The Oilfield Service Giant Plummeted By More Than 20%. What Happened?

On April 5, China Oilfield Services, an H-share listed company, fell sharply. It fell 24.4% after the opening, hitting a low of HK$7.46. The decline then narrowed, closing at HK$8.28, a drop of 16.11%.

On the evening of April 3, China Oilfield Services issued an announcement regarding the suspension of operations on some drilling platforms. According to the announcement, in October 2022, the company disclosed the signing of multiple long-term contracts for drilling platform services in the Middle East. Recently, the company suddenly received a notice from a customer in the Middle East that the operations of four drilling platforms were suspended (hereinafter referred to as this operation suspension). The company is discussing with the customer the specific suspension execution time, follow-up arrangements and corresponding solutions. During the suspension period, the company will actively search for suitable market opportunities.

The announcement stated that this suspension of operations will have a certain impact on the company's original operating expectations in the Middle East region, and the specific impact is still being further evaluated. The company's board of directors believes that although this suspension of operations will pose a short-term challenge to the company's development in the Middle East region, it will not have a significant impact on the company's overall business and financial status. The company still maintains a positive and optimistic attitude towards the overall development of overseas business.

China Oilfield Services stated that the company anchors the goal of building a world-class enterprise, deeply implements the five major development strategies of "technology-driven", "cost leadership", "integration", "internationalization" and "regional development", and coordinates the promotion of production operations, corporate governance, Reform and innovation and other work will continue to create new prospects for high-quality development and continue to create value for shareholders.

It is understood that the cooperation between China Oilfield Services and Saudi Aramco began in 2020. At that time, the Saudi Energy Ministry required Saudi Aramco to increase production capacity to 13 million barrels per day by 2027. Since then, Saudi Aramco has invested billions of dollars in expanding production. In October 2020, China Oilfield Services announced the signing of multiple long-term drilling platform service contracts with leading international oil companies in the Middle East, with a total amount of approximately 14 billion yuan. In the past two years, OPEC+ member states have repeatedly announced production cuts due to weak oil market demand. Against this background, Saudi Aramco said in January this year that its maximum production capacity would be maintained at 12 million barrels per day. In March this year, Saudi Aramco announced that it would suspend its crude oil production expansion to a target of 13 million barrels per day.

Bank of America Securities recently released a research report stating that the recent rise in oil prices is basically driven by OPEC+ production cuts, and there is limited room for increase in oil exploration and production capital expenditures. It will also take time for rising oil prices to be beneficial to COSL. The bank lowered its after-tax net profit forecast for COSL this year and next by 4% to 5%, lowered its target price from HK$10.8 to HK$9.3, and lowered its investment rating from "buy" to "underperform the market."

The company announced that a Middle Eastern customer had requested the suspension of operations on four oil rigs, the same seven rigs it moved offshore Saudi Arabia last year, the report said. The bank pointed out that there are two uncertain factors in the incident, including the length of the suspension and whether customers will be compensated.

The bank estimates that if the relevant oil wells are shut down for the whole year, the company's net profit after tax this year will decrease by 5% to 8% or 200 million to 300 million yuan. The bank expects that due to Saudi Aramco's production capacity cuts, it believes that similar outages will reduce drilling daily operating costs in the long term. In addition, COSL has ordered four new drilling rigs and used additional capital expenditures for three leased drilling rigs last year. It needs to be alert to the long-term negative impact of the incident on potential asset impairment.

The annual report recently disclosed by China Oilfield Services shows that the company achieved operating income of 44.109 billion yuan in 2023, a year-on-year increase of 23.7%; it achieved net profit of 3.283 billion yuan, a year-on-year increase of 31.3%. Regarding the growth of operating income, China Oilfield Services explained that during the industry's upward cycle, the company actively ensured the steady development of domestic exploration and development plans and continued to optimize the precise layout of overseas markets. The main business workload of each segment increased throughout the year, and the operating income of each segment increased. Maintained year-on-year increase.

The annual report shows that as of the end of 2023, 41 of COSL's drilling platforms are in China and 19 in international regions. Affected by the continued recovery of the offshore oil and gas industry, the company's drilling platform operating days will be 17,726 days in 2023, an increase of 999 days or 6.0% year-on-year.