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China Oilfield Services (2883 HK) Summary

Core Content

China Oilfield Services (COSL) is a leading integrated oilfield services provider in the offshore China market, offering services in drilling, well services, marine support, and geophysical services. The company is a dominant supplier of oil services offshore China and has a strong market position due to its low-cost operations and geographic advantage in the Asia oil services sector.

Main Points

• Share Price Performance: Despite a 19% decline in share price YTD, COSL has shown strong net-profit growth of 20% YoY for 2014E.
• Target Price & Rating: The target price is raised to HKD28.80 from HKD27.30, with a 50.6% upside from the 27 May 2014 price of HKD19.12. The Buy (1) rating is reaffirmed.
• Valuation: COSL's 2014E PER of 9.1x is 45% below its historical average of 16.5x. It is undervalued compared to its Asia oil services peers and global peers.
• Earnings Growth: The company is forecasted to maintain a net profit CAGR of 10% from 2013 to 2016. Free cash flow is expected to grow at a CAGR of 31%.
• Operating Margin: The operating profit margin is forecasted to expand from 27.8% in 2013 to 30.2% in 2016.

Key Financial Forecasts

Financial Highlights

• Earnings Momentum: COSL has strong earnings fundamentals and a relatively stable earnings stream compared to other oil services companies.
• Rig Utilization & Day Rates: The company has raised its rig utilization rates and day rates, contributing to higher EPS forecasts.
• Capital Expenditure: COSL has a consistent capital expenditure (Capex) strategy, with a focus on expanding its fleet and enhancing its operational capacity.

Risk Factors

• Oil and Gas Prices: Lower oil and gas prices could negatively impact the company's earnings.
• Client Dependency: COSL's main client is CNOOC, which presents a key customer risk.

Investment Thesis

• Market Prospects: Offshore China remains under-explored and highly prospective, with expected oil and gas production growth of at least 50% over the next five years.
• Earnings Visibility: COSL's earnings are more predictable and less affected by the broader China macroeconomic environment compared to other Chinese companies.
• Strategic Position: As the dominant supplier of oil services offshore China, COSL is well-positioned to benefit from the continued expansion of the market.

Key Assumptions

• Rig Day Rates (USD/day): Expected to increase over the forecast period.
• Rig Utilization Rate (%): Maintained at a high level, contributing to solid earnings growth.
• Operating Days: Projected to grow at a 7.3% CAGR from 2014 to 2016.

Conclusion

COSL is viewed as a strong investment opportunity due to its solid earnings fundamentals, growth potential in the offshore China market, and undervalued stock price. The company's strategic position, combined with its transparent earnings and low PER, makes it an attractive option for investors looking to capitalize on the continued growth of the China oil and gas industry.