12]

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[Interpreted] Thank you for your questions. The first question, it's true that some of the services are still provided by overseas suppliers to, for example, CNOOC, but the volume of such services is not very big. And in terms of the technical oil services, we have been providing services to our clients, a lot of them. For example, in the chemical suppliers and the drilling fluid suppliers, 100% from COSL already. So in terms of all the technologies, a lot of technologies are already provided by us, for example, the underground drilling. So depending on different segments, there are some partners or overseas suppliers involved in providing such services, but it is done through COSL. So this is our business model.

Any overseas supplier, they provide services, but have to go through us. So this is the way how we outsource such services. So along with more technologies, more breakthroughs as well as better supply chain, we were able to provide as many new services to our clients as possible. In this way, we can reduce the total volume of outsourcing and improve our profit performance in the future.

So please don't be pessimistic about it because along with more technical outbreaks, more technical product will be available. And we will definitely take initiatives to go to enter into the onshore market, both in China and outside of China.

As for your second question about the international competition and our goals. So talking about our competitiveness and what we're going to achieve. It is true that in the first half, all the players in the market witnessed the hardest competition in the market for the whole industry. However, we managed to maintain some competitiveness through this period. For example, if you look at our overseas contracts, if you look at our operations quality in the implementation of these contracts, apparently, we do have our own advantages. So this is the first point.

The second point is that our technical service capabilities have been improving. And in different markets, we will provide more technical products, technical support and technical suppliers. So in this way, we can fully give play to our own competitiveness in the oil services sector. And in the first half, for example, in Indonesia, we were able to apply in some of the local markets there.

To your second question, we -- our new President just came on board. And now the management is drafting our plans for the future growth and our future prospects. It is also our dream that we turn the company into an outstanding company in this sector. If you look at our report in the past 2 years, we realized the progress in different market segments. Equipment also progressed a great lot. Drilling is #2 in the world. And the equipment sector is still moving forward in a very -- in a very competitive manner. So it is our goal that we want to be one of the best performers in the world, and it has always been. So while we keep progressing our technology each year, we are also getting closer and closer to this target.

We are also fully aware that internationally, there are strong competitors, and there is a gap between us. The most established competitors, the #1 is 5x of the size as us. The #2 is 4x of the size, and the #3 is 3x of the size as us. So we are fully aware that these are the goals, and this is also the direction that we will work hard to move on the business. So this is also where you can see the potential for further growth in the upcoming years. I hope I have answered your questions. Thank you.

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Yanyan Wu, China Oilfield Services Limited - Company Secretary [13]

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[Interpreted] So thank you, management, for taking all the questions. We have had a very interactive discussion just now. We talked about the workload, the price, the seasonality as well as our future plan. Just one quick comment. In the first half, if you look at our business performance, the technical service is still the most important sector in all our business portfolio, which contributed 50.7% of the overall profit. This is over 50% already. So it is still the most important one in our business portfolio.

So in the second half, in the future, we will continue with our stable operations, the safe capital position as well as the [refer] technical plans in order to further strengthen our foundation to realize further growth in the future. Oil price is now going back. And I believe that COSL will continue to be one of the most popular targets for our investors. Thank you.

So before we end the results announcement, I would like to thank all our investors and analysts and friends who have been supporting us and giving great attention to the company. Once again, thank you very much.

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