[ET Net News Agency, 15 January 2020] S&P Global Ratings said today that higher capital
spending from Chinese national oil companies will fuel China Oilfield Services Ltd.'s
(COSL: BBB+/Stable/--)(02883) strong cash flow.
Increased spending on exploration and production activities will steadily elevate COSL's
work volume in the drilling and well service segments.
Nonetheless, the credit rating agency does not expect prices for COSL's services to
improve significantly. It thinks price recovery will remain slow given continued
overcapacity in the offshore drilling and oilfield service industry.
Robust cash flow will improve COSL's ratio of funds from operations to debt to above 30%
over the next 12-24 months. At the same time, the management intends to pay down long-term
maturities with internal cash during the peak period in debt repayment in 2020-2022.
S&P expects COSL to continue its asset-light strategy by leasing more rigs instead of a
large-scale purchase of new rigs for business expansion. COSL's capital expenditure
(capex) guidance of RMB4.8 billion in 2020 is 60% higher than RMB3 billion in 2019.
The capital spending will be mainly on upgrading COSL's equipment amid strengthening
environmental regulations and higher research and development expenses. Nevertheless, S&P
believes the company has sufficient financial headroom to absorb the additional capex. The
debt level is unlikely to increase materially because we expect the company to generate
positive operating cash flows.
COSL will maintain its high utilization rate for the drilling segment in line with that
in 2019, especially for its domestic rigs. This is backed by its sister company CNOOC
Ltd.'s higher budgeted capex of RMB85 billion-RMB95 billion in 2020 (versus RMB80.2
billion in 2019), of which 62% will be spent in China.
Work volumes for COSL's well services segment are also likely to expand given CNOOC's
rising spending on exploration activities to increase oil and gas reserves and support its
production target of two million barrels of oil equivalents (mmboe) per day (or about 730
mmboe annually) by 2025.
Based on COSL's latest contract profile, S&P estimated COSL's utilization rates for
jack-up rigs to remain high at over 85% in 2020, similar to that of around 85% in 2018.
The utilization rates for semi-sub rigs will improve to around 80%, from around 70% in
2019. (KL)