China Oilfield Services-A:Industry decline has been expected

Q2operating loss of Rmb200m; Rmb7.1bn of impaired assets in H1

    In H116, COSL made an Rmb7.1bn provision for asset impairment and posted a netloss of Rmb8.4bn, with an Rmb230gross operating loss in Q2. The drilling segmenthad a loss of Rmb400m (excluding asset impairment) due to substantial decreases indrilling fees and rig utilization. The oilfield service segment lost Rmb150m due to lowercapex and average selling price (ASP).

    H1drilling fee fell 25% YoY; relatively heavy pressure on ASP

    COSL moved some rigs overseas but the H116drilling rig utilization ratio was 50%,affected by the market environment. Its drilling fee (excluding accommodation rigs)decreased c25% YoY, falling less than the average market fee, which we attribute to along-term strategic cooperation with CNOOC, helping the drilling segment record onlya small loss. The average day-rate decreased c40% YoY in H116, with relatively largepressure coming from CNOOC. The Rmb7.1bn of asset impairment in H116was 15%of COSL's net assets. In addition, we think the utilization ratio COSL used to run itsimpairment test may have been higher than the real level in 2016, although it was inline with consensus for the utilization ratio over the long term.

    Recovery to be difficult in H216

    We expect COSL's operations to remain weak in H216, as we think it will be difficultfor drilling fees in the global market to pick up due to drilling rig oversupply. COSL isexpanding in foreign markets with its low-cost rigs but we still expect the domesticmarket to remain the main revenue resource for the company.

    Valuation: Maintain Neutral rating

    Investors have expected weaker results in 2016, while the market forecastsimprovement in 2017, with a high possibility of a turnaround. We maintain our Neutralrating and price target of Rmb13.14(based on 24.8x 2018E PE).