20141030-美银美林-Headwind_in_2015；_Downgrade_COSL_to_Underperform_13页_605kb

Summary of Document: Headwind in 2015; Downgrade COSL to Underperform

Core Content

This document is a research report by Bank of America Merrill Lynch on China Oilfield Services Ltd (COSL), focusing on the challenges it faces in 2015 due to a weak oil price environment and reduced capital expenditures (capex) by CNOOC, its largest client. The report also includes updated earnings estimates, valuation metrics, and investment ratings for both H-shares and A-shares.

Main Views and Key Information

Market Challenges and Downgrade

• Rating Change: COSL's rating has been downgraded to Underperform for both H-shares and A-shares.
• Reasons for Downgrade:
  • Lower oil prices have led to reduced capex for CNOOC, which in turn affects COSL's dayrates and utilization.
  • A $10/bbl decline in Brent oil price starting from $100/bbl would reduce CNOOC's capex by ~10%, impacting COSL's revenue.
  • Some of COSL's rigs, especially those in the overseas market, may be idled or face dayrate cuts.

Earnings Estimates and Price Objectives

• Earnings Cuts:
  • COSL's earnings are estimated to decline by 3% in 2014, 15% in 2015, and 17% in 2016.
  • For 2015, a 7% YoY decline in earnings is expected, which is 15% below Bloomberg consensus.
• Price Objectives (PO):
  • H-share PO: HK$14.60 (implying 7.3x 2015 P/E)
  • A-share PO: CNY11.40 (implying 7.3x 2015 P/E)
  • Both POs indicate a 20% / 37% downside to the close prices on Oct 29, 2014.

Valuation and Metrics

• Valuation Metrics:
  • P/E Ratio: 7.3x for 2015, broadly in line with global peers.
  • Dividend Yield: 3.36% for H-shares and 2.67% for A-shares.
  • EV/EBITDA: 6.48x for 2015, lower than previous years.
  • Free Cash Flow Yield: 6.37% for 2015.
• Balance Sheet Highlights:
  • Net Debt-to-Equity Ratio: Reduced to 22.6% for 2015.
  • ROE: Expected to decline to 14.5% in 2015 from 18.7% in 2014.
  • Free Cash Flow: Expected to be HK$4,347/mn for 2015, down from HK$5,096/mn in 2014.

CNOOC Capex Cut Impact

• CNOOC confirmed a lower 2015 capex compared to 2014.
• The capex cut is estimated to be Rmb110-115bn, implying an oil price of ~US$85/bbl.
• If Brent averages at US$80/bbl, COSL's earnings would face a 4.1% downside.
• If Brent averages at US$70/bbl, earnings would face a 16.6% downside.

Rig Utilization and Contracts

• Jackup Utilization: Fell below 85% in September 2014.
• Jackup Dayrates: Expected to decline due to market pressures.
• Contract Expirations: Several rigs are scheduled to exit contracts in 2015, with potential for idling or transfer to CNOOC.
• Statoil Rigs: Three semi-sub rigs are at risk of further suspension due to weak floater market and reduced capex.

Investment Thesis

• The Underperform rating is based on the anticipated impact of CNOOC's capex cuts and reduced dayrates.
• Keppel Corp is maintained as a positive investment due to its diversified revenue base and secured order backlog.
• COSL's non-oil businesses account for 41% of 2015 revenue, offering some diversification.

Scenario Analysis

• Table 4 provides a scenario analysis based on oil price fluctuations:
  • Oil Price (US$/bbl): 100, 90, 80, 70
  • CNOOC Capex (Rmb bn): 130, 119, 108, 96
  • Jackup Dayrates (US$ thousand/day): 126, 122, 118, 110
  • Semi-sub Dayrates (US$ thousand/day): 321, 313, 299, 271
  • Net Profit (Rmb mn): 8,060, 7,669, 7,198, 6,206
  • EPS (Rmb): 1.69, 1.61, 1.51, 1.31

Valuation Comparison with Global Offshore Drillers

• Table 5 compares COSL with global offshore drillers:
  • COSL: P/E 7.3x (2015E), P/B 1.3x (2015E), ROE 19%
  • Noble Corp: P/E 8.2x (2015E), P/B 0.5x (2015E), ROE 8%
  • Rowan: P/E 6.5x (2015E), P/B 0.5x (2015E), ROE 5%
  • Seadrill: P/E 7.3x (2015E), P/B 0.8x (2015E), ROE 15%
  • Ensoco: P/E 8.3x (2015E), P/B 0.7x (2015E), ROE 11%
• COSL's valuation is now in line with global peers, with a premium no longer justifiable due to CNOOC's reduced capex.

Downside and Upside Risks

• Downside Risks:
  • Faster-than-expected cost increases.
  • Unfavorable RMB exchange rate.
  • Disappointing progress in China's deepwater E&P.
• Upside Risks:
  • Unexpected improvement in global offshore drilling market.
  • Significant oil price rebound.
  • Potential rig acquisitions with meaningful earnings contribution.

Conclusion

COSL faces significant headwinds in 2015 due to the weak oil price environment and CNOOC's capex reduction. The report downgrades the company to Underperform for both H-shares and A-shares, with updated price objectives reflecting the reduced earnings outlook. While the company's non-oil businesses provide some stability, the overall outlook remains cautious due to potential rig idling and reduced utilization.