China Oil, Gas and Chemical Thematic Research_Offshore oilfield services likely to remain buoyant; we prefer COSL

Industry and Company Overview * Industry: Offshore oilfield services (OFS) * Company: COSL (China Oilfield Services Limited) * Analyst: UBS * Date: 2 January 2025 Key Points Industry Trends 1. Offshore OFS Utilization and Day Rates: The offshore OFS industry has been experiencing an upcycle since 2021, driven by rising oil prices and increased capex by global oil companies. Rig utilisation rates have been high, with average day rates for jack-ups, semi-subs, and drill ships increasing annually since 2022. * [2] 2. Global Offshore Rig Utilization: The average utilisation rate for offshore rigs in 2024 was 79%, with jack-up utilisation experiencing a temporary decline in Q324 due to service suspensions in the Middle East, followed by a recovery in Q424. * [2] 3. Offshore Rig Day Rates: Day rates for offshore rigs have remained on an upward trajectory in 2024, with rates for jack-ups, semi-subs, and drill ships increasing by 12%, 8%, and 16% respectively from the end of 2023. * [2] 4. Global Offshore OFS Demand: Global offshore OFS demand is expected to remain solid, with day rates for jack-ups, semi-subs, and drill ships projected to increase by 6%, 9%, and 9% respectively from 2026 to 2028. * [3] 5. Regional Variations: The Mediterranean, Southeast Asia, and Australia have seen the fastest growth in average day rates for jack-ups in 2024. Norway has maintained high day rates for semi-subs, with the average leading edge day rate increasing by 23% YoY. * [4] 6. Rig Suspensions in the Middle East: Some rigs in the Middle East were suspended from service in 2024 due to service suspensions. However, new contracts have been secured for a quarter of the suspended rigs, and demand is expected to recover in 2026. * [4] 7. Supply Gap: UBS expects a supply gap to emerge in 2030, requiring an investment of US$250-400bn/year to fill the gap, accounting for the natural decline at mature fields and the need for new projects. * [19] COSL Analysis 1. **COSL Drilling Business**: UBS has updated its analysis of COSL's drilling business and adjusted its 2024/2025/2026 earnings estimates. The company's drilling segment is expected to experience high growth in 2025, driven by new contracts for suspended rigs and higher day rates for some of its semi-subs. * [5] 2. **COSL Earnings Estimates**: UBS has adjusted its DCF-based price target for COSL from HK$10.80 to HK$10.60, implying a 10x 2025E PE. The company's 2025 net profit growth forecast is 40%. * [5] 3. COSL Valuation: COSL's 2025E PE of 6.6x is below the global OFS peer average of 11.9x, and its 2025E P/BV of 0.6x is below the global OFS peer average of 1.6x. * [5] 4. COSL Rig Contracts: UBS has provided a detailed breakdown of COSL's rigs subject to contract changes in 2025, including new contracts for suspended rigs and higher day rates for some of its semi-subs. * [40] 5. COSL Financials: UBS has provided a financial overview of COSL, including revenue, EBITDA, net profit, capex, EPS, DPS, ROE, and gearing ratio. * [42] Risks 1. Oil Prices: COSL's share price tends to track oil prices, which could impact sentiment on the stock. 2. Deep-water Drilling: The market may have higher earnings expectations for COSL from deep-water drilling offshore China, which faces higher risks than shallow-water drilling. 3. Exchange Rates: If the US dollar appreciates against the renminbi, there could be upside risk to COSL's earnings. 4. Large Portion of Revenue from CNOOC: While this represents reliable revenue, there is a risk that COSL may not raise rates in line with overseas peers. * [48]