Belt And Road Expansion Will Secure Offshore Potential

Key Takeaways

• Strategic international expansion and technology innovation strengthen COSL's revenue stability, pricing power, and margin potential across both domestic and global markets.
  
• Fleet modernization and supportive domestic policy environment boost operational efficiency, reduce cyclicality, and underpin steady long-term revenue growth.
  
• Intense competition, customer concentration, aging assets, overseas contract risk, and energy transition pressures threaten the company's revenue stability, margins, and long-term growth.

Catalysts

Provides integrated oilfield services in China, Indonesia, Mexico, Norway, the Rest of the Middle East, and internationally.

• Robust medium-term visibility in offshore drilling driven by rising global energy demand and a steady shift toward offshore and deepwater exploration: COSL's international drilling rigs are locked into long-term contracts in Norway, the Middle East, Southeast Asia, and Brazil until as late as 2029/2030, underpinned by resilient upstream capex in these regions. This supports stable or growing drilling revenue and better asset utilization.
  
• Technology upgrades and innovation investment: Ongoing commitment to upgrading fleet capabilities (such as the development of "Made in China" rigs and the Xuanji innovation project), combined with increased spend in technology R&D (over CN¥2 billion annually), will enable COSL to capture higher-margin, technically advanced contracts and maintain pricing power, positively impacting net profit margins.
  
• Expansion and diversification of international operations: Continued international contract wins-especially in Belt and Road countries and partnerships with major national oil companies-reduce over-reliance on domestic clients like CNOOC and diversify the revenue base, supporting long-term earnings stability.
  
• Supportive domestic policy environment: China's emphasis on energy security and domestic upstream development, reinforced by COSL's ongoing close ties and support from its parent company, drives sustained domestic contract flow and offsets cyclicality, providing a foundation for steady long-term revenue.
  
• Fleet renewal and operational efficiency: Progress in optimizing and modernizing the vessel fleet, including disposal of older rigs and transition to new, more cost-effective assets, improves operating leverage and asset returns, enhancing both revenue and operating margins over the medium to long term.

China Oilfield Services Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming China Oilfield Services's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.1% today to 9.6% in 3 years time.
• Analysts expect earnings to reach CN¥5.5 billion (and earnings per share of CN¥1.06) by about September 2028, up from CN¥3.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CN¥4.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.9x on those 2028 earnings, up from 8.8x today. This future PE is lower than the current PE for the HK Energy Services industry at 15.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.41%, as per the Simply Wall St company report.

China Oilfield Services Future Earnings Per Share Growth

Risks

• The sustained decline in the Well Services segment's revenue and profit-driven by a shrinking domestic customer base, pricing model changes, and more intense international competition-highlights challenges in maintaining top-line revenue growth and stable net margins for China Oilfield Services, especially as well services become a more competitive and commoditized part of the portfolio.
  
• Customer concentration risk remains significant, as softening demand and reduced activity from major domestic clients, especially CNOOC, directly led to notable revenue and profit declines, exposing COSL to volatility if its main clients continue to scale back investments, threatening both earnings reliability and revenue stability.
  
• While the company is optimizing its fleet and investing in Made-in-China rigs, a substantial portion of its asset base consists of aging rigs and vessels; ongoing capital intensity required for fleet renewal, especially amid uncertain oil price environments and regional project delays, could pressure free cash flow and diminish near-term profitability, especially if utilization rates falter.
  
• Early termination of major drilling contracts in key overseas regions like the Middle East-resulting in lower-than-expected effective day rates-underscores exposure to shifting strategies by national oil companies, saturating supply, and regional project risk, which could compress margin and disrupt future earnings growth if similar events recur.
  
• Macroeconomic headwinds, including ongoing oil price volatility, regulatory cost pressure, and rising global emphasis on energy transition, reinforce long-term risks that upstream oilfield services demand may stagnate or decline; this would threaten both revenue growth and sustainable margin expansion for COSL despite current optimism about technological advances and international expansion.

Valuation

• The analysts have a consensus price target of HK$9.747 for China Oilfield Services based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$10.99, and the most bearish reporting a price target of just HK$8.17.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥57.5 billion, earnings will come to CN¥5.5 billion, and it would be trading on a PE ratio of 9.9x, assuming you use a discount rate of 8.4%.
• Given the current share price of HK$7.03, the analyst price target of HK$9.75 is 27.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.