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Edited Transcript of 601808.SS earnings conference call or presentation 22-Mar-17 2:00am GMT

Thomson Reuters StreetEvents

Full Year 2016 China Oilfield Services Ltd Earnings Presentation (Chinese, English)

Hong Kong Apr 10, 2017 (Thomson StreetEvents) -- Edited Transcript of China Oilfield Services Ltd earnings conference call or presentation Wednesday, March 22, 2017 at 2:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Li Feilong

China Oilfield Services Limited - CFO

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Conference Call Participants

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* Neil Beveridge

Bernstein - Analyst

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Presentation

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Unidentified Company Representative [1]

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Ladies and gentlemen, good morning. First of all, thanks for attending COSL's annual results presentation 2016 today. Now, please allow me to introduce to you the management and representatives on stage. Mr. [Liu], Board Chairman of the Company; Mr. Qi Meisheng, CEO and President; Mr. Li Feilong, Executive Vice President and CFO.

At today's presentation, Mr. Li Feilong will walk you through the financial figures and operational review for the year 2016. Then she will -- he will share with you the Company's outlook in 2017 and the future. After that, we will open the floor for questions. Now let me pass the time to Mr. Li.

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Li Feilong, China Oilfield Services Limited - CFO [2]

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Good morning again. Thank you for your coming. Nice to see you again in the new year.

My presentation will be divided in two parts. First, as 2016 results reveal, in 2016 the crude oil price hit its bottom and remained at low levels and the national oil and gas companies cut back their CapEx for two consecutive years. The shrinking demand led to [feature] market competition for the resulting overcapacity and significant declines in services were at low end price for oilfield services industry.

We impact by the challenging industry environment. The Company faced growing pressure on operation and COSL saw declines in revenue, profit, and other financial indicators by various degrees.

In 2016, the Company completed an issue of RMB10 billion corporate bond, hereby enhance the financial flexibility and resilience to market challenges. At year-end, the cash available amounting to RMB13.1 billion reached guaranteed daily liquidity.

During 2016, COSL continuously optimized its fleets to better join in the market competition. This fleet structure will help more market breakthroughs in year 2017. COSL enforced its leading position in the offshore China market with an emergent client quantities and rich services tabs in 2016. It provided high-quality IPM and bundled services for clients. Meanwhile, COSL has accomplished proprietary I&D results in conversion. Furthermore, the Company maintained or enhanced the four segments' market share.

In the international market, COSL implemented strategic market expansion measures, including the establishment of global sales teams and restructuring of the original overseas units. [Leading the period], the Company continuously achieved breakthroughs in exploration of new markets, the Far East, Oman, Saudi Arabia, and Gabon, obtaining 11 new customers and citing server IPM services contracts.

In 2016, COSL's strength is market competitiveness through proactive market expansion, cost reductions, and prudent financial policies. Having conducted a thorough analysis of the macro environment, oil prices and the Company's strength is committed to maintaining our established strategies. We have a much clearer picture of the Company's future development goals.

Guided by its business strategies, COSL has been proactively expanding both domestic and overseas markets. In 2016, domestic market contribute 68% and international market contribute 32% of the total revenue. During this period, the Company continuously optimized its equipment configurations and increased its number of patents, with the technology segment outperforming the equipment segment in terms of revenue contribution.

Though market competition was fierce, COSL's four segments accomplished overseas expansion. With its increasing client quantity, the Company also received stronger recognition, which help promote the market expansion in the future.

In addition to expanding the markets, COSL continuously will make steady progress in facilitating I&D. We achieved partly substitution of important technologies so as to strengthen our core competence. In 2016, COSL further reduced its costs by optimizing its storage resources, enhancing materials management, conducting more maintenance using in-house resources, lowering the proportion of subcontract causes, and controlling administrative expenses.

Safety is on COSL's top priority. We kept expecting hidden dangers and conducting emergency management. Our OSA index stood at 0.1 in 2016. A premium QHSE record is the foundation of the cost control. Meanwhile, COSL concern about energy-saving and environmental protection issues. We actively make charitable contributions in core host safety culture events with clients.

Amid the intensive competition involve domestic and overseas markets, COSL won customers' recognition and respect by helping them reduce costs and improve efficiencies. This has further enhanced [the radiance] of COSL's spread in the international market. For example, the Company was named by Shell as its sole Well Emerging Partner in 2016. We constantly committed to full compliance, good market communications, timely disclose, and well-regulated operations. This has helped us win a number of recognitions in the capital market.

In the next section, I would like to share with you the outlook for COSL. In the light of future industrial developments, COSL will further optimize its synergies and cost advantages among different segments. We will adhere to our prudent financial policies, realize our goal of obtaining 50% revenue from each of the domestic and international markets, and target our 50 -- to 50 missed of revenue contributions from the technology and the equipment segments.

To achieve these goals, COSL will continue to promote IPM business; develop a high-quality, young, and skilled team; maximize the synergies and cost advantages among different segments; and expand into six overseas regions on top of its leading presence in the offshore China market.

The offshore China market is COSL's core market. The Company will closely follow the demands of long-term strategy partners and check their potential new [win loss]. In addition, we will focus on boosting the four segments' global presence, formulating differentiated market strategies that are tailored to the demand of different types of clients in various regions.

As we all know, COSL is an integrated oilfield services provider covering the exploration, development, and production phases of the oil industry, which is a unique advantage of the Company. In the coming years, COSL will maximize the synergistic effects between its technology and equipment segments. The Company will boost its revenue contributions from the technology segment by accelerating technology conversion and development in parallel and by industrializing its technology products.

COSL will insist prudent financial policy, strictly control CapEx and cost. Moreover, we have a good credit rating and have cash flow, which ensure the Company to take flexible business models and opportunities in the future.

Here is a summary of our current contract issue -- status. COSL is operating and managing 43 rigs. This may change in the future because we are still in negotiation with [CNO] and other clients. We will keep you posted. The Company's workload is expected to increase in 2017.

In conclusion, the Company is adhering to its target of achieving a 50 to 50 [miss] in domestic and overseas revenue contribution. This should build further on our cost advantages, our unique integrated oilfield services, and our rich industry experience, enhancing the Company's core competitiveness and realizing its internationalization.

Thank you all for your support for the Company. This is the end of my presentation. I welcome your questions. Thank you.

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Questions and Answers

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Unidentified Company Representative [1]

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Now we will open the floor for questions. Please note we will provide consecutive interpretation during the Q&A session. Please raise your questions one by one and allow some time for the interpretation. First the question, please.

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Neil Beveridge, Bernstein - Analyst [2]

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Just two questions. First of all, at the strategy update a couple of months ago, you talked about reaching breakeven for 2017. I just wonder, given the first three months of the year, if you feel that is still an achievable result for the year?

The second question is about rig rates. We saw very significant declines in jackup and particularly semisub rig rate. Do you think that we will see those rig rates bottom in the first half of the year? Or do you think we've seen the bottom already? So just some guidance for the year in terms of where you think rig rates are likely to be. Thank you.

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Unidentified Company Representative [3]

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(inaudible - microphone inaccessible)

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Neil Beveridge, Bernstein - Analyst [4]

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The day rates on the jackups and semis.

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Unidentified Company Representative [5]

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(Interpreted). First of all, I would like to thank you all for your support and ongoing attention to our Company. And this occasion is a very good opportunity for us to have an open communication with all of you.

And regarding this gentleman's question, you asked about the performance of the first three months and whether that would have an impact on the whole year performance in 2017. And at the moment, as we see the performance of the first month and second month of this year, I think actually the performance is better than last year, whether in terms of the workload or in terms of our general performance. And also the oil prices are improving, and we see that the CapEx investment from the oil companies also are recovering. But still, there is a lagging effect in terms of the oilfield service companies.

And for a specialized oilfield service company like COSL, I think the prime operation period would be the second quarter and the third quarter. And our major client is CNOOC and their E&P investment is going to increase by 20% to 30%, so that will result in an increase of workload and revenue for us, for COSL. And because -- and also, two-thirds of our business is coming from CNOOC.

Because of that, the workload and service prices will increase as a result. At the same time, we will also expand the overseas markets so as to get more workload from there, and that will help us to make a good performance and also to balance the production and operation in 2017. So I think in general that will help us to achieve a better performance this year.

So the [CEO] will answer the second question about day rate.

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Unidentified Company Representative [6]

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(Interpreted). First of all, for the first quarter I think we are even much more confident than we had in the strategic guidance meeting in terms of making a turnaround and achieving a better performance this year. Although the first quarter hasn't ended, but from the moment the performance is slightly better than last year.

In terms of day rate, first for jackups, there is a still serious oversupply at the moment. And, also, the market competition is very fierce. So in the short term, it's very hard to increase day rate for the jackups, whether it's in the Asia-Pacific region or in the global markets.

And for semisubs, there are two types. The first is the traditional deepwater semi subs and the second is more than ultra-deepwater semisubs.

The oil prices are improving and the large oil and gas companies are also increasing their E&P investment. So we will first see an improvement of day rate for the traditional semisubs. Because for these types of semisubs, the contracts between the supply and the demand is not that obvious. And also, the traditional semisubs is a strength of our Company and in the future in Asia-Pacific region, where we will gradually see an improvement of day rate for the traditional semisubs.

And the third type is the more than ultra-deepwater semisubs. The oil prices at the moment are not sufficient to support the oil companies to increase the investment or the day rate.

So in summary for the jackups, this year we will not see a very significant improvement of the day rate. It will mainly remain flat, and for the traditional semisubs, there is room for improvement of day rate. And for the more than ultra-deepwater semisubs, I think the day rate will remain flat.

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Unidentified Company Representative [7]

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Okay, next question, please.

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Unidentified Audience Member [8]

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(Interpreted). The question is from the [OC] International, three questions. First question is regarding the day rate. Just wondering in a contract with CNOOC whether there are any changes as regard to day rate.

And second is about the overseas market expansion. From the contract you currently secured in terms of the profit margin, is there any difference between the profit margin from overseas contracts versus the domestic contracts?

And third question is regarding the dividend payout policy. We appreciate that you still pay out dividends to the shareholders in the event of a loss. And also, will the bonus or dividend payout in 2016, lowest in history, would that be the down limit we can expect?

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Unidentified Company Representative [9]

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(Interpreted). First, regarding the contracts with CNOOC, we have already signed parts of the contracts. And for other contracts, some of it is due in the negotiation process. As indicated earlier, the CapEx of CNOOC will increase by 20% to 40% and that will bring in more workload. And as to your question regarding the day rate or the price, for parts of the contracts the price will increase. I think that will be beneficial for improvement to performance in 2017.

And just to add one more point, the negotiation between COSL and CNOOC is based on the market prices because the major client of COSL is CNOOC and we will consider the market and also the workload. And based on that, the COSL, we will provide fixed services and also we will look at the market conditions and get a balance between the market conditions and the prices. In general, compared to last year, for part of the contracts there is an adjustment of the price.

And second question regarding the overseas market, we are very pleased to see that in the first quarter we have signed three contracts worth nearly -- each contract worth nearly RMB100 million, and we are going to perform those contracts in the coming month. And there are also some other contracts which are in the process of negotiation and they will be signed in due course.

And regarding the day rate for the overseas market, it is based on the full competition of the market. And in all the winning regions, like in the Americas or in the Asia-Pacific region, market competition is very fierce. For every project, probably, there are over 16 or 17 feeders competing with each other. But we pretty much have won all the bids, so we are very pleased to see that result.

So in conclusion, the day rate of the overseas market is based on the market -- the full competition of the market.

And in addition to the equipment segment in terms of technology development, we are also accelerating the pace. And the three contracts, each worth RMB100 million, one of it is technology service contracts, so we are very pleased to see that we are accelerating the rate -- the pace of development in terms of technology contract in the overseas market.

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Unidentified Company Representative [10]

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(Interpreted). I would like to add a few more points regarding the second question because you all show keen interest in our overseas development and our CEO, Mr. [Chi], have talked about that and I would like to say a few more words regarding the profit margin.

And COSL has been expanding its market in the overseas regions and in the past 10 years, actually until 2014, our profit margin was improving each year. But in the last three years, the oil prices were dropping and that resulted in a significant decline of workload and the prices. So our profit margin in the overseas regions were also declining.

Compared with the profit margin of the domestic businesses, actually the profit margin of the overseas business is converging with that of the domestic business. But if we only look at last year, actually the profit margin of the overseas business was slightly better than that of the domestic business.

And from the long-term perspective, the profit margin will change as the market changes, because the international competition may be even more fierce than the domestic competition. So as the market changes, the profit margin of the international business will probably see greater changes.

The third question is regarding the dividend payout policy. And in the past, the dividend was distributed based on the 20% or 30% of the net profit. And 2016 is the first year that we suffered from a loss since the foundation of the Company. So the Board of Directors had thorough discussions regarding whether we still -- we will still pay the dividends and also what would be the amount of dividend.

So our (inaudible) AGM is that the dividend would be RMB0.05 per share and that is a decrease compared to RMB0.68 last year.

And this suggestion is based on several considerations. First, according to the dividend payout policy, it is not saying that the dividend payout is not allowed in the event of a loss. And more importantly, we'd like to send a message to the market and to the shareholders that we are confident in the Company and the future of the Company. And the dividend payout for each share is RMB0.05, so in total the cash payout would be RMB240 million. That will not have any material impact on the flow. In terms of cash flow, we still have one -- we still have RMB13 billion cash available.

And this year, we will repay some of the debts that are going to mature and, at the same time, we also reduced the CapEx significantly. So, according to this, we expect that by the end of this year, we will still have RMB8 billion cash available.

So the dividend payout this year is a message to the shareholders to show that we are confident in the Company and also is a reward for the shareholders even if we have made a loss. But this dividend payout does not mean that we will have a fundamental change to our dividend payout policy. Thank you.

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Unidentified Company Representative [11]

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Next question, please.

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Unidentified Audience Member [12]

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(Interpreted). From Morgan Stanley, two questions. First, regarding the improvement of performance or turnaround in 2017, there are some controversies. Some would -- and I'm just wondering, would this be based on the changes of fundamentals or would this turnaround be based on the adjustment of the accounting policy? As we know, we have over RMB7 billion provision for write-offs, and also will there be any -- and some investors are concerned that maybe the Company will see a change or adjustment of the accounting policies to add back those amount that have been written off. So, I'm just wondering whether that would be the case. And last year, we have seen there are many consumptions regarding the provision. So I'm just wondering can you please give us a bit more information on that.

And the second question is regarding the onshore oilfield services. And in the strategic items meeting in January, the management have mentioned that the Company will use the strengths of the offshore market to further develop the onshore oilfield services market. So my question is in 2017 or from a longer term, from 2017 to 2020, in terms of the onshore oilfield services, what will be the business volume and the prospect of profitability?

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Unidentified Company Representative [13]

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(Interpreted). So I will answer the first question. And the second question, the difficult one, will be given to our CEO.

Regarding the first question, in terms the goal of making a turnaround or improvement of performance in 2017, as our CEO and Chairman mentioned, we are -- feel confident in reaching that goal and that is based on our confidence in the fundamentals.

And the first is the improvement of workload. Our major client will invest 20% to 40% more in terms of the CapEx in 2017. And second is based on our negotiation of contracts with the client. And some -- for some of the contracts, there will be adjustment of the price.

Thirdly, in the past three years, we've tried our best to use different measures to reduce our cost. That being said, we still have further room for further cost reduction. And internally, we also have adopted strong measures to further reduce the cost.

In addition to that, we will also make good use of our assets and adopt other measures to improve the operations. So we are fully confident that in 2017 we will be able to improve the performance significantly and make a turnaround.

And in terms of the concern about the accounting policy of adjustment, accounting is accounting. And all the accounting policy would be based on the accounting rules.

And in terms of the accounting adjustment, sometimes it will deliver positive effect; sometimes it will deliver a negative effect. Indeed, last year, based on the market and our asset conditions and according to the accounting rules, we have made a big impairment to our assets, goodwill, and accounts of receivables. In terms of the asset and the goodwill impairment, and from the current market conditions, it will be very difficult to see a reverse back.

And in terms of the provision for the Accounts Receivable, that is based on the age of the accounts and also assessment of the risks. But we do not rule out the possibility that if the credit worthiness and the cash flow conditions of the client is getting better, some of it might be reversed back.

So in conclusion, the accounting policy of adjustment will not and should not -- and also should not be a measure or means for us to get improvement of the performance.

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Unidentified Company Representative [14]

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(Interpreted). Just add one additional point to the first question. Regarding account receivables, we are now using the legal means to engage with our customers. And if we will are able to win the case, some of it might be got back.

I will answer the second question. We are fully confident in the onshore oilfield services. And it's based on the following three factors.

First of all, our offshore technology actually is stronger than the onshore technology. And second, our IPM service is a unique advantage of the Company. And thirdly, many Chinese private companies, they are now expanding into the overseas market, especially regarding the onshore part.

And we are now planning our business in the six key regions in overseas markets, including the onshore part. And by 2020, we will see some results in terms of the onshore business in some of the regions.

The first is the western region of China. We are now already developing the tight gas and the shale gas business. And in the Middle East, we also have a scalable onshore business. And in the next two to three years, we will see a significant increase of the onshore business in Africa. And in Far East, we also have a very sizable volume of business for the onshore part. And we are now in negotiation with many of our partners. And in the southeast region, we are now in negotiation of the business in Indonesia, Myanmar, Thailand, and Philippines.

And based on the current negotiations and our business outlook, we expect that by 2020 the value of the overseas onshore business would be RMB2 billion to RMB3.5 billion. Thank you.

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Unidentified Company Representative [15]

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Okay. Is there anything to add from the management? (Spoken in foreign language).

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Unidentified Company Representative [16]

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(Interpreted). Indeed we face a lot of pressure, but in the past few years we have been strengthening our internal management and have taken various measures to reduce the cost and improve efficiency and that will help us to improve our operation and performance.

And from 2014 to 2017, we have been reducing the cost, and each year, the cost reduction is about RMB2 billion. And last year, we have seen a significant reduction of the cost, amounting to RMB2.6 billion, and that will be beneficial for our internal management strengthening and improvement of operation.

Last week, I personally visited Yentai and I had a look at one of our drilling rigs, which is (inaudible) 30981. I have seen that many of the maintenance work is done in house, including the painting and the renovation. So all this work have been done by the crew members themselves. So this kind of in-house maintenance helped to reduce the expenses by over RMB20 million, so that shows we have made great efforts to reduce different costs.

And 2016 for COSL is a year of great challenge and also huge pressure and is a tough year for us. But we have also made great efforts. And in 2017, we still face huge pressure and a great challenge, but, as remarked earlier, oil prices are improving and the workload will also see a gradual increase. And we are adopting different internal management measures -- for example, the technology [conversion] and innovation of business models. So we have made various efforts. And we believe that that will enable us to see a significant increase or improvement of the performance in 2017.

And in conclusion, we have made great efforts and will continue to do that going forward. And in 2016, we have withstood the test and we have withstood the challenges, and we believe that in 2017 there will be a turnaround and we will be able to see the light at the end of the tunnel.

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Unidentified Company Representative [17]

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Again, I am pleased to announce that today's presentation is successfully ended. Thanks again for joining us. Goodbye and have a nice day.

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Editor [18]

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Portions of this transcript that are marked (Interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.