BUY. China Oilfield Services Limited - H [2883.HK] September 23, 2014

Transcription

1 September 23, 214 China Oilfield Services Limited - H [2883.HK] Strong demand offshore China supports multi-year growth; Valuation discount not justified; Initiate with BUY By leveraging the ability to offer integrated oilfield services for offshore applications; low cost of financing; a unique link with parent CNOOC; coupled with strong management execution; China Oilfield Services Limited (COSL) has successfully established a strong market position in offshore China. Most importantly, COSL has built a deep-water capability, which will help the company grasp the huge and growing opportunities in the South China Sea. We forecast COSL to deliver solid earnings growth of 23%/14%/8% in 214E/215E/216E, and any new rigs added will offer further upside to our estimates. We believe the current valuation of 8x 215E, after a share price retreat of 11% since early this month, offers a good entry opportunity. Initiate with BUY and target price of HK$25 (based on 1x 215E PER, five-year average forward multiple). COSL a beneficiary of China s oil and gas activities in South China Sea. COSL has gradually built a deep-water capability by acquiring more high-end semi-submersible rigs. COSL reported strong revenue growth and margin expansion in the well services segment in 1H14, driven by integrated deepwater projects (two wells) in the South China Sea. We see huge potential in the South China Sea, given the abundant oil and gas reserves. Global oil capex slowdown not a big concern; CNOOC s capex growth the key driver. There have been concerns that the global oil capex slowdown (4% growth in 213) will exert downward pressure on oilfield services activities, but we argue that 66% of COSL s revenue is generated from the China market, where CNOOC s capex growth of 3%+ in 214E will continue to drive COSL s growth. Also, of the four semi-sub rigs working overseas, three are under long-term contracts which will help mitigate day-rate volatility. Capacity growth the key driver; additional rigs offer further upside. COSL plans to add seven drill rigs (five jack-ups and two semi-subs) through charter, build and purchase between 214E and 216E. COSL added three jack-ups in 1H14 and is expected to sign a contract for its new semi-sub (COSL Prospector) in 1Q15E. We believe COSL will add more capacity over the next few years and we have assumed another two jack-ups in 216E. Any rig additions will offer further upside to our current estimates. Risks: (1) Decline in oil and gas price; (2) operating risk in disputed water; (3) customer concentration. Key Financials (RMB m) E 215E 216E Revenue 22,279 27,527 34,365 38,719 42,418 Change (YoY) 2% 24% 25% 13% 1% EBIT 5,619 7,648 1,3 11,124 11,915 Change (YoY) 13% 36% 31% 11% 7% Core net profit 4,463 6,716 8,281 9,459 1,168 Change (YoY) 13% 5% 23% 14% 8% Core EPS (RMB) Change (YoY) 13% 5% 16% 14% 8% ROE 15% 19% 19% 18% 17% Net debt/equity 61% 55% 3% 19% 1% PER (core earnings) (x) Dividend yield 1.9% 2.8% 3.2% 3.7% 3.9% PBR (x) EV/EBITDA (x) estimates Oilfield Services Sector Wayne Fung, CFA Analyst (852) waynefung@chinastock.com.hk Harry He Research Assistant (852) harryhe@chinastock.com.hk John Mulcahy Head of Research (852) BUY Close: HK$2.45 (Sept 22, 214) Target Price: HK$25. (+22%) Share Price Performance Market Cap Shares Outstanding Auditor johnmul@chinastock.com.hk US$13,877m 4,771.6m Deloitte Free Float 33% 52W range 3M average daily T/O Major Shareholding HK$ US$31m CNOOC Group (5.5%) 1

2 Investment positives 1) South China Sea offers great potential for oilfield services demand South China Sea has huge oil and gas reserves. China National Offshore Oil Corp. (CNOOC), COSL s major customer, owns most of China s offshore oil and gas reserves. CNOOC s oil and gas reserves reached 3.6 bn barrels and 6,323 bn cubic feet (ft 3 ) respectively in 213. Bohai has long been the major oil producing region in offshore China, accounting for 44%/35.5% of CNOOC s total output/oil reserves in 213 respectively. In the South China Sea, CNOOC s natural gas reserves reached 3,619.6 bn ft 3, accounting for 57.2% of its total reserves in 213. We see the South China Sea as a major source of drilling demand for COSL. The US Energy Information Administration (EIA) has estimated the South China Sea contains approximately 11bn barrels of oil and 19 trillion ft 3 of natural gas in proved and probable reserves in 1H213. As of end-213, CNOOC s South China Sea proved oil and natural gas reserves accounted for only 45% and 24% of China s total reserves in the South China Sea as estimated by EIA in 213, implying huge potential for CNOOC s exploration activities, which we believe will directly benefit COSL. As of end-213 CNOOC had proved oil and gas reserves with a life of over 1 years, which will support COSL s long-term growth. Figure 1: Comparison of CNOOC proven reserves to EIA estimated proven and probable reserves in South China Sea (Oil in b barrels & gas in tcf) China (EIA) South China Sea Total (EIA) EIA estimated oil reserves CNOOC oil reserves.6 - CNOOC % of EIA estimate 45.% 5.3% EIA estimated gas reserves CNOOC gas reserves CNOOC % of EIA estimate 24.1% 1.9% Sources: CNOOC, EIA, CGIHK Research 2

3 Figure 2: CNOOC proved oil and gas reserves and reserve life 7, 6, 5,431 6,232 6,223 5,623 5,944 5,945 5,627 6,5 6, , 4, , 3, 2, 1, 4,154 3,548 3,248 1,424 1,436 1,456 1,457 1,49 1,564 1,578 1,668 1,719 1,246 1,969 2,181 3, Proved oil reserves (m barrels) (RHS) Oil reserve life (yrs) (LHS) Proved gas reserves (billion cubic ft) (RHS) Gas reserve life (yrs) (LHS) Sources: CNOOC, CGIHK Research CNOOC to open 33 offshore blocks; South China Sea the key focus CNOOC announced recently that it will open 33 offshore blocks to foreign oil companies for joint development (figures 3 & 4). The blocks cover an area of 126,18 sq km, located in the Yellow Sea, East China Sea and South China Sea. We note that 17 blocks (out of the 33) are located in the South China Sea (44% in terms of km 2 ), illustrating China s strategic focus on the South China Sea oil and gas development. We believe this will help drive demand for offshore oilfield services and will continue to benefit COSL. 3

4 Figure 3: CNOOC s 214 open blocks in offshore China Sources: CNOOC, CGIHK Research 4

5 Figure 4: China s 214 open blocks in offshore China Information of 214 Open Blocks Offshore China BASIN BLOCK AREA WATER DEPTH SEIMIC ACQUIRED (km 2 ) (m) 2D(km) 3D(km 2 ) WELLS DRILLED HORIZON FOR OPEN EAST CHINA SEA BASIN SOUTH YELLOW SEA BASIN PEARL RIVER MOUTH BASIN (EAST) BEIBUGULF BASIN 25/ / / / / / / / / / / / / / / / / / / / / / / / / / / YINGGEHAI BASIN 5/ / / Liushagang Ⅲ of Paleogene QIONG DONGNAN BASIN 64/ / / TOTAL Sources: CNOOC, CGIHK Research 5

6 2) Deep-water development a long-term growth driver According to the South China Sea water depth map and the proved and probable reserves of oil and natural gas shown in figure 5 & 7, most current reserves exist in shallow water basins that are distributed along the coastline of the South China Sea. Conversely, exploration in the deep water area is limited. Exploration has been difficult in deep waters in the South China Sea due to extreme weather such as typhoons, complex geological conditions, much higher requirements for risk management, drilling equipment and technologies. Up to now, exploration and development in the deep waters of the south is still at an early stage and we believe this implies huge potential for COSL. CNOOC has long-term strategic E&P plan focusing on South China Sea. Indeed, in 28 CNOOC announced that it planned to build an offshore Daqing Oilfield in the deep water area of the South China Sea with annual production capacity of ~5m tons oil equivalent by 22. Total investment of RMB2bn will be invested over the subsequent 1-2 years. Besides, CNOOC has announced that it will gradually establish exploration capacity in water depths of 1,5-3,m. COSL has HYSY 981 (the most advanced 6 th generation semi-sub in China with working water depth of 1,ft; invested by CNOOC and currently operated and managed by COSL) and three other semi-subs of over 4,6ft working water depth. Through the gradual increase of deep-water capacity, COSL has significantly increased its deep-water revenue from 18% in 213 to 24% in 1H14. HYSY981 just discovered an ultra-deep water gasfield. CNOOC recently announced HYSY 981 has made its first deep-water gas-field discovery in the South China Sea. The gas-field, named Lingshui 17-2, around 15km south of Hainan Island, is an ultra-deep water gas-field at an average operational water depth of 1,5 meters. According to Xie Yuhong, a CNOOC manager, the well would produce 56.5m ft 3 of gas per day, equivalent to about 9,4 barrels of liquid oil per day, the highest daily flow of all CNOOC's gas wells during testing. We believe this will continue to offer huge opportunities for COSL. 6

7 Figure 5: South China Sea oil and natural gas proved and probable reserves map Sources: EIA, CGIHK Research Figure 6: COSL s semi-submersible rigs working depth Unit: ft 1, 5, 5, 5, 4,6 2,5 2,5 2,5 1,5 1,5 1, 1, 7

8 Figure 7: Water depth map of the South China Sea Sources: Encyclopedia Britannica, CGIHK Research 8

9 3) Slowdown of global spending not a concern; CNOOC capex growth the key driver E&P capex growth of global oil majors slowed to 4% in 213 from ~2% between 21 and 212 (figure 8). There have been concerns over the potential global capex slowdown over the coming years due to higher capex discipline of some oil majors as well as project delays, which could impose downside pressure on global drilling day rates. China market accounted for 66% of COSL s revenue in 1H14 While COSL has gradually increased its overseas revenue portion from 6% in 24 to 34% in 1H14, we believe the impact on COSL is limited, given COSL s main source of revenue flow is still coming from China market (66% in 1H14). CNOOC maintained its spending budget of RMB15-12bn for 214E during the 1H14 results presentation, suggesting 3%+ year-on-year (YoY) growth, which we believe will help COSL to maintain resilient growth with good visibility. Figure 8: Global oil and gas capex on E&P (Excl. of acquisition) 45, 4, 41.2% 419,825 42,562 5.% 4.% 35, 3, 25, 2, 29.9% 19.6% 13.% 336, % 27.7% 22.5% 26, , % 19.6% 2.9% 212, ,96 177,5 19.5% 3.% 2.% 1.% 15, 1, 5, 56, % 139,16 92,672 14,72 73,424 77, % 4.3%.% -1.% % Sources: Bloomberg, CGIHK Research Oil and gas industry total Capex (Excl. of Acquisitions) (Unit: US$m) (RHS) YoY% 9

10 Figure 9: CNOOC s capex 12, 7% 1, 57% 55% 48% 47% 6% 5% 8, 29% 39% 35% 3% 35% 4% 3% 6, 21% 17% 17% 2% 1% 4, -1% % -1% 2, -33% -2% -3% E CNOOC E&P capex (RMB m) Change (YoY) estimates -4% Figure 1: COSL s revenue breakdown by region 2, 94% 91% 18, 1% 9% 16, 14, 12, 83% 82% 75% 78% 75% 72% 69% 67% 8% 7% 6% 1, 5% 8, 4% 33% 6, 3% 25% 28% 31% 25% 4, 22% 18% 2% 17% 2, 6% 9% 1% % International (RMB m) (LHS) Domestic (RMB m) (LHS) % of domestic revenue (RHS) % of international revenue (RHS) 1

11 Resilient jack-up day rate through commissioning of high specification rigs High specification jack-up rigs narrow COSL and global dayrate gap. Over the past 1 years COSL gradually added more high-specification jack-ups. In 28 COSL acquired AWO (a Norwegian drilling company now known as COSL Drilling Europe AS) and immediately raised the average specification of its rig fleet. This drove COSL s day rate which has since then gradually exceeded the market day rate of jackups with <25 feet water depth (figure 11). Currently, COSL has 22 jack-up rigs (out of total 33) which are classified as high-end rigs (working water depth of 3 feet or above). In future, with more high-specification drill rigs coming on line, we expect COSL s day rate will continue to move closer to the day rate for deeper water-depth rigs. Figure 11: COSL s Jack-ups day rate vs. market day rates US$ 2, 18, 16, 14, 12, 1, 8, 6, 4, 2, Jackup IC 3+ WD COSL JU Avg. Jackup IC <25 WD Sources: Bloomberg, COSL, CGIHK Research 11

12 Not all semi-subs are exposed to the potential weakness of day rate Long-term contracts signed with Statoil In the international market, COSL has three semi-subs working for Statoil in the North Sea. COSL has secured 8-year contracts with Statoil for COSL Innovator and COSL Promoter (until 22 and 221 respectively). While the contracted day rates are subject to adjustment according to the latest oil price and local inflation rates, we believe it can still help mitigate against volatile market day-rates in the foreseeable future. Besides, COSL Pioneer renewed its contracts in late 213 with Statoil till August 216. Only Nanhai VI (whose current operator is Santos, an Australian upstream E&P company; contract expires in April 215); COSL Prospector (contract still under negotiation); and HYSY982 (expected to be commissioned in 216E) are exposed to potential softness in deep-water market day rates. In China, HYSY981, Nanhai II, V, VII, VIII and IX are currently working for CNOOC. We expect day rates will be subject to less volatility given that the customer is CNOOC. Figure 12: COSL s Semi-subs day rate vs. market day rates US$ 45, 4, 35, 3, 25, 2, 15, 1, 5, Semi-sub 5-8 WD COSL Semi-Subs Avg. Semi-sub 15-5 WD Sources: Bloomberg, COSL, CGIHK Research 12

13 4) Capacity growth to help withstand the potential day rate weakness Over the past decade, COSL has gradually built up a sizeable fleet of drill rigs. As of end -June 214, COSL had a total fleet of 44 drill rigs consisting of 33 jack-ups and 1 semisubs. We believe capacity addition is the key growth driver for COSL. COSL is adopting a flexible approach to add capacity through build, charter and purchase. Jack-up drill rigs expansion Number of jack-up rigs more than tripled between 22 and 213. COSL had only 9 jack-ups in 22. During 22 to 27, 3 jack up rigs, HYSY 935,931 and 941 were delivered into the COSL fleet via dry leasing, second-hand buying and construction respectively, which are all high-end specifications jack-up rigs with working water depth larger than 3ft. In 28, COSL had 6 jack ups added after the acquisition of AWO, a Norwegian drilling company which is now known as COSL Drilling Europe AS, CDE, expanding the total fleet to 19 jack ups (including HYSY 942 delivered in 28) and 3 semisubs. Between 29 and 213, COSL had relatively stable capacity additions with an average of around two jack ups annually. We expect seven new jack-ups between 214E and 216E. In 1H14, three new jackups are added by consecutive operating lease. Another two new jack-ups HYSY 943 and HYSY 944 are scheduled to be delivered in September 215 and October 215 respectively, taking the total number of jack-ups to 35 by end-215e. Although COSL currently has no plans on new built jack-up delivery in 216, we assume two more highend jack-ups to be added through chartering or second-hand purchase in 216E, which will take the total number of jack-ups to 37 by end-216. Semi-submersible drill rigs expansion COSL had only three semi-subs in 22. It was not until 21 that the fourth semi-sub (COSL Pioneer) was delivered. Starting from 21, COSL expanded its semi-sub fleet rapidly, taking the total number of semi-subs to 1 by end-213. According to rig delivery schedule of COSL, COSL Prospector is expected to be delivered in early 215 and HYSY 982 to be delivered in August 216, taking the total number of semi-subs to 12 by end-216. Figure 13: COSL s rig fleet growth Nos. of COSL Semi-subs Nos. of COSL Jack ups estimates 13

14 5) Well services a new growth driver over the medium term COSL completed integrated deep-water project (2 wells) in 1H14 boosted EBIT margin significantly. COSL s well services segment performance was hit by the oil spill incident at the Penglai 19-3 oilfield in 211 (The oil spill incident at Penglai 19-3 oilfield was a series of oil spills that began on June 4, 211 at Bohai Bay. The project was 51% owned by CNOOC and 49% owned by ConocoPhillips and ConocoPhillips was the operator). However, COSL continued to explore the overseas market as well as domestic deep water area, increasing unconventional oil and gas services work volume, as well as further enhancing its oilfield services technologies like drilling fluids and cementing in deep water. After about two years development, meaningful revenue growth started in 2H13 (figure 14). In 1H14, COSL reported 5% YoY increase in well services revenue with significant EBIT margin expansion of 11.1ppt to 23.5%, resulting in a 185% increase in EBIT, helped by a deep-water integrated project (two wells) in the South China Sea for CNPC. According to management, COSL is now able to provide 6% in-house supply of chemical-related products and tools for its well services. Besides, COSL achieved 1% market share in some specific service lines like well completion and production enhancement in China waters. We believe the well services segment is entering a new growth stage, underpinned by continuous enhancement of high-end service technologies and increasing capacity in deep-water areas, in particular in the South China Sea. While we expect EBIT margin in 2H14E will be lower than 1H14 as a result of the lack of integrated projects, we believe the overall growth trend remains favourable and we see more integrated projects possible in 215E. Figure 14: Well services historical revenue 4,5 4, 3,5 3, 2,5 2, 1,5 68.9% 71.5% 47.4% 29.4% 32.% 3.7% 9.4% 8% 6% 5.4% 38.7% 4% 24.4% 26.2% 21.9% 2% 5.3% % 1, % -22.5% -2% -4% Well services revenue (RMB m) - LHS Growth (YoY) 14

15 Figure 15: Well services historical EBIT 1, % 2.1% 22.7% 23.5% 25% 2% % 16.7% 14.3% 14.9% 17.3% 14.8% 15.5% 12.4% 15% % 8.5% 9.5% 1% 5% 1 % Well services EBIT (RMB) - LHS EBIT Margin 6) Low cost of financing a key to leveraged expansion Due to its unique SOE background, COSL has been able to obtain low-cost financing from banks and bond issuance. The weighted-average borrowing rate was 1.61% (largely LIBOR-based) while the tranches of bonds issued in 27 and 212 carried interest rates of 4.48% and 3.38% respectively. Low cost of financing is important to COSL due to its capital-intensive business model. 15

16 Earnings forecast COSL projected to deliver core earnings growth of 23%/14%/8% in 214E/215E/216E; we see additional upside potential when COSL raises capacity We expect drilling revenue to grow 19% YoY in 214E (Excluding the one-off gain of ~RMB4m from the settlement of a standby fee dispute between COSL and Statoil) and 1% YoY in 215E, while we expect some slowdown in 216E (4%). We assume the day rate of jack-ups to increase further between 214E and 215E due to commissioning of more high-spec drill rigs. For semi-subs, we expect the day rate to stay largely stable between 214E and 215E, due mainly to the potential increase in global supply. Despite the slowdown, any new capacity additions will offer additional upside to our estimates. In 1H14, drilling segment EBIT margin reached 42%. Excluding the one-off gains from Statoil, the adjusted EBIT margin for this segment was ~39%, largely stable from 1H13. We believe the growth of well services will become a new earnings driver in the foreseeable future. We forecast this segment to deliver revenue CAGR of 25% between 214E and 216E. Besides, we expect margin expansion will continue. Management revealed during the 1H14 post-result meeting that this segment will be able to deliver above-average growth rates (vs. the past). We project total revenue to grow 25%/13% in 214E/215E. EBIT margin should be maintained at a resilient level of 28%-29% between 214E and 216E. COSL raised RMB4.6bn through a share placement early this year, which helped enhance its balance sheet. We estimate the net debt-to-equity ratio to drop to 29% by end-214e from 55% in 213. We believe this will enable COSL to grasp acquisition opportunities, offering earnings upside from our current estimates. Management guided that capex this year will be ~RMB8.5bn. For 215E-216E, capex is expected to be lower than 214E. 16

17 Figure 16: Key assumptions for COSL Key operating assumptions E 215E 216E Revenue from drilling (RMB m) 5,92 9,892 9,327 9,515 11,252 14,665 17,827 19,115 19,873 Change (YoY) 51.% 67.1% -5.7% 2.% 18.3% 3.3% 21.6% 7.2% 4.% Drilling EBIT 2,118 2,748 3,55 3,43 3,714 5,765 7,131 7,55 7,79 EBIT margin 35.8% 27.8% 37.6% 36.% 33.% 39.3% 4.% 39.5% 39.2% No. of Jack up rigs Average Jack up day rate (US$) 116, 12, 113, 17, 18, 117, 13, 135, ,584 Change (YoY) 48.1% 3.4% -5.8% -5.3%.9% 8.3% 11.1% 4.5% -.9% No. of operating days of Jack ups 4,556 7,89 7,933 8,692 9,244 9,654 1,478 11,464 12,353 Change (YoY) 7.8% 55.6% 11.9% 9.6% 6.4% 4.4% 8.5% 9.4% 7.7% Jack ups Calendar Day Utilization Rate 91.1% 94.7% 94.9% 93.4% 93.5% 95.8% 93.% 94.% 94.% No. of Semi-sub rigs Average Semi-sub day rate (US$) 179, 188, 194, 261, 298, 323, 323, 323, 318,916 Change (YoY) 25.8% 5.% 3.2% 34.5% 14.2% 8.4%.%.% -1.3% No. of operating days of Semi-subs 1,98 1,66 1,3 1,178 1,712 3,33 3,631 3,895 3,987 Change (YoY) 1.7% -2.9% -5.9% 17.4% 45.3% 77.2% 19.7% 7.3% 2.4% Semi-subs Calendar Day Utilization Rate 1.% 97.4% 91.6% 95.5% 91.6% 95.% 98.% 97.% 97.% Revenue from well services (RMB m) 2,733 4,417 4,327 3,95 4,858 6,475 9,195 11,33 12,688 Change (YoY) 2.4% 61.6% -2.% -8.7% 23.% 33.3% 42.% 2.% 15.% Well services EBIT ,655 1,986 2,284 EBIT margin 17.2% 16.8% 18.8% 11.4% 11.6% 1.7% 18.% 18.% 18.% Revenue from MS&T (RMB m) 1,614 2,171 2,346 2,534 2,945 3,251 3,64 4,29 4,514 Change (YoY) 17.5% 34.5% 8.% 8.% 16.2% 1.4% 1.8% 11.8% 12.% MS&T EBIT EBIT margin 3.4% 3.1% 23.1% 2.5% 18.6% 14.3% 9.5% 13.5% 13.5% No. of total vessels No. of operating days of self-owned vessels 23,626 27,72 26,769 25,65 24,195 23,916 25,924 27,652 3,72 Self-owned Vessels Calendar Day Utilization rate 94.8% 93.4% 94.7% 94.6% 91.7% 93.9% 94.7% 94.7% 94.7% Revenue from geophysical (RMB m) 1,877 1,399 1,561 2,427 3,5 2,973 3,569 4,349 5,131 Change (YoY) 3.1% -25.5% 11.6% 55.5% 25.7% -2.5% 2.1% 21.9% 18.% Geophysical EBIT ,44 1,231 EBIT margin 29.3% 23.1% 21.7% 24.2% 26.1% 24.4% 24.5% 24.% 24.% No. of seismic vessels owned No. of integrated marine surveying vessels No. of undersea cable teams n.a n.a n.a n.a n.a Revenue from surveying (RMB m) Revenue from seismic (RMB m) 1,611 1,97 1,251 2,4 2,443 2,431 3,16 3,78 4,545 2D Collection (km) 49,448 33,9 24,469 27,88 17,894 25,976 22,8 22,521 22,972 2D Processing (km) 23,42 22,588 14,846 22,132 23,6 23,656 9,462 9,936 1,432 3D Collection (km 2 ) 13,592 1,394 13,8 23,174 29,498 24,675 32,571 4,714 48,857 3D Processing (km 2 ) 8,382 7,951 7,983 9,972 16, 24,397 32,3 4,375 48,45 17

18 Figure 17: Earnings projection (RMB m) FY212 FY213 FY214E FY215E FY216E (RMB m) FY212 FY213 FY214E FY215E FY216E Income Statement (Y/E Dec) Cash Flow Statement (Y/E Dec) Revenue 22,279 27,527 34,365 38,719 42,418 Pretax profit 5,437 7,52 9,941 11,217 12,23 Drilling 11,252 14,665 17,827 19,115 19,873 Depreciation & Amortization 3,173 3,311 3,644 3,98 4,89 Well services 4,858 6,475 9,195 11,33 12,688 Share of profits of jointly-controlled entities (243) (297) (365) (468) (6) Marine support and transportation 2,945 3,251 3,64 4,29 4,514 Interest expenses Geophysical 3,5 2,973 3,569 4,349 5,131 Change in w orking capital 599 (1,187) (164) Other revenue Interest income (127) (125) (171) (193) (211) Total operating expense (16,66) (19,879) (24,362) (27,595) (3,53) Income tax paid (791) (1,337) (1,243) (1,739) (2,13) EBIT 5,619 7,648 1,3 11,124 11,915 Others 174 (52) Drilling 3,714 5,765 7,131 7,55 7,79 Operating cash flow 8,727 8,463 12,24 13,351 14,111 Well services ,655 1,986 2,284 Marine support and transportation Purchase/(disposal) of PP&E,net (3,638) (7,646) (8,457) (6,948) (6,442) Geophysical ,44 1,231 Acqusition of subsidiaries D&A 3,173 3,311 3,597 3,86 4,4 Investment in associates/jce EBITDA 8,792 1,959 13,6 14,984 15,955 Dividend received from associates/jce Exchange loss, net (42) (6) Interest received Finance costs (513) (638) (598) (568) (523) Others (5,5) 2,581 Interest income Investing cash flow (8,43) (4,785) (8,122) (6,545) (5,961) Investment income 2 94 Share of profits of joint ventures, net of tax Proceed from /(repayment of) borrow ings 5,299 (1,636) (1,714) (2,) (4,29) Pretax Profit 5,437 7,52 9,941 11,217 12,23 Proceed from equity 4,631 Income tax expenses (867) (793) (1,243) (1,739) (2,13) Dividend paid (811) (1,394) (2,52) (2,484) (2,838) After tax profit 4,57 6,726 8,698 9,478 1,189 Others (555) (663) (598) (568) (523) Minority interests Financing cash flow 3,933 (3,693) 268 (5,52) (7,39) Net Profit 4,559 6,716 8,681 9,459 1,168 Recurring net profit 4,463 6,716 8,281 9,459 1,168 Net change in cash 4,256 (16) 4,386 1, EPS (RMB) FY212 FY213 FY214E FY215E FY216E Reported Valuation Recurring PER (recurring earnings) (x) DPS (RMB) Dividend yield 1.9% 2.8% 3.2% 3.7% 3.9% PBR (x) (RMB m) FY212 FY213 FY214E FY215E FY216E EV/EBITDA (x) Balance Sheet (RMB m) Growth rate NON-CURRENT ASSETS Revenue 2.2% 23.6% 24.8% 12.7% 9.6% Property, plant and equipment 47,76 51,292 56,92 59,121 61,463 EBIT 12.8% 36.1% 3.8% 11.2% 7.1% Goodw ill 4,235 4,18 4,18 4,18 4,18 EBITDA 9.2% 24.6% 24.1% 1.2% 6.5% Other intangible assets Recurring net profit 12.6% 5.5% 23.3% 14.2% 7.5% Investments in joint ventures ,168 1,499 Deferred Tax Assets, LT Operating ratios Other non-current assets 235 1,16 1,16 1,16 1,16 EBIT margin 25.4% 28.% 29.3% 28.9% 28.2% Total non-current assets 52,425 57,672 62,686 65,983 68,666 EBITDA margin 39.8% 4.% 39.8% 38.9% 37.8% Recurring net margin 2.2% 24.5% 24.2% 24.6% 24.1% CURRENT ASSETS Asset Turnover Inventory 949 1,52 1,35 1,543 1,72 Adjusted ROE 14.7% 19.3% 19.3% 18.2% 17.2% Notes Receivable 62 1,513 1,949 2,273 2,575 Adjusted ROA 6.4% 8.7% 9.7% 1.% 1.1% Accounts Receivable 4,145 5,873 7,352 8,283 9,74 Interest coverage Prepayments, deposits and other receivable Net debt / equity 6.9% 55.4% 3.% 19.4% 9.5% Cash and equivalents 9,815 9,61 13,986 15,741 16,52 Current Ratio Other Current Assets 6,44 3,125 3,125 3,125 3,125 Quick Ratio Total Current Assets 22,223 21,591 28,548 31,851 33,967 Days inventories Days receivables Total assets 74,649 79,262 91,234 97,835 12,633 Days payables NON-CURRENT LIABILITIES Long term borrow ings 31,71 27,27 24,537 22,537 2,537 Deferred tax liabilities 1,688 1,129 1,129 1,129 1,129 Deferred revenue 1,122 1,266 1,71 1,926 2,11 Other non-current liabilities Total Non-Current Liabilities 34,521 29,458 27,413 25,629 23,813 CURRENT LIABILITIES Short term borrow ings 1,66 3,84 4,58 4,58 2,551 Trade payables 5,22 7,159 9,33 1,325 11,511 Other payables 914 1,21 1,31 1,398 1,53 Current income tax liabilities Other Current Liabilities Total current liabilities 7,923 12,544 15,284 16,674 15,937 EQUITY Share capital 4,495 4,495 4,772 4,772 4,772 Reserves 27,699 32,743 43,728 5,72 58,33 MI Total equity 32,25 37,26 48,538 55,531 62,883 Toal equity and liabilities 74,649 79,262 91,234 97,835 12,633 BVPS (RMB)

19 Oct-9 Feb-1 May-1 Aug-1 Nov-1 Mar-11 Jun-11 Sep-11 Dec-11 Apr-12 Jul-12 Oct-12 Jan-13 May-13 Aug-13 Nov-13 Mar-14 Jun-14 Sep-14 Valuation COSL is trading at 8x 215E PER, 2% below its five-year average (1x). We think this is due to the market s concerns over the weakness of day rates. However, we expect COSL will still be able to achieve ROA of 1%+ between 214E and 216E, up from single digits over the past few years (we use ROA instead of ROE to exclude the gearing effect), suggesting improving profitability. In terms of PER, COSL is trading at a 29% discount to Chinese oilfield services names. We think this is unjustified given COSL s high earnings visibility vs. independent oilfield services players. Compared with international players, COSL is trading at a ~4% discount to the tier-one players and 23% discount to the global drillers. We are initiating coverage on COSL with a BUY rating and target price of HK$25, based on 1x 215E PER (COSL s average rolling forward PER over the past five years). We believe our target multiple is not demanding. Share price catalysts come from more news flow on oil and gas development in the South China Sea, as well as any new capacity additions by COSL. Figure 18: COSL PER trend HKD 3 15x 13x 11x 25 9x 2 7x Sources: Bloomberg, CGIHK Research estimates 19

20 Figure 19: Peer comparison Ticker Company Rating Price Market cap PE (x) PB (x) EV/EBITDA (x) (local currency) (US$ m) 213A 214E 215E 213A 214E 215E 213A 214E 215E Chinese (HK listed) 2178 HK Equity Petro-king HOLD HK Equity Anton Oilfield SELL HK Equity SPT Energy HK Equity China Oilfield Services-H BUY , HK Equity Honghua Group HK Equity Hilong Holding SELL Average Chinese (SZ listed) 2353 CH Equity Yantai Jereh , CH Equity China Oil HBP Science & Technology CH Equity Gi Technologies Average International HAL US Equity Halliburton , SLB US Equity Schlumberger , BHI US Equity Baker Hughes , WFT US Equity Weatherford , NOV US Equity National Oilwell Varco , TS US Equity Tenaris , VK FP Equity Vallourec , Average International (Drilling services focus) NBR US Equity Nabors Industries , HP US Equity Helmerich & Payne , PDS US Equity Precision Drilling , ESI CN Equity Ensign Energy , EDCL LI Equity Eurasia Drilling , SPM IM Equity Saipem SPA , RIG US Equity Transocean , SDRL US Equity Seadrill , Average Sources: Bloomberg, Company, CGIHK Research estimates for covered stocks Figure 2: Correlation between COSL share price and WTI crude price COSL share price (HK$) (LHS) WTI oil price (US$) (RHS) Sources: Bloomberg 2

21 1/1/27 1/1/28 4/1/28 7/1/28 1/1/28 1/1/29 4/1/29 7/1/29 1/1/29 1/1/21 4/1/21 7/1/21 1/1/21 1/1/211 4/1/211 7/1/211 1/1/211 1/1/212 4/1/212 7/1/212 1/1/212 1/1/213 4/1/213 7/1/213 1/1/213 1/1/214 4/1/214 7/1/214 Figure 21: Correlation between COSL share price and day rates US$ 35, HK$ 3 3, 25, 2, 15, 1, 5, COSL JU Avg. (LHS) COSL Semi-Subs Avg. (LHS) Share price Sources: Bloomberg, CGIHK Research Figure 22: H share price discount to A share price.% -1.% -2.% -3.% -4.% -5.% -6.% -7.% -8.% Sources: Bloomberg, CGIHK Research H share discount to A share 21

22 Major risk factors Potential decline in oil and gas price. We believe this is the major risk to COSL. Decline in oil and gas prices will affect oil companies capex plans and will put pressure on the drilling day rates and demand for oilfield services. Operating risk in disputed waters. Recently, CNOOC sent HYSY981 (semi-sub operated and managed by COSL) to carry out activities in the disputed waters located in the South China Sea, which resulted in tension between China and Vietnam. We expect this will potentially affect some upcoming exploration activities in certain areas in the future, though we believe the overall impact to COSL is under control. Customer concentration. CNOOC is COSL s largest customer. In 213, 65% of COSL revenue was generated from CNOOC. While we believe it is good for COSL to leverage on CNOOC s offshore growth potential, the high reliance hand increases COSL s business risk. We understand that some of COSL s drilling contracts signed with CNOOC in the past carried lower day rates compared with the market rates. This reduces the transparency of the revenue outlook and could result in valuation discount. 22

23 Company background China Oilfield Services Limited (COSL) is an integrated oilfield services provider with nearly 5 years of experience in offshore operation. Its services cover each phase of offshore oil and gas exploration. COSL provides services for single operations for customers, and also offers integrated package and turnkey services. Its operations are divided into four segments - drilling services; well services; marine support & transportation services; and geophysical and surveying services. COSL's services cover offshore China, mainly Bohai, East China Sea and South China Sea, and also extend to Southeast Asia, Australia, Middle East, America, North Africa and northern Europe. COSL has the largest fleet of offshore oilfield services facilities in China. As of end June 214, COSL operated 43 drilling rigs of which 33 are jack-up drilling rigs and 1 semi-submersible drilling rigs, two accommodation rigs and four module rigs. In addition, as of end- 213, COSL owns and operates the largest and most diverse fleet in offshore China, including 69 working vessels and three oil tankers, four chemical carriers, seven seismic vessels, two OBC teams, seven surveying vessels and a vast array of modern facilities and equipment for logging, drilling fluids, directional drilling, cementing and well work-over services, including FCT (Formation Characteristic Tool), FET (Formation Evaluation Tool), LWD (Logging-While-Drilling) and ERSC (ELIS Rotary Sidewall Coring Tool). COSL has been listed on the Main Board of the HKEx since November 2, 22 [2883.HK] and been listed on Shanghai Stock Exchange since Sep 28 [6188.SH]. CNOOC is its largest shareholder with a stake of 5.52%. Figure 23: Shareholding structure of COSL as of Sep 22,214 Shareholder m shares % of total CNOOC Group (A) 2,41 5.5% Common Wealth Bank of Australia (H) % JP Morgan (H) % BlackRock (H) % Morgan Stanley (H) % OppenheimerFunds (H) % Others 1, % Total 4,772 1.% H share 1, % A share 2,96 62.% Sources: HKEx, SHEx, CGIHK Research 23

24 Business model Figure 24 shows services and products at each phase of the exploration, development and production of offshore oil and natural gas. The production platforms and platform installation services marked by dotted squares are owned and/or provided by third parties. Figure 24: COSL business model Well Services & Geophysical Seismic Survey Drilling Wildcat w ell drilling MS&T Exploration Drilling fluids Directional drilling Cementing Logging Tow ing & anchoring Supply Support team Appraisal w ell drilling Drilling fluids Directional drilling Development Cementing Logging Well completion Development w ell drilling Platform installation (3rd Party) Tow ing & anchoring Supply Support team Production Shuttle tankers Well w orkovers Producing platforms Standby Production logging (3rd Party) Supply Crew boats Platform drilling teams FPSO management Terminal management Support team 24

25 Major customers and suppliers COSL has a relatively concentrated customer base with CNOOC the largest customer, accounting for about 6% of total revenue in 213. Statoil is the second largest customer, contributing 9% of COSL s revenue in 213. Figure 25: Breakdown of sales to five largest customers of 213 Others, 15.8% Petróleos Mexicanos, 3.4% Global Petro Tech FZCO, 4.4% ConocoPhillips, 6.8% CNOOC, 6.7% Statoil, 8.9% Figure 26: Breakdown of five largest suppliers of 213 China Merchants Group, 9.2% Schlumberger (China), 3.7% Bohai Petroleum Supply Co., Ltd (Related Party of CNOOC), 2.6% Shanghai Shipyard Co., Ltd, 2.5% Yantai CIMC Raffles Offshore Limited, 2.% Others, 8.% 25

26 Figure 27: COSL revenue breakdown (RMB m) 16, 14,665 14, 12, 11,252 1, 9,892 9,327 9,515 8, 6, 4, 2, 5,92 4,858 4,417 4,327 3,922 3,95 3,5 2,645 2,733 2,534 1,877 2,171 2,346 2,945 2,26 2,27 1,88 2,427 1,165 1,614 1,399 1, ,43 1,442 1, ,475 3,251 2, Geophysical (RMBm) Marine support and transportation (RMBm) Well services (RMBm) Drilling (RMBm) Figure 28: COSL revenue breakdown (%) 6.% 5.% 46.1% 41.6% 43.5% 48.8% 55.3% 53.1% 51.6% 5.9% 53.6% 4.% 3.% 24.3% 28.4% 25.2% 22.5% 24.7% 24.6% 21.4% 22.% 23.7% 2.% 1.% 18.1% 11.5% 16.4% 13.7% 16.% 15.3% 15.5% 13.3% 12.1% 7.8% 13.4% 8.9% 13.8% 13.2% 13.8% 13.3% 11.9% 1.9%.% Geophysical Marine support and transportation Well services Drilling 26

27 Figure 29: Cost breakdown of past five years of COSL 3% 25% 2% 15% 1% 5% % 27% 26% 25% 25% 24% 24% 24% 25% 23% 21% 22% 2% 2% 21% 19% 17% 17% 11% 9% 8% 8% 7% 8% 8% 7% 6% 4% 5% 4% 3% 4% 3% 4% 5% 5% Operating lease expense Repair and maintenance Other operating expense Sub-contracting expense Depreciation and amortisation Employee compensation costs Consumption of Supplies, Materials, Fuel etc. Figure 3: Breakdown of segment operating profits (% of total operating profit each year) 8% 7% 6% 5% 6% 51% 54% 59% 48% 53% 58% 7% 67% 67% 63% 73% 4% 3% 26% 2% 1% 16% 13% 11% 2% 15% 14% 18% 18% 15% 15% 12% 13% 1% 11% 19% 14% 14% 17% 13% 12% 13% 11% 5% 16% 14% 12% 11% 13% 1% 1% 9% 7% 12% 1% 6% % Geophysical Marine support and transportation Well services Drilling 27

28 Drilling segment COSL is the major supplier to China s offshore drilling services sector and an important participant in international drilling services. The company provides services such as drilling, module rigs, land drilling rigs and drilling-rig management to upstream oil companies, as well drilling is needed in the oil exploration and development stages. In the China seas, COSL s major customer is CNOOC and it operates mainly in Bohai where waters are relatively shallow; East China Sea and South China Sea where waters are mainly deep water (>3m) and sea conditions are relatively more complicated. COSL leases its rigs to oil companies and charges a fixed day rate or rates related to market conditions. Contracts are either on a well-by-well basis or on a term basis where the rig is rented for a predetermined period regardless of whether the equipment is put to work during the period. COSL has upgraded its fleet capacity over the years by adding new high-end jackups with working water depths over 3ft. The fleet has been expanded via construction, operating and buying rigs. As at the end of 213, 11 drilling rigs were operating in Bohai, China; 1 in the South China Sea; two in the East China Sea and 15 in international markets such as the North Sea off Norway; Mexico, Indonesia and the Middle East. The drilling segment generates more than 5% of COSL s total revenue. Figure 31: Revenue from drilling segment 16, 14, 12, 1, 8, 6, 4, 2, 9,892 9,327 9,515 5,92 3,922 2,645 2,26 1, ,64 1,282 11,252 14,665 8% 7% 6% 5% 4% 3% 2% 1% % -1% Rev. of drilling (RMB m) (LHS) YoY 28

29 Figure 32: Cost structure of drilling segment (% of total segment operating expenses) based on PRC GAAP 4% 35% 3% 25% 2% 15% 1% 5% 34% 27% 27% 25% 25% 25% 15% 1% 8% 5% 24% 25% 23% 2% 9% % Other operating expense Employee compensation costs Depreciation and amortisation Sub-contracting & Operating Lease Consumption of Supplies & Repair Figure 33: COSL Semi-sub details Jack-up Time delivered to COSL Construction/Lease/Buy Working w ater Depth (ft) Nanhai II 22 C 1 Nanhai V 22 C 15 Nanhai VI 22 C 15 COSLPIONEER 1/26/21 C 25 COSLINNOVATOR October 211 C 25 COSLPROMOTER 4/25/212 C 25 Haiyangshiyou 981 5/9/212 L 1 Nanhai VIII October 212 B 46 Nanhai VII March 213 Dry Lease 5yrs 1 Nanhai IX July 213 B 5 COSL Prospector (New) 2H214 C 5 Haiyangshiyou 982 (New) August 216 C 5 29

30 Figure 34: COSL Jack-up rig details Jack-up Time delivered to COSL Construction/Lease/Buy Working w ater Depth (ft) Bohai IV 22 C 3 Bohai V 22 C 13 Bohai VII 22 C 13 Bohai VII 22 C 25 Bohai IX 22 C Bohai X 22 C 25 Bohai XII 22 C 18 Nanhai I 22 C 165 Nanhai IV 22 C 315 HYSY 935 November 23 Dry Lease 3 HYSY 931 July 24 B 3 HYSY 941 5/31/26 C 4 HYSY 942 8/18/28 C 4 COSLBOSS 9/28 by acquisition B 4 COSLCRAFT 9/28 by acquisition B 4 COSLSEEKER 9/28 by acquisition B 375 COSLFORCE 9/28 by acquisition B 375 COSLSUPERIOR 9/28 by acquisition B 375 COSLPOWER 9/28 by acquisition B 375 COSLConfidence February 29 C 375 COSLSTRIKE May 29 C 4 HYSY /2/29 C 3 HYSY /3/29 C 3 HYSY 921 1/3/21 C 2 HYSY 922 1/3/21 C 2 HYSY 923 May 211 C 2 HYSY 924 May 211 C 2 Kantan II 1H213 Wet Lease 3 COSLGIFT August 213 B 375 COSLHUNTER December 213 B 375 Gulf Driller I 5/1//214 Lease 6yrs 3 HYSY 932 4/18/214 Dry Lease 5yrs 3 Kaixuan I 7/17/214 L 4 HYSY 943 (New ) September 215 C 4 HYSY 944 (New ) October 215 C 4 3

31 Figure 35: COSL rigs average day rate % 1% 25 8% % % % % -2% Jackup Average Day Rate (' USD) YoY of Jack up average day rate Semi-sub Average Day Rate (' USD) YoY of Semi-sub average day rate Figure 36-1: Drill rigs delivery schedule (23-27) Rig Name Jack ups COSLSTRIKE COSLGIFT COSLHUNTER COSLConfidence HYSY936 COSLBOSS COSLSEEKER COSLFORCE COSLSUPERIOR COSLCRAFT COSLPOWER HYSY921 HYSY922 HYSY923 HYSY924 HYSY931 HYSY935 HYSY937 HYSY941 HYSY942 Kantan II Gulf Driller I HYSY932 Kaixuan I HYSY943 HYSY944 Semi-subs HYSY981 COSLPROMOTER COSLINNOVATOR COSLPIONEER Nanhai VII Nanhai VIII Nanhai IX COSL Prospector HYSY982 31

32 Figure 36-2: Drill rigs delivery schedule (28-212) Rig Name Jack ups COSLSTRIKE COSLGIFT COSLHUNTER COSLConfidence HYSY936 COSLBOSS COSLSEEKER COSLFORCE COSLSUPERIOR COSLCRAFT COSLPOWER HYSY921 HYSY922 HYSY923 HYSY924 HYSY931 HYSY935 HYSY937 HYSY941 HYSY942 Kantan II Gulf Driller I HYSY932 Kaixuan I HYSY943 HYSY944 Semi-subs HYSY981 COSLPROMOTER COSLINNOVATOR COSLPIONEER Nanhai VII Nanhai VIII Nanhai IX COSL Prospector HYSY982 Figure 36-3: Drill rigs delivery schedule ( E) E 215E 216E Rig Name Jack ups COSLSTRIKE COSLGIFT COSLHUNTER COSLConfidence HYSY936 COSLBOSS COSLSEEKER COSLFORCE COSLSUPERIOR COSLCRAFT COSLPOWER HYSY921 HYSY922 HYSY923 HYSY924 HYSY931 HYSY935 HYSY937 HYSY941 HYSY942 Kantan II Gulf Driller I HYSY932 Kaixuan I HYSY943 HYSY944 Semi-subs HYSY981 COSLPROMOTER COSLINNOVATOR COSLPIONEER Nanhai VII Nanhai VIII Nanhai IX COSL Prospector HYSY982 32

33 Well services segment COSL has over 3 years experience in offshore well service operations and over 2 years experience in onshore well service operations. COSL s major clients for well services include oil and gas companies in China (mainly CNOOC and PetroChina) and international oil and gas companies (BP, Shell, ConocoPhillips and Chevron etc.). COSL s well services segment provides onshore and offshore well services, such as logging, drilling and completion fluids, directional drilling, cementing, well completion and work-over, oilfield production optimization, etc. for oil and gas companies. COSL continues to enhance the efficiency of this segment by research and development to introduce new technologies, patents and production. Figure 37: Revenue from well services segment 7, 6,475 7% 6, 6% 5, 4,417 4,327 3,95 4,858 5% 4% 4, 3% 3, 2, 1, ,165 2,733 2,27 1,88 2% 1% % -1% -2% Rev. of well services (RMB m) (LHS) YoY Figure 38: Cost structure of well services segment (% of total segment operating expenses) PRC GAAP 4% 35% 3% 25% 2% 15% 1% 5% % 34% 34% 33% 31% 25% 22% 22% 21% 18% 16% 13% 9% 1% 6% 7% Other operating expense Employee compensation costs Consumption of Supplies & Repair Depreciation and amortisation Sub-contracting & Operating Lease 33

34 MS&T segment The Marine Support and Transportation Services segment offers offshore utility transportation services for supplies, cargoes, and crew transportation; standby services at sea; moving and positioning services for drilling rigs; and towing and anchoring services for offshore vessels. This segment also provides services for offshore oil and natural gas fields exploration, development, and production; oil tankers for transporting crude oil, refined oil, and gas products; and chemical carriers for carrying chemical products, such as methanol. Figure 39: Rev. of Marine support and transportation services segment 3,5 3,251 4% 3, 2,945 35% 2,5 2, 1,5 1, ,43 1,374 1,614 2,171 2,346 2,534 3% 25% 2% 15% 1% 5 5% % Tol. Rev. of marine segment (mrmb) YoY Figure 4: Cost structure of well services segment (% of total segment operating expenses) 4% 35% 3% 25% 2% 15% 1% 5% % 5% 34% 34% 35% 3% 28% 23% 21% 19% 18% 16% 14% 13% 4% 4% Other operating expense Employee compensation costs Consumption of Supplies & Repair Depreciation and amortisation Sub-contracting & Operating Lease 34

35 As of 31 December 213, COSL owned 69 utility vessels of various types, three oil tankers and four chemical carriers, operating mainly in offshore China. Main duties of the utility vessels are to provide services to offshore production facilities and also to support offshore maintenance and construction work. They typically range from 96 feet to 135 feet and may, depending on the vessel design, have enhanced features such as firefighting and pollution response capabilities. Except for self-owned vessels, COSL also charters vessels to expand its shipping capacity. Figure 41: Total No. of vessels of Marine support and transportation services segment % 98% 96% % 3 92% 2 1 9% 88% No. of total self-owned utility vessels (LHS) Calendar day utilization rate of self-owned vessels 35

36 Geophysical and Surveying segment The Geophysical and Surveying segment provides offshore geophysical and surveying services, including marine seismic data collection, marine surveying, seismic data processing and interpretation, land-based engineering, underwater engineering, etc. Figure 42: Revenue breakdown of geophysical and surveying segment 3, 2,5 2,443 2,431 1% 8% 2, 1,5 1,147 1,611 1,97 1,251 2,4 6% 4% 2% 1, % -2% % Rev. of surveying (RMBm) YoY of surveying Rev. of geophsical (RMBm) YoY of geophsical Figure 43: Cost structure of geophysical and surveying segment (% of total segment operating expenses) PRC GAAP 4% 35% 35% 33% 33% 38% 3% 25% 2% 15% 1% 5% % 6% 25% 26% 18% 16% 17% 15% 15% 15% 4% 5% Other operating expense Employee compensation costs Consumption of Supplies & Repair Depreciation and amortisation Sub-contracting & Operating Lease 36

37 The seismic data are recorded in either two-directional (2D) or three-directional (3D) form from sound wave reflections off sub-surface geology. This is used to understand and map geological structures for exploratory purposes to predict the location of undiscovered reserves. The following two figures show the details working volume of the 2D and 3D business. Figure 44: 2D business details of geophysical and surveying segment 6, 8% 5, 45,682 49,448 6% 4, 3, 2, 14,512 14,137 37,81 23,42 22,588 33,9 14,846 24,469 22,132 27,88 23,6 23,656 17,894 25,976 4% 2% % -2% 1, -4% % 2D Processing (km) YoY of 2D collection 2D Collection (km) YoY of 2D processing Figure 45: 3D business details of geophysical and surveying segment 35, 12% 3, 25, 23,174 29,498 24,675 24,397 1% 8% 2, 15, 1, 5, 4,187 7,337 9,694 5,686 13,592 13,8 1,394 8,382 7,951 7,983 9,972 16, 6% 4% 2% % -2% % 3D Processing (km2) YoY of 3D collection 3D Collection (km2) YoY of 3D processing 37