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Deutsche Bank Markets Research

Asia Hong Kong Energy Oil & Gas

Industry

Oil Service Companies

Date 7 October 2013

Industry Update

COSL vs. Global peers

Inaugural piece

________________________________________________________________________________________________________________

Deutsche Bank AG/Hong Kong

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013.

David Hurd, CFA

Research Analyst (+852) 2203 6242 [email protected]

Companies Featured

China Oilfield Services (2883.HK),HKD20.05

Hold

2012A 2013E 2014EP/E (x) 10.3 12.8 12.5EV/EBITDA (x) 7.2 8.5 8.0Price/book (x) 1.8 2.0 1.8Source: Deutsche Bank

This is our inaugural piece on oil service company COSL vs. Global Peers. It is our attempt to finish off our series on China Oils vs. global peers. COSL vs. global peers is more difficult in that oil service companies lack that common anchor of reserves and production against which to measure performance. In this piece we look at operating margins and ROEs, capex efficiency, asset turnover, correlation to oil price and other metrics. We also take a deep(er) dive into the relative current valuation of COSL vs. its global peers.

Bottom line COSL’s 2014 PE valuation is at parity with global peers but its growth rates are 1/3 to 1/4 those of global peers. Investors are paying 3-4x more for COSL’s growth than for global peers. COSL’s 2013e ROE is 2x global peers; yet, its debt-to-equity is similarly 2x that of global peers. COSL’s average 5-year ROE is quite in line (1.1x) with global peers. COSL’s Revenue and Ebitda per drilling rig is discounted to peers, yet the dispersion / volatility of its operating margin and ROE is 1/3 that of its global peers. This all makes sense: COSL’s pricing strategy provides consistency at the expense of growth vs. global peers.

Oil price sensitivity Similar to its Chinese cousins (PetroChina, Sinopec and CNOOC), COSL’s share price correlation and R-Square to rising / falling oil prices is low relative to global peers. The average LT Correlation of global peer share price to rising / falling oil price is 0.54 vs. 0.20 for COSL. COSL’s R-Square to changes in oil price is a miserly 0.04 vs. 0.33 for global peers (Figure 2). We suspect that this has something to do with COSL’s concentration of business in offshore China, where markets tend to be more managed than freewheeling.

COSL – Investment thesis We like this stock; but don’t want to pay-up for ST sub-peer growth rates and declining visibility. Due to the structure of China’s off-shore oil industry, COSL is a generalist in a world of specialists. That being said, we took note that 73% of COSL’s 1H13 operating income came from its drilling segment. Typically drilling makes up 60% of COSL’s operating income with Geological & Geophysical, Marine Transport and Well Services (includes equipment) almost evenly split. For YE11, COSL stopped publishing its average drilling day rates; none of its global peers have followed suit.

Valuation and risks We value COSL from a DCF model. Our WACC is 8.0% which is composed of a COE 10% and an after tax CoD of 2.3%. Our China Rfr (3.10%) and Erp (5.6%) are standardized for China by a DB Strategy group. We use a 3-yr adjusted Beta of 1.24 and a TG rate of 3%, which is a reasonable assumption for COSL’s equipment volume growth over the coming years. The principal risks to COSL include: 1) a material reduction / increase in oil prices; 2) the termination of COSL’s high-tech preferential (15%) tax treatment in China and 4) any shortfall / major success in exploring deep water South China Sea.

7 October 2013

Oil & Gas



Peer comparables (part 1)

COSL vs. global oil service companies

Our intent is to present a balanced assessment of COSL’s past and current operating and valuation metrics relative to global peers. COSL’s long term (2003-12) Ebitda CAGR is 25.9% (x-Rmb appreciation) vs. only 18.5% for our subset of “global peers” (Figure 11). Yet, investors are currently paying 3-4x more for COSL’s consensus 2014 growth relative to global peers (Figure 3-4).

Actually, there are no “global peers” to COSL (Figure 1). We have struggled with this issue for years. COSL is a provider of 4 basic oil services, predominantly to its sister company CNOOC Ltd: offshore drilling, well services, marine transport (M&T) and geological & geophysical (G&G). Drilling is a high margin, high beta, cyclical business. The well services business and equipment business is a lower margin, less cyclical business.

Most global oil service “peers” have evolved into specialists: 1) Transocean specializes in deep water drilling; COSL is just starting to develop experience in deepwater South China Sea; 2) Cameron International manufactures oil industry equipment – pumps & values; to the best of our understanding, COSL’s equipment business is more of a procurement business than a manufacturing business; 3) Baker Hughes is a well service company; only 10% of COSL’s operating income typically comes from its well service division; 4) Nabors is a large on-shore drilling and well service company; COSL has minimal onshore drilling experience.

Historically, sixty percent (60%) of COSL’s operating income and 50% of its revenues have come from its offshore drilling business. We took note that drilling represented 73% of COSL’s operating income 1H13. Whether COSL has a strategy to become a specialist in offshore drilling has yet to be stated by management; however, there seems to be a growing and more valid argument to compare COSL to the world’s drilling “peers” (Noble, Rowan, Diamond & Transacean) rather than to the world’s oil service companies (Halliburton, Baker Hughes & Schlumberger) and / or oil field equipment providers (Cameron International & Weatherford).

Throughout this report, we analyze metrics of a handful of offshore drilling companies (4) as a standalone business. We also analyze the metrics of an amalgamation of these same (4) offshore drilling companies, plus one (1) onshore drilling / well service company; plus two (2) well service providers, and one (1) equipment manufacturer in order to better mimic the generalist structure of COSL. Given that COSL’s drilling business provides it with 60-70% of its operating income, maybe the global drilling “peers” are the better fit. Then again, COSL’s pricing policy for sister company CNOOC Ltd. does not carry the beta that free markets retain globally, which we believe explains a large part of Figure 2 results.

Balanced

No such thing as a “peer”

Specialists

COSL – more and more a

drilling company

COSL – an amalgamation of

oil services

7 October 2013

Oil & Gas



Figure 1: COSL and global “peers” by business activity as a % of operating income

% Drilling Well Services Equipment % Other % Drilling Well Services Equipment % Other

China Oilfield Services 58.3% 12.9% 0.0% 28.7% 66.1% 10.0% 0.0% 23.9%

- Noble Corp 97.8% 0.0% 0.0% 2.2% 98.5% 0.0% 0.0% 1.5% - Rowan Companies 101.8% 0.0% -1.8% 0.0% 100.0% 0.0% 0.0% 0.0% - Diamond Offshore Drilling 100.0% 0.0% 0.0% 0.0% 100.0% 0.0% 0.0% 0.0% - Transocean Ltd 100.0% 0.0% 0.0% 0.0% 100.0% 0.0% 0.0% 0.0%

- Nabors Industries Ltd 116.3% 13.5% 0.0% -29.8% 84.5% 31.8% 0.0% -16.3%

- Halliburton Co 0.0% 100.0% 0.0% 0.0% 0.0% 100.0% 0.0% 0.0% - Baker Hughes 0.0% 92.8% 0.0% 7.2% 0.0% 94.7% 0.0% 5.3%

- Cameron International 0.0% 0.0% 100.0% 0.0% 0.0% 0.0% 100.0% 0.0%

Notes: - In 1H13, "Drilling" accounted for 72.4% of COSL's operating income.

- COSL's "Well Service" business segment includes an equipment business; COSL's "Other" includes Marine Transport and Geological & Geophysical businesses;

- In 2008, Rowan had a legacy manufacturing busess for oil, mining, timber and steel equipment. This business was sold in June 2011.

- Nabors built an E&P business 2007-10. In 2010 Nabors began to liquidate its upstream E&P businesses. - Baker Hughes has a business ("Other") that provides industrial products and services to the downstream refining and pipeline industries.

2008 Operating Income 2012 Operating Income

Source: Deutsche Bank; Company data

Figure 2: Share price sensitivity to changes in oil price – COSL relative to global “peers”

Company vs Brent 1 year 3 year 5 year

China Oilfield Services correl 0.06 0.14 0.20 rsq 0.00 0.02 0.04

Noble Corp correl 0.38 0.47 0.56

rsq 0.14 0.22 0.32

Transocean Ltd correl 0.31 0.36 0.55

rsq 0.10 0.13 0.55

Rowan Companies correl 0.33 0.48 0.56

rsq 0.11 0.23 0.31

Diamond Offshore Drilling correl 0.36 0.48 0.57

rsq 0.13 0.23 0.33

Baker Hughes correl 0.41 0.47 0.53

rsq 0.17 0.22 0.28

Cameron International correl 0.37 0.48 0.51

rsq 0.14 0.23 0.26

Halliburton Co correl 0.40 0.46 0.50

rsq 0.16 0.21 0.25

Nabors Industries Ltd correl 0.41 0.50 0.57

rsq 0.16 0.25 0.32

- Averages correl 0.37 0.46 0.54

rsq 0.14 0.21 0.33

Source: Deutsche Bank; Bloomberg Financial LP

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Peer valuations


We think the shares of COSL are currently trading expensive relative to global peers. On 2014e consensus earnings, we show COSL trading at parity to global peers, but with 1/3 to 1/4 of the growth rate of global peers 2014 / 2013.

We show COSL trading at 11.1x forward 2014 earnings estimates with consensus growth (2014 / 13) of 11.7% for EPS and 9.7% for Ebitda. We show “All peers (x-COSL)” trading at the same 11.1x PE multiple but with consensus EPS growth of 43% and Ebitda growth of 48.5%. Investors are paying 3-4x more for COSL’s growth (PEG rate or PE to Growth) than they are paying for the growth of global peers.

We show COSL trading at a premium price to “All peers (x-COSL)” in terms of 2014 Price-to-Book and EV-to-Ebitda. Justifying these premiums might be COSL’s “current” ROE of 16.7% which is 2x that of global peers. Notwithstanding, COSL’s current total debt-to-equity is also 2x “All peers (x-COSL)” and COSL’s 5-year average ROE of 15.8% is more in line with “All peers (x-COSL”) of 14.2%. Higher ROEs come with higher debt levels; COSL’s ROE’s should be higher than global peers which have half the debt of COSL.

With regards to Figures 3-5:

Global “peer” oil service companies include Noble Corp; Diamond Offshore Drilling; Rowan Companies; Transocean; Nabors Industries; Baker Hughes; Halliburton; and Cameron International (See Figure 5). This is the COSL global peer group which we have chosen.

“All (x-COSL)” or “All x” refers to all of our chosen global peer companies except COSL.

“Drillers” refer to Noble Corp; Diamond Offshore; Rowan; Transocean and for purposes of valuations Nabors Industries.

“Service Cos” refers to Halliburton and Baker Hughes.

“Equipment” refers to Cameron International.

“Synthetic COSL 70-15-15” refers to a synthetic COSL valuation which we have created and which consists of a 70% weighting of Drilling Co valuations plus 15% weighting of Service Co valuations plus 15% weighting of Equipment company valuations. In 1H13, seventy three (73%) percent of COSL’s operating income came from its drilling segment.

All numbers used for valuations are taken from Bloomberg including consensus estimates for EPS, Ebitda and PB values (2013-14e).

Our estimated 2013 and 2014 growth forecasts are taken from Bloomberg consensus EPS, Ebitda and PB estimates.

Paying up for growth

PE parity, but for less growth

COSL premiums on PB and

EV / Ebitda

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Figure 3: COSL vs. global oil service peers: PE parity but 1/3 to 1/4 the growth in 2014e

5-Oct-13 Synthetic COSL Global Oil Service Companies ALL (x-COSL) Drillers COSL Service Cos Equiptment 70-15-15

EPS Growth (2014e / 13e) 43.0% 48.5% 11.7% 34.4% 32.8% 44.0%EBITDA Growth (2014e / 13e) 26.7% 28.0% 9.7% 21.6% 30.0% 27.4%PEG (2014e) 0.28 0.23 0.94 0.35 0.41 0.27

Operating Margin (Current year) 17.9 21.2 26.0 12.4 12.5 18.6ROE (Current year) 8.3 7.1 16.7 9.3 12.4 8.2Total Debt / Equity (Current year) 0.47 0.57 0.96 0.29 0.37 0.505-Yr ROE 14.2 12.9 15.8 16.4 16.2 13.9

P/E (2013e) 15.8 15.4 12.4 15.9 17.9 15.8P/E (2014e) 11.1 10.3 11.1 11.9 13.5 11.0

EV/ EBITDA (2013e) 7.5 7.1 8.7 7.1 10.0 7.5EV/ EBITDA (2014e) 5.9 5.5 8.0 5.8 7.7 5.9

P/B (2013e) 1.5 1.2 1.9 2.0 2.0 1.4PB (2014e) 1.3 1.1 1.7 1.7 1.8 1.3

ROE % (Current year) 8.3 7.1 16.7 9.3 12.4 8.2ROE % (5-Yr average) 14.2 12.9 15.8 16.4 16.2 13.9

Notes - All numbers above are compiled from data downloaded from Bloomberg; "Current year" typically means trailing 12-months and / or most recent year end. - All growth rates have all been calculated from Bloomberg consensus estimates as of 05 October 2013. - "Drillers" = Noble, Diamond, Rowan, TransOcean, & Nabors - "Service Cos" = Baker Hughes & Halliburton - "Equiptment" = Cameron International - "Synthetic COSL" = 70% weighting Drillers + 15% weighting Service Cos + 15% weighting Equiptment - In 1H13, "Drilling" accounted for 72.4% of COSL's operating income.

Source: Deutsche Bank; Bloomberg Finance LP

Figure 4: COSL premiums to global peers are represented by numbers > 1; discounts by numbers < 1

5-Oct-13Global Oil Service Companies

COSL / All (x) COSL / Drillers COSL / COSL COSL / Services COSL / Equipmt COSL / Synthetic

PEG (2014) 3.36 4.13 1.00 2.71 2.30 3.45Operating Margin (Current year) 1.45 1.23 1.00 2.09 2.08 1.40

ROE (Current Year) 2.01 2.35 1.00 1.80 1.34 2.03Total Debt / Equity (Current Year) 2.03 1.70 1.00 3.27 2.58 1.94ROE (5-Yr Average) 1.11 1.22 1.00 0.96 0.97 1.13

P/E (2013e) 0.78 0.80 1.00 0.78 0.69 0.78P/E (2014e) 1.00 1.07 1.00 0.93 0.82 1.00

EV/ Ebitda (2013e) 1.17 1.23 1.00 1.23 0.87 1.16EV/ Ebitda (2014e) 1.35 1.44 1.00 1.36 1.03 1.35

P/B (2013e) 1.30 1.66 1.00 0.95 0.97 1.36P/B (2014e) 1.30 1.60 1.00 0.99 0.98 1.35

Notes: - All numbers above are compiled from data downloaded from Bloomberg; "Current year" typically means trailing 12-months and / or most recent year end. - All growth rates have all been calculated from Bloomberg consensus estimates as of 05 October 2013. - "Drillers" = Noble, Diamond, Rowan, TransOcean, & Nabors - "Service Cos" = Baker Hughes & Halliburton - "Equiptment" = Cameron International - "Synthetic COSL" = 70% weighting Drillers + 15% weighting Service Cos + 15% weighting Equiptment - In 1H13, "Drilling" accounted for 72.4% of COSL's operating income.


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Figure 5: COSL and global peer consensus estimates from Bloomberg 2013-14

5-Oct-13

Global Oil Service Companies COSL NOBLE DIAMOND ROWAN TRANSOCEAN NABORS BAKER HUGHES HALLIBURTON CAMERONBbrg Ticker 2883 HK Equity NE US Equity DO US Equity RDC US Equity RIG US Equity NBR US Equity BHI US Equity HAL US Equity CAM US EquityCountry HK SZ / US US UK / US SZ / US US US US US

Share Price (Local) 20.1 38.7 63.5 37.4 45.5 17.5 49.5 49.1 61.5

EPS (Consensus 2013e - Local Currency) 1.62 2.92 4.79 2.17 3.99 0.80 2.97 3.22 3.44EPS (Consensus 2014e - Local Currency) 1.81 4.70 6.36 3.58 5.33 1.20 4.11 4.20 4.57EPS Growth 2014e / 13e 11.7% 61.0% 32.8% 65.0% 33.6% 50.0% 38.4% 30.4% 32.8%

EBITDA (Consensus 2013e - US$ mln) 1,727 1,964 1,309 633 3,468 1,601 3,901 6,273 1,552EBITDA (Consensus 2014e - US$ mln) 1,895 2,685 1,731 876 4,159 1,809 4,742 7,634 2,018EBITDA growth 2014e / 13e 9.7% 36.7% 32.2% 38.3% 19.9% 13.0% 21.6% 21.7% 30.0%

BV/ Share (Consensus 2013e - Local Currency) 10.35 33.18 34.20 38.90 44.27 20.90 41.10 17.10 30.90BV/ Share (Consensus 2014e - Local Currency) 11.67 36.80 37.58 42.40 47.28 22.50 44.40 20.70 35.00

P/E (2013e) 12.4 13.3 13.2 17.2 11.4 21.8 16.6 15.2 17.9P/E (2014e) 11.1 8.2 10.0 10.4 8.5 14.5 12.0 11.7 13.5

EV/ Ebitda (2013e) 8.7 7.6 6.7 8.9 6.8 5.5 6.7 7.5 10.0EV/ Ebitda (2014e) 8.0 5.6 5.1 6.4 5.7 4.8 5.5 6.2 7.7

P/B (2013e) 1.9 1.2 1.9 1.0 1.0 0.8 1.2 2.9 2.0P/B (2014e) 1.7 1.1 1.7 0.9 1.0 0.8 1.1 2.4 1.8

ROE % (Current year) 16.7 7.4 15.2 5.1 4.5 3.4 5.9 12.7 12.4ROE % (5-Yr avg) 15.8 16.6 29.3 12.1 3.2 3.5 11.6 21.2 16.2

PEG (PE / Growth 2014e) 0.94 0.14 0.30 0.16 0.25 0.29 0.31 0.38 0.41Total Debt / Equity (Current year) 0.96 0.55 0.33 0.44 0.79 0.73 0.28 0.31 0.37

Notes: - All numbers above have been downloaded from Bloomberg; "Current year" typically means trailing 12-months and / or most recent year end. - All EPS, EBITDA and BV/ Share numbers above for 2013e and 2014e represent Bloomberg consensus estimates as of 05 Oct 2013. - All growth rates have all been calculated from Bloomberg consensus estimates as of 05 October 2013.


The above estimates and growth rates have all been taken from Bloomberg consensus numbers. Note the growth rates for global peer 2014 EPS and Ebitda relative to COSL. COSL’s 2014 estimated growth rates are 1/3 to 1/4 the growth rates expected from global peers.

COSL’s drilling rig rates are set by negotiations between CNOOC Group (parent company to COSL), CNOOC Ltd. (COSL’s sister company and beneficiary of COSL’s services), and COSL itself. Historically, CNOOC Ltd has provided COSL with +90% utilization of its equipment in exchange for discounted rates. According to our numbers, COSL’s average Jack Up discount to global peers (2001-08) was 41.4%. As international rates fell 2009-10, COSL’s day rates remained relatively flat. We suspect that COSL will be in a position to receive day rate increases on its Jack Up fleet, once those prices charged to CNOOC Ltd have reestablished a reasonable discount to global rig rates. (Figure 6)

Bloomberg consensus

estimates

Tit for tat – utilization for

discounted day rates

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Figure 6: Jack Up day rates – COSL vs. global offshore day rates

Jack Ups MediterianUS$ ('000) / day W. Africa S / E Asia ME / India SE Asia AVGS

300' IC > 300' IS 300' IC 300' IC Up to 300' IC > 300 IC

International day-rates:Avg 2001 42.3 43.1 62.2 57.6 45.3 61.0 51.9Avg 2002 23.4 27.7 58.2 57.2 43.5 67.3 46.2Avg 2003 27.9 30.4 53.2 51.9 41.9 61.4 44.5Avg 2004 43.9 41.3 54.2 60.4 48.5 71.6 53.3Avg 2005 72.5 65.4 82.7 82.0 61.6 94.6 76.5Avg 2006 123.3 139.1 149.8 179.0 116.5 186.4 149.0Avg 2007 81.5 116.4 180.4 178.2 131.4 200.0 148.0Avg 2008 104.9 127.5 177.7 172.4 128.7 181.8 148.8Avg 2009 62.5 93.3 118.7 121.9 108.4 148.5 108.9Avg 2010 57.3 70.4 86.1 92.3 73.6 123.6 83.9Avg 2011 71.6 na 92.1 98.4 76.4 129.5 93.6Avg 2012 93.8 na 114.0 118.8 100.4 142.5 113.91Q13 123.3 na na 136.5 105.4 149.3 128.62Q13 125.8 na 142.0 131.0 108.9 164.0 134.31H13 124.6 na 142.0 133.8 107.2 157.1 132.9

COSL AVGS Discount

Avg 2001 26.7 26.7 26.7 26.7 26.7 26.7 -48.7%Avg 2002 29.1 29.1 29.1 29.1 29.1 29.1 -37.0%Avg 2003 31.5 31.5 31.5 31.5 31.5 31.5 -29.1%Avg 2004 33.3 33.3 33.3 33.3 33.3 33.3 -37.5%Avg 2005 40.4 40.4 40.4 40.4 40.4 40.4 -47.2%Avg 2006 55.5 55.5 55.5 55.5 55.5 55.5 -62.8%Avg 2007 78.3 78.3 78.3 78.3 78.3 78.3 -47.1%Avg 2008 116.0 116.0 116.0 116.0 116.0 116.0 -22.1%Avg 2009 120.0 120.0 120.0 120.0 120.0 120.0 10.2%Avg 2010 108.0 108.0 108.0 108.0 108.0 108.0 28.8%Avg 2011 107.0 107.0 107.0 107.0 107.0 107.0 14.3%Avg 2012 107.0 107.0 107.0 107.0 107.0 107.0 -6.1%2013e 108.0 -18.8%

Notes:"IC" = Independent Cantelever. "IS" = Independent Slot. "300" ect. - represents maximum water depth in which the drill rig can operate.

Day Rates (U$ '000 / day) - COSL vs International Operators

GOM

COSL - Avg JACK UP Day Rates

Source: Deutsche Bank; Company specific data

The above table, which demonstrates COSL’s pricing policy, goes a long way to explaining the “stability” (i.e. – less volatility) seen in COSL’s operating margins (Figure 7), ROE’s (Figure 8) and day rates (Figure 6) relative to global peers. As the world fell apart in 2008 and global rig rates collapsed, COSL’s Jack Up day rates remained stable. We suspect that 1) COSL may be in for a rate increase on its Jack Up fleet if the above discount continues to grow to somewhere between 20-40%; and 2) we suspect that the pricing policy for COSL’s three other business segments reflect this same philosophy: “Price discounts” to CNOOC Ltd in exchange for high rates (90-96%) of utilization; and Price stability relative to global instability.

Operating volatility is less

than at global peers

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Figure 7: The volatility of COSL’s operating margin is lower than global peers

Dispersion (Op Margins) Hi Low Hi - Low

China Oilfield Services 31.3% 17.7% 0.135 - Noble Corp 55.4% 17.5% 0.378 - Rowan Companies 51.1% 1.7% 0.493 - Diamond Offshore Drilling 53.9% 1.9% 0.520 - Transocean Ltd 50.7% 8.3% 0.424

- Nabors Industries Ltd 30.1% 11.2% 0.189 - Halliburton Co 25.0% 4.1% 0.209 - Baker Hughes 21.8% 7.6% 0.143 - Cameron International 15.8% 4.9% 0.109

Averages 38.0% 7.2% 0.308Averages (Drillers) 52.8% 7.4% 0.454

2003-12


Figure 8: The volatility of COSL’s ROEs is lower than global peers

Dispersion (ROE) Hi Low Hi - Low

China Oilfield Services 16.1% 7.1% 0.090 - Noble Corp 29.5% 4.9% 0.246 - Rowan Companies 16.9% 2.0% 0.150 - Diamond Offshore Drilling 39.0% 14.0% 0.249 - Transocean Ltd 24.8% 0.3% 0.246

- Nabors Industries Ltd 28.1% 2.6% 0.255 - Halliburton Co 37.0% 10.1% 0.268 - Baker Hughes 45.8% 5.2% 0.405 - Cameron International 24.8% 5.0% 0.197

Averages 30.7% 5.5% 0.252Averages (Drillers) 27.6% 5.3% 0.223

2003-12


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Peer comparables (part 2)


In this segment we look at COSL metrics relative to global peers, annually over a longer term (2003-12) period. The data collected for this section has been downloaded from company filings.

Operating margins – ROEs – and the cyclicality of the oil service business

COSL operating margins are right about where we would expect them to be: a bit higher than the entire subset of peers but a bit lower than the global drillers. In soft years (2009-12) COSL’s ROEs look great; in go-go years (2005-08) COSL’s ROEs lag behind. The cyclicality of the oil service business can be seen from the average ROEs presented for different time periods at the bottom of this table: years 2003-04 were lackluster; years 2005-08, oil prices were rising and oil service companies were rocking; years 2009-12 looks a bit light.

Figure 9: Looking at operating margins, ROEs and the volatility of ROEs through the cycle

AVGS 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 AVGS x-outliers

Operating Margins : China Oilfield Services 17.9% 18.0% 17.7% 21.8% 31.3% 29.8% 24.9% 29.5% 26.9% 25.2% 24.3% 24.3% - Noble Corp 22.4% 17.5% 27.0% 44.2% 49.8% 55.4% 55.2% 32.6% 18.2% 22.1% 34.4% 34.4% - Rowan Companies 1.7% 8.6% 31.9% 32.2% 51.1% 50.1% 43.6% 37.7% 15.9% 16.7% 28.9% 28.9% - Diamond Offshore Drilling -5.6% 1.9% 30.7% 45.8% 47.6% 53.9% 52.4% 42.9% 37.8% 32.2% 34.0% 38.4% - Transocean Ltd 8.3% 15.0% 30.3% 42.3% 50.7% 42.2% 38.1% 33.9% -59.3% 17.2% 21.9% 30.9%

- Nabors Industries Ltd 11.2% 15.5% 26.6% 30.1% 24.0% 23.1% 16.3% 15.3% 14.4% 13.1% 19.0% 19.0% - Halliburton Co 4.4% 4.1% 21.4% 25.0% 22.9% 21.9% 13.6% 16.7% 19.1% 14.6% 16.4% 16.4% - Baker Hughes 10.6% 13.4% 17.2% 21.4% 21.8% 20.0% 7.6% 9.8% 12.9% 10.3% 14.5% 14.5% - Cameron International 4.9% 7.1% 10.4% 13.7% 15.8% 15.7% 15.5% 14.0% 13.1% 12.5% 12.3% 12.3%

Averages: 7.3% 10.4% 24.4% 31.8% 35.5% 35.3% 30.3% 25.4% 9.0% 17.3% 22.7% 24.3%Avgs x-outliers: 9.1% 10.4% 24.4% 31.8% 35.5% 35.3% 30.3% 25.4% 18.8% 17.3% 23.8% 23.8%

Averages (Drillers) 6.7% 10.8% 30.0% 41.1% 49.8% 50.4% 47.3% 36.8% 3.1% 22.1% 29.8% 33.2%Averages (Drillers, x-outliers) 10.8% 10.8% 30.0% 41.1% 49.8% 50.4% 47.3% 36.8% 24.0% 22.1% 32.3% 32.3%

AVGS2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 AVGS x-outliers

ROE : China Oilfield Services 7.1% 9.9% 10.7% 13.1% 13.0% 15.7% 14.1% 16.1% 14.2% 14.2% 12.8% 12.8% - Noble Corp 7.6% 6.1% 10.9% 22.7% 28.0% 29.5% 24.7% 10.8% 4.9% 7.2% 15.2% 15.2% - Rowan Companies -0.3% 2.0% 13.5% 16.9% 16.7% 15.2% 10.6% 7.1% 3.1% 4.5% 8.9% 9.9% - Diamond Offshore Drilling -2.9% -0.4% 14.0% 30.5% 29.4% 39.0% 37.9% 24.7% 22.2% 15.7% 21.0% 26.7% - Transocean Ltd 0.3% 2.0% 9.0% 20.3% 24.8% 23.5% 15.6% 8.7% -36.8% 5.2% 7.2% 12.1%

- Nabors Industries Ltd 7.7% 10.3% 17.0% 28.1% 17.7% 10.6% 2.6% 4.8% 6.1% 4.0% 10.9% 10.9% - Halliburton Co 14.8% 10.1% 33.3% 29.8% 37.0% 34.1% 13.3% 17.4% 22.8% 16.4% 22.9% 22.9% - Baker Hughes 5.2% 13.5% 18.6% 45.8% 24.0% 24.0% 5.8% 5.8% 11.1% 7.7% 16.1% 16.1% - Cameron International 5.0% 7.7% 10.7% 18.3% 23.3% 24.8% 12.1% 12.8% 11.1% 13.5% 13.9% 13.9%

Averages: 4.7% 6.4% 15.9% 26.5% 25.1% 25.1% 15.3% 11.5% 5.6% 9.3% 14.5% 16.0%Avgs x-outliers: 6.8% 7.4% 15.9% 26.5% 25.1% 25.1% 15.3% 11.5% 11.6% 9.3% 15.5% 15.5%

Averages (Drillers) 1.2% 2.4% 11.8% 22.6% 24.7% 26.8% 22.2% 12.8% -1.6% 8.2% 13.1% 16.0%Averages (Drillers, x-outliers) 4.0% 3.4% 11.8% 22.6% 24.7% 26.8% 22.2% 12.8% 10.1% 8.2% 14.7% 14.7%

Cyclical businsess Avgs 2003-04 Avgs 2005-08 Avgs 2009-12

- Noble Corp 6.9% 22.8% 11.9% - Rowan Companies 0.8% 15.6% 6.3% - Diamond Offshore Drilling -1.7% 28.2% 25.2% - Transocean Ltd 1.1% 19.4% 9.8%

- Nabors Industries Ltd 9.0% 18.3% 4.4% - Halliburton Co 12.5% 33.6% 17.5% - Baker Hughes 9.4% 28.1% 7.6% - Cameron International 6.4% 19.3% 12.4%

Averages: 5.6% 23.1% 11.9%Averages (Drillers) 1.8% 21.5% 13.3%

Notes: - Values in red are outliers

Source: Deutsche Bank; Company data

No surprises

7 October 2013

Oil & Gas



Referring to Figure 9 above:

In October 2011, Transocean recognized an estimated loss of US$ 5.2bn on the impairment of goodwill balances.

In June 2011, Rowan sold a subsidiary which manufactured heavy equipment for the oil and gas, mining, steel and forestry industries. In September 2011, Rowan sold its onshore drilling operations. The company realized several impairment and legal charges in 2011.

In 2009, Baker Hughes took charges of US$ 250 mln before tax including US$ 138 mln associated with reorganization and severance pay and an increase of US$ 94 mln to an allowance for doubtful accounts. In 2009, the company proposed a merger with BJ Services Company which was completed in April 2010.

In 2007, Nabors Industries began to build an upstream E&P business through various M&A transactions. Nabors’ E&P business was subsequently sold beginning 2010.

COSL operating margins and ROE’s are all very much in the same ball park as its global peers.

Ebitda, Capex and Depreciation issues Our Capex numbers used throughout this report do not include acquisitions.

Given COSL’s pricing policy of discounting to CNOOC Ltd, it is no surprise, only confirmation, that COSL produces on average (2003-12) US$ 1.29 of Ebitda for every US$1 of Capex spent while the peer group produces on avg (2003-12) US$ 2.26 of Ebitda for every US$1 of Capex spent (Figure 10).

What did surprise us however (Figure 10) was COSL’s Ebitda growth rate (2003-12) of 29.4% CAGR vs. global peers of 20.4% and global drilling peers of 20.8%. For those that are counting, the Rmb appreciated (2003-12) at a rate of 3.2% CAGR. Even adjusting for the currency appreciation, COSL still outpaced global peers in terms of Ebitda growth 2003-12.

COSL’s average (2003-12) Capex spend relative to assets (Figure 12) is only modestly higher than its global peers. It was however multiples higher than global peers through 2010 and then multiples lower than global peers 2010-12. Looking at these numbers, it’s difficult to understand how COSL is about to go through an earnings growth spurt. This (modest) “over capexing”, which is a given for many Chinese SOEs is also seen in the average Capex to depreciation numbers for COSL (2.35x) relative to global peers (2.17x) but not relative to global drillers (2.45x).

What is most interesting however about Figure 12 is that COSL is an SOE (State Owned Enterprise) that seems to be able to actually reduce its Capex spend year on year. We don’t see this often (a reduction in Capex Y/y) with PetroChina, Sinopec and CNOOC. Lest we forget however, it was in 2010 that COSL began annual principal payments on its rather sizable (US$ 4.5bn) debt position. We estimate that COSL will need to pay roughly Rmb 2.0 to 2.5bn / year (US$ 300-400 mln) in principal to its creditors over the foreseeable future. This certainly could be the reason for the reduction in COSL’s Capex 2009-12.

Bang for the buck

Impressive Ebitda growth

What – no over capexing?

Cutting capex – unheard of

7 October 2013

Oil & Gas



Figure 10: Ebitda and Ebitda / Capex COSL vs. global oil service peers

AVGS AVGS

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 AVGS x-outliers EBITDA (US$ mlns)China Oilfield Services 138 164 196 287 509 748 1,073 1,240 1,249 1,410 701 701 - Noble Corp 404 396 615 1,181 1,784 2,265 2,419 1,456 1,149 1,542 1,321 1,321 - Rowan Companies 79 137 422 576 664 704 578 522 334 481 450 450 - Diamond Offshore Drilling 137 194 558 1,141 1,459 2,198 2,250 1,819 1,654 1,355 1,276 1,276 - Transocean Ltd 710 918 1,283 2,042 3,730 6,790 5,794 3,706 (3,653) 2,706 2,403 3,075

- Nabors Industries Ltd 438 626 1,189 1,781 1,605 1,857 1,259 1,395 1,795 1,974 1,392 1,392 - Halliburton Co 1,238 1,329 2,612 3,725 4,081 4,748 2,925 4,128 6,096 5,787 3,667 3,667 - Baker Hughes 891 1,174 1,601 2,348 2,778 2,993 1,412 2,408 3,781 3,619 2,301 2,301 - Cameron International 164 232 340 613 847 1,053 968 1,060 1,119 1,317 771 771

Averages: 508 626 1,077 1,676 2,118 2,826 2,201 2,062 1,534 2,348 1,698 1,698 Avgs x-outliers: 508 626 1,077 1,676 2,118 2,826 2,201 2,062 1,534 2,348 1,698 1,698

Averages (Drillers) 333 411 719 1,235 1,909 2,989 2,760 1,876 (129) 1,521 1,362 1,531 Averages (Drillers, x-outliers) 333 411 719 1,235 1,909 2,989 2,760 1,876 1,046 1,521 1,480 1,480


EBITDA / Capex (x)China Oilfield Services 1.03 0.84 0.78 1.28 1.24 0.68 0.99 1.88 1.75 2.41 1.29 1.29 - Noble Corp 2.08 3.59 2.90 1.76 2.36 2.83 3.37 1.04 0.44 0.92 2.13 2.13 - Rowan Companies 0.32 1.00 2.11 1.20 1.43 0.85 1.02 1.06 0.22 0.70 0.99 0.99 - Diamond Offshore Drilling 0.66 2.18 1.90 2.07 2.25 3.30 5.45 4.19 2.13 1.93 2.61 2.61 - Transocean Ltd 1.44 7.23 7.05 2.33 2.70 3.08 1.91 2.75 (3.75) 2.08 2.68 3.40

- Nabors Industries Ltd 1.24 1.15 1.31 0.92 0.79 1.23 1.15 1.50 0.88 1.30 1.15 1.15 - Halliburton Co 2.40 2.31 4.54 4.47 2.58 2.60 1.57 2.00 2.06 1.62 2.62 2.62 - Baker Hughes 2.21 3.37 3.35 2.55 2.46 2.30 1.30 1.62 1.54 1.24 2.19 2.19 - Cameron International 2.53 4.34 4.39 3.32 3.45 3.87 4.02 5.28 2.88 3.08 3.72 3.72

Averages: 1.61 3.15 3.44 2.33 2.25 2.51 2.47 2.43 0.80 1.61 2.26 2.26 Avgs x-outliers: 1.61 3.15 3.44 2.33 2.25 2.51 2.47 2.43 0.80 1.61 2.26 2.26

Averages (Drillers) 1.12 3.50 3.49 1.84 2.19 2.51 2.94 2.26 (0.24) 1.41 2.10 2.28 Averages (Drillers, x-outliers) 1.12 3.50 3.49 1.84 2.19 2.51 2.94 2.26 0.93 1.41 2.22 2.22



Figure 11: Ebitda growth rates – COSL vs. global oil service peers

CAGR CAGR CAGR CAGREBITDA Growth (US$ mln) 2003 2009 2012 2003-12 2009-12 2003-12 2009-12

China Oilfield Services 138 1,073 1,410 29.1% 9.5% 3.2% 2.3% - Noble Corp 404 2,419 1,542 15.9% -13.9% - Rowan Companies 79 578 481 21.9% -6.0% - Diamond Offshore Drilling 137 2,250 1,355 28.7% -15.5% - Transocean Ltd 710 5,794 2,706 15.9% -22.4%

- Nabors Industries Ltd 438 1,259 1,974 18.0% 16.1% - Halliburton Co 1,238 2,925 5,787 18.5% 25.5% - Baker Hughes 891 1,412 3,619 16.7% 36.8% - Cameron International 164 968 1,317 25.7% 10.8%

Averages 508 2,201 2,348 18.5% 2.2%Averages (Drillers) 333 2,760 1,521 18.4% -18.0%

Rmb Appreciation


7 October 2013

Oil & Gas



Figure 12: Capex metrics COSL vs. global oil service peers

AVGS AVGS

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 AVGS x-outliers

Capital Expenditure (US$ mlns):China Oilfield Services 135 195 253 224 411 1,098 1,083 660 713 584 536 536 - Noble Corp 194 111 212 671 755 800 717 1,406 2,621 1,670 916 916 - Rowan Companies 251 137 200 479 463 829 566 491 1,518 685 562 562 - Diamond Offshore Drilling 209 89 294 551 647 667 412 434 775 702 478 478 - Transocean Ltd 494 127 182 876 1,380 2,208 3,041 1,349 974 1,303 1,193 1,193

- Nabors Industries Ltd 353 544 907 1,927 2,039 1,507 1,093 930 2,043 1,519 1,286 1,286 - Halliburton Co 515 575 575 834 1,583 1,824 1,864 2,069 2,953 3,566 1,636 1,636 - Baker Hughes 404 348 478 922 1,127 1,303 1,086 1,491 2,461 2,910 1,253 1,253 - Cameron International 65 54 78 185 246 272 241 201 388 427 216 216

Averages: 310 248 366 806 1,030 1,176 1,128 1,046 1,717 1,598 942 942 Avgs x-outliers: 310 248 366 806 1,030 1,176 1,128 1,046 1,717 1,598 942 942

Averages (Drillers) 287 116 222 644 811 1,126 1,184 920 1,472 1,090 787 787 Averages (Drillers, x-outliers) 287 116 222 644 811 1,126 1,184 920 1,472 1,090 787 787


CapEx / AssetsChina Oilfield Services 0.135 0.176 0.213 0.136 0.135 0.136 0.122 0.070 0.071 0.049 0.095 0.095 - Noble Corp 0.061 0.033 0.049 0.146 0.128 0.113 0.085 0.124 0.194 0.114 0.120 0.120 - Rowan Companies 0.114 0.055 0.067 0.139 0.119 0.182 0.109 0.079 0.230 0.089 0.124 0.124 - Diamond Offshore Drilling 0.067 0.026 0.081 0.133 0.149 0.135 0.066 0.065 0.111 0.097 0.094 0.094 - Transocean Ltd 0.042 0.012 0.017 0.076 0.040 0.063 0.083 0.037 0.028 0.038 0.047 0.047


Averages: 0.059 0.041 0.058 0.113 0.116 0.115 0.086 0.073 0.123 0.092 0.092 0.092

Averages (Drillers) 0.071 0.032 0.054 0.124 0.109 0.123 0.086 0.076 0.141 0.085 0.096 0.096


Capex / Depreciation (x)China Oilfield Services 1.88 2.42 2.74 1.98 3.00 4.88 2.58 1.42 1.50 1.15 2.35 2.35 - Noble Corp 1.06 0.53 0.88 2.65 2.58 2.24 1.76 2.60 3.98 2.20 2.05 2.05 - Rowan Companies 3.58 1.74 2.46 5.32 5.89 8.49 4.57 3.55 8.25 2.76 4.66 4.66 - Diamond Offshore Drilling 1.19 0.50 1.60 2.75 2.75 2.32 1.19 1.10 1.94 1.79 1.71 1.71 - Transocean Ltd 0.97 0.24 0.45 2.18 2.77 1.54 2.12 1.34 0.88 1.16 1.36 1.36



Averages (Drillers) 1.70 0.75 1.35 3.23 3.49 3.65 2.41 2.15 3.76 1.98 2.45 2.45 Averages (Drillers, x-outliers) 1.70 0.75 1.35 3.23 3.49 3.65 2.41 2.15 3.76 1.98 2.45 2.45



Figure 13 below sizes up the assets of COSL vs. our global peer group. It reminds us that COSL more than doubled its size with the acquisition of Awilco in September 2008. It also points out the rather material acquisition of Global Santa Fe by Transocean in November 2007; and similarly the acquisition of BJ Services by Baker Hughes in April 2010.

With regards to the data on Total Assets / Depreciation, COSL’s current (2012) asset replacement of 23.5 years seems a bit more globally realistic than its 2003-06 number of something like 13.7 (average) years. We read this only to say that COSL, as an oil service company has matured / developed over the past 6 years into a honest peer of the global oil service industry. We suspect that the average life of a big drilling rig is 20-25 years. How about that 25-year old second hand rig (NH9) that COSL just bought from Transocean.

Sizing up the assets

Buying 2nd hand rigs

7 October 2013

Oil & Gas



Figure 13: Total Assets and Depreciation issues COSL vs. global oil service peers

AVGS 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 AVGS x-outliers

Total Assets (US$ mlns):China Oilfield Services 994 1,104 1,185 1,647 3,035 8,087 8,897 9,458 10,054 11,973 5,644 5,644 - Noble Corp 3,190 3,308 4,346 4,586 5,876 7,107 8,397 11,302 13,495 14,608 7,622 7,622 - Rowan Companies 2,191 2,492 2,975 3,435 3,875 4,549 5,211 6,217 6,598 7,700 4,524 4,524 - Diamond Offshore Drilling 3,135 3,379 3,607 4,133 4,342 4,954 6,264 6,727 6,964 7,235 5,074 5,074 - Transocean Ltd 11,663 10,758 10,457 11,476 34,364 35,182 36,436 36,814 35,032 34,255 25,644 25,644

- Nabors Industries Ltd 5,603 5,863 7,230 9,142 10,103 10,518 10,645 11,647 12,912 12,656 9,632 9,632 - Halliburton Co 15,499 15,864 15,048 16,860 13,135 14,385 16,538 18,297 23,677 27,410 17,671 17,671 - Baker Hughes 6,417 6,821 7,807 8,706 9,857 11,861 11,439 22,986 24,847 26,689 13,743 13,743 - Cameron International 2,141 2,356 3,099 4,351 4,731 5,902 7,725 8,005 9,362 11,158 5,883 5,883

Averages: 6,230 6,355 6,821 7,836 10,785 11,807 12,832 15,249 16,611 17,714 11,224 11,224 Avgs x-outliers: 6,230 6,355 6,821 7,836 10,785 11,807 12,832 15,249 16,611 17,714 11,224 11,224

Averages (Drillers) 5,045 4,984 5,346 5,908 12,114 12,948 14,077 15,265 15,522 15,949 10,716 10,716 Averages (Drillers, x-outliers) 5,045 4,984 5,346 5,908 12,114 12,948 14,077 15,265 15,522 15,949 10,716 10,716


Depreciation (US$ mlns):China Oilfield Services 72 81 92 113 137 225 419 465 476 509 259 259 - Noble Corp 183 209 242 253 293 357 408 540 659 759 390 390 - Rowan Companies 70 79 81 90 79 98 124 138 184 248 119 119 - Diamond Offshore Drilling 176 179 184 201 236 287 346 393 399 393 279 279 - Transocean Ltd 508 525 406 401 499 1,436 1,433 1,009 1,109 1,123 845 845

- Nabors Industries Ltd 227 255 285 365 464 609 664 761 924 1,056 561 561 - Halliburton Co 518 509 448 480 583 738 931 1,119 1,359 1,628 831 831 - Baker Hughes 334 357 367 414 500 617 680 991 1,221 1,427 691 691 - Cameron International 84 83 78 101 110 132 157 202 207 255 141 141

Averages: 262 274 261 288 345 534 593 644 758 861 482 482 Avgs x-outliers: 262 274 261 288 345 534 593 644 758 861 482 482

Averages (Drillers) 234 248 228 236 277 544 578 520 588 631 408 408 Averages (Drillers, x-outliers) 234 248 228 236 277 544 578 520 588 631 408 408


Total Assets / Depreciation (x)China Oilfield Services 13.86 13.70 12.84 14.59 22.16 35.93 21.21 20.34 21.12 23.53 19.93 19.93 - Noble Corp 17.47 15.82 17.97 18.11 20.05 19.92 20.57 20.94 20.49 19.26 19.06 19.06 - Rowan Companies 31.30 31.75 36.64 38.17 49.30 46.56 42.06 44.96 35.88 31.06 38.77 38.77 - Diamond Offshore Drilling 17.85 18.90 19.63 20.61 18.42 17.24 18.08 17.11 17.47 18.42 18.37 18.37 - Transocean Ltd 22.96 20.49 25.76 28.62 68.87 24.50 25.43 36.49 31.59 30.50 31.52 31.52



Averages (Drillers) 22.39 21.74 25.00 26.38 39.16 27.06 26.53 29.87 26.36 24.81 26.93 26.93 Averages (Drillers, x-outliers) 22.39 21.74 25.00 26.38 39.16 27.06 26.53 29.87 26.36 24.81 26.93 26.93



The data in Figures 10-13 above, for the most part tell us a positive story about the on-going development of COSL.

For the past 10-years we have seen COSL’s senior management “recycled-up” to senior management positions at the larger CNOOC Ltd; and then from CNOOC Ltd up to CNOOC Group. It would be nice to see COSL viewed as a permanent goal for senior management rather than boot camp for a career at either CNOOC Ltd or CNOOC Group.

COSL’s drilling business vs. the global peers.

For the data in Figure 14 below we consider only the drilling business (revenue, Ebitda, and depreciation) of the companies noted. We have not included Nabors in the data because Nabors drills oil and gas wells onshore whereas all the other drillers included in the table drill oil and gas wells offshore, globally.

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We have taken the number of drilling rigs from the 2012 Annual Report from each of the companies. We have not included rigs that are on order or under construction. We have not made adjustments for the differences in rig fleets (i.e – standard Jack Up vs. high spec Jack Up; harsh weather vs. ultra-deep water; etc.). As general commentary deep water rigs (drill ships and Semisubmersible rigs) carry a day rate that is a multiple (2x-4x) of a standard Jack Up rig; whereas a high-spec Jack Up makes 20-40% more than standard Jack Up rigs. The rig fleet for each of our drilling companies is in Figure 15.

Figure 14: Revenue, EBITDA and Depreciation / drilling rig

(US$ millions)AVGS

2008 2009 2010 2011 2012 AVGS x-outliers Revenue / RigChina Oilfield Services 34.07 37.13 33.89 31.39 36.83 34.66 34.66 - Noble Corp 54.71 58.72 38.45 34.12 44.90 46.18 46.18 - Transocean Ltd * 96.02 84.75 58.88 60.35 70.20 74.04 74.04 - Rowan Companies 19.85 20.06 17.55 15.40 44.92 23.55 23.55 - Diamond Offshore Drilling 78.76 77.26 72.24 67.80 67.88 72.79 72.79

Averages: 62.33 60.20 46.78 44.42 56.97 54.14 54.14 Noble-Rowan 37.28 39.39 28.00 24.76 44.91 34.87 34.87

COSL discout to Avgs -45.3% -38.3% -27.6% -29.3% -35.4% -36.0% -36.0%COSL discount to Noble-Rowan -8.6% -5.7% 21.0% 26.8% -18.0% -0.6% -0.6%

AVGS2008 2009 2010 2011 2012 AVGS x-outliers

EBITDA / RigChina Oilfield Services 17.44 17.62 20.20 17.72 18.56 18.31 18.31 - Noble Corp 35.95 39.02 19.94 14.55 19.52 25.80 25.80 - Transocean Ltd * 51.44 42.92 27.45 (27.47) 20.66 23.00 35.62 - Rowan Companies 11.55 11.12 9.00 5.47 15.51 10.53 10.53 - Diamond Offshore Drilling 48.84 47.86 39.53 33.76 30.80 40.16 40.16


COSL discout to Avgs -52.8% -50.0% -15.8% -1.1% -14.2% -26.4% -32.5%COSL discount to Noble-Rowan -26.6% -29.7% 39.6% 77.1% 5.9% 0.8% 0.8%

AVGS2008 2009 2010 2011 2012 AVGS x-outliers

Depreciation / RigChina Oilfield Services 5.25 7.30 7.46 6.41 6.40 6.56 6.56 - Noble Corp 5.66 6.59 7.39 8.34 9.60 7.52 7.52 - Transocean Ltd * 10.88 10.61 7.47 8.34 8.57 9.18 9.39 - Rowan Companies 1.60 2.38 2.38 3.01 8.00 3.48 3.48 - Diamond Offshore Drilling 6.39 7.37 8.55 8.13 8.93 7.87 7.87


COSL discout to Avgs -14.4% 8.4% 15.7% -7.9% -27.1% -6.4% -6.4%COSL discount to Noble-Rowan 44.5% 62.9% 52.6% 12.9% -27.3% 19.4% 19.4%

Notes: - Values in red are outliers * In Nov 2012, Transocean sold its Standard Jack Up business and a total of 49 Jack Up rigs. In the above metrics we include all 49 Jack Ups in the 2012 rig count in that the Revenue, Ebitda and Depreciation generated by these rigs remains in the company's reported financial statements. In 2011, Transocean boked a US$ 5.2bn goodwill impairment loss.


Fleet structure

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Oil & Gas



Figure 15: Drilling fleet structure by company

YE 2012 COSL NOBLE ROWAN DIAMOND TRANSOCEAN

Total Drilling Rigs 49 79 32 44 82

- Jack Ups 27 49 31 7 9 - Semisubmersibles 8 16 1 32 51 - Drill Ships 0 14 0 5 22

- Accomodation 2 0 0 0 0 - Module 4 0 0 0 0 - Land 8 0 0 0 0

Average Age of Fleet (Yrs) 15 12 17 25 22

As % of totals: 100% 100% 100% 100% 100% - Jack Ups 55% 62% 97% 16% 11% - Semisubmersibles 16% 20% 3% 73% 62% - Drill Ships 0% 18% 0% 11% 27%

- Accomodation 4% 0% 0% 0% 0% - Module 8% 0% 0% 0% 0% - Land 16% 0% 0% 0% 0%


Take away comments from Figures 14-15:

Fleet structure determines compensation; companies making money on their drilling fleet are typically underweight Jack Ups (shallow water) and overweight semisubmersibles and drill ships (deep water and ultra-deep water).

Most companies are all moving in the same direction: away from Jack Ups and into deep water either via semisubmersible rigs or drill ships. Standard Jack Ups are being shunned for the deeper water rigs.

Despite COSL’s pricing policy with CNOOC Ltd., COSL’s revenue / drilling rig as well as its EBITDA / drilling rig look quite reasonable relative to peers that similarly have a heavy concentration of Jack-Up rigs (Noble and Rowan).

Five of COSL’s land rigs are currently stranded in Libya and not operating. COSL’s remaining 3 land rigs are at work for CNOOC Ltd. in Iraq. It’s been interesting to watch COSL’s struggles in Libya.

We have included a table in the back (Figure 17) which lists day rates for Semisubmersible rigs around the world. This is for purposes of information only and is a sister-table to Figure 6 above.

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Oil & Gas



DB oil and gas price forecasts Our Deutsche Bank oil and natural gas price forecasts are presented in Figure 16, below. We last adjusted our global oil and gas prices on 25-Sept 2013.

Figure 16: Deutsche Bank oil and gas price forecasts (2013-19e)

Bbrg Median Consensus (06 Oct 2013)

Last Adjusted : 25/Sept/2013

WTI (US$ / bbl)

BRENT (US$ / bbl)

DB Nymex Gas (US$ / mmBtu)

WTI ‐ Brent (US$ / bbl)

WTI (US$ / bbl)

BRENT (US$ / bbl)

BRENT DB ‐ Consensus

(US$/ bbl)

Q1 2012 102.9 118.4 2.51 ‐15.4Q2 2012 94.2 110.2 2.35 ‐15.9Q3 2012 92.2 109.5 2.90 ‐17.3Q4 2012 88.2 110.1 3.54 ‐21.92012 94.4 112.0 2.82 ‐17.6

Q1 2013 94.4 112.6 3.48 ‐18.3Q2 2013 94.0 103.4 4.00 ‐9.3Q3 2013 106.1 109.8 3.80 ‐3.6Q4 2013E 105.0 110.0 4.00 ‐5.02013E 99.9 108.9 3.82 ‐9.07 95.0 108.0 0.9

Q1 2014E 105.0 110.0 4.30 ‐5.0Q2 2014E 100.0 105.0 4.15 ‐5.0Q3 2014E 95.0 105.0 4.20 ‐10.0Q4 2014E 95.0 105.0 4.35 ‐10.02014E 98.75 106.25 4.25 ‐7.50 98.3 107 ‐0.8

2015E 95.0 105.0 4.50 ‐10.00 105.5 107 ‐2.0

2016E 85.0 100.0 4.75 ‐15.00 108.0 106 ‐6.0

2017E 92.0 102.0 5.00 ‐10.0 103 ‐1.02018E 99.0 104.0 5.25 ‐5.02019E 102.0 106.0 5.50 ‐4.0

DB FORECASTS

Source: Deutsche Bank

Valuations and risks

We value COSL from a DCF model. Our WACC is 8.0% which is composed of a COE 10% and an after tax cost of debt of 2.3%. Our China risk free rate (3.10%) and equity risk premium (5.6%) are standardized for China by a DB Strategy group. We use a 3-yr adjusted Beta of 1.24 and a TG rate of 3%, which we believe is a reasonable assumption for COSL’s (equipment) volume growth over the coming years.

We also look at more traditional PE and EV / EBITDA valuations relative to a handful of “global peers” (Figure 18). COSL’s structure as a one-stop, generalist provider of multiple services is unique in a world of specialists. This is one of the reasons why we do not believe COSL should trade at a premium to global “peers”. Notwithstanding, we can look at either a broad cross section of specialists in the various oil service business segments to come up with an integrated “generalist” valuation or we can focus more on the valuations of global drilling companies. Seventy-five (75%) percent of COSL’s 1H13 operating income came from its drilling business.

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Oil & Gas



The principal risks to our Hold rating at COSL include: 1) a material reduction / increase in oil prices that would force CNOOC Ltd to reduce / increase its 2014-16 Capex plans for offshore China; 2) continued impairment write-offs of COSL’s 5-land rigs that are stranded in Libya; 3) the termination of COSL’s high-tech preferential (15%) tax treatment in China and 4) any shortfall / major success in exploring deep water South China Sea.

Figure 17: Semisubmersible day rates COSL vs. Global peers

Semi-submersible MediterianUS$ ('000) / day GOM Lat Am W. Africa Asia / FE Australia AVGS

Up to 3000' Up to 3000' Up to 3000' Up to 3000' Up to 3000'

International day-rates:Avg 2001 44.5 67.5 59.8 64.1 87.6 64.7Avg 2002 35.4 63.7 60.7 63.7 92.2 63.1Avg 2003 40.0 61.4 54.2 52.3 73.9 56.4Avg 2004 60.6 54.7 66.7 57.1 92.0 66.2Avg 2005 124.9 103.9 137.7 81.6 163.6 122.3Avg 2006 215.4 241.9 298.9 205.4 345.9 261.5Avg 2007 223.5 225.3 337.0 264.3 407.8 291.6Avg 2008 265.1 246.7 392.4 268.0 412.5 316.9Avg 2009 239.3 250.0 216.3 143.5 319.4 233.7Avg 2010 200.6 227.0 194.9 195.5 273.3 218.3Avg 2011 230.0 226.9 224.3 220.6 260.0 232.4Avg 2012 252.5 na 299.4 246.5 na 266.11Q13 266.7 246.6 351.5 237.4 na 275.62Q13 280.0 246.6 300.0 251.7 na 269.61H13 273.3 246.6 334.3 243.1 na 274.3

COSL AVGS Discount

Avg 2001 50.0 50.0 50.0 50.0 50.0 50.0 -22.7%Avg 2002 44.9 44.9 44.9 44.9 44.9 44.9 -28.9%Avg 2003 50.1 50.1 50.1 50.1 50.1 50.1 -11.1%Avg 2004 49.2 49.2 49.2 49.2 49.2 49.2 -25.7%Avg 2005 57.1 57.1 57.1 57.1 57.1 57.1 -53.3%Avg 2006 118.4 118.4 118.4 118.4 118.4 118.4 -54.7%Avg 2007 142.3 142.3 142.3 142.3 142.3 142.3 -51.2%Avg 2008 179.0 179.0 179.0 179.0 179.0 179.0 -43.5%Avg 2009 188.0 188.0 188.0 188.0 188.0 188.0 -19.6%Avg 2010 188.0 188.0 188.0 188.0 188.0 188.0 -13.9%Avg 2011 220.0 220.0 220.0 220.0 220.0 220.0 -5.3%Avg Ytd 12 227.9 227.9 227.9 227.9 227.9 227.9 -14.4%2013e 258.0 -6.0%

Notes:"Up to 3000" - represents maximum water depth in which the drill rig can operate.

COSL - Avg SEMI - SUB Day Rates

Day Rates (U$ '000 / day) - COSL vs International Operators

Source: Deutsche Bank; COSL company data

Oil S

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Figure 18: Traditional valuations – COSL vs. global peers

Price Upside / Net Debt / Prices close on 6-Oct-13 Price Target Downside Mkt Cap Equity (%)Company Ticker FX $ / shr Rating ($ / Shr) (%) (US$bn) 13F 14F 13F 14F 13F 14F 13F 14F 13FOil Service Companies:Engineering Services: Oceaneering Int'l. OII.N USD 82.3 Buy 96.00 16.7 8.9 24.2 20.6 11.6 10.0 4.4 4.1 19.4 20.8 (5.3) Drilling:Aban Offshore Limited ABAN.BO INR 220.4 Buy 435.00 97.4 0.2 5.7 2.6 7.0 6.2 0.4 0.3 6.4 12.7 471.9 Saipem SPMI.MI EUR 16.8 Hold 20.00 19.0 10.1 NM 12.8 17.2 6.8 1.6 1.5 (6.7) 11.9 111.1 Eurasia Drilling EDCLq.L USD 39.7 Hold 40.00 0.8 5.8 12.0 10.9 6.5 5.6 2.9 2.4 26.4 24.2 13.9 Diamond Offshore Drilling DO.N USD 63.5 Hold 68.00 7.2 8.8 13.0 11.0 7.3 6.4 1.9 1.7 14.6 16.3 35.5 Nabors Industries NBR.N USD 17.5 Buy 23.00 31.8 5.1 18.4 9.7 5.1 3.8 0.8 0.8 5.3 8.3 57.8 Noble Corp. NE.N USD 38.7 Buy 52.00 34.4 9.8 12.4 7.9 8.1 5.8 1.2 1.1 11.1 15.1 81.9 Patterson-UTI PTEN.OQ USD 23.4 Buy 28.00 19.9 3.4 17.5 13.4 4.5 3.8 1.2 1.1 7.2 8.9 22.5 Precision Drilling PD.TO CAD 10.6 Hold 9.00 (15.2) 2.9 15.0 10.6 6.6 5.6 1.2 1.1 9.0 11.7 54.7 Rowan Companies RDC.N USD 37.4 Hold 34.00 (9.0) 4.6 16.6 10.0 9.4 7.5 1.0 0.9 6.3 9.3 28.4 Transocean RIG.N USD 45.5 Sell 45.00 (1.0) 16.4 10.7 8.4 6.8 5.9 1.0 1.0 9.0 11.7 47.8 Equiptment Suppliers:Cameron International CAM.N USD 61.5 Buy 66.00 7.3 15.1 17.8 12.6 8.8 6.5 2.0 1.7 13.3 15.7 2.7 Weatherford International WFT.N USD 15.9 Buy 20.00 25.9 12.2 17.4 9.6 6.5 4.6 1.4 1.2 4.3 13.3 82.7 Well Services:Halliburton HAL.N USD 49.1 Buy 55.00 12.1 44.8 14.9 10.8 7.5 5.9 2.8 2.4 15.0 23.7 21.7 Baker Hughes BHI.N USD 49.5 Buy 56.00 13.2 21.9 16.5 11.2 6.5 5.1 1.2 1.1 7.2 10.3 19.6 Schlumberger SLB.N USD 90.0 Buy 97.00 7.8 119.1 18.6 14.9 9.8 8.3 3.1 2.8 19.1 19.7 22.0 C.A.T. oil O2C.DE EUR 14.5 Hold 11.60 (20.1) 1.0 17.2 13.9 6.5 5.4 2.6 2.3 15.9 17.5 (4.4) Integrated: China Oilfield Services 2883.HK HKD 20.1 Hold 18.11 (9.7) 12.6 12.8 12.5 8.5 8.0 2.0 1.8 16.2 14.8 62.3

MEAN: 16.1 11.8 8.0 6.1 1.8 1.6 10.7 14.8 37.0 MEDIAN: 16.5 10.9 7.0 5.9 1.4 1.2 9.0 13.3 28.4 OSX MEAN: 16.4 11.5 7.9 6.3 1.9 1.7 11.3 14.9 35.9

DRILLERS - MEAN: 14.4 10.5 7.9 5.7 1.4 1.3 9.1 13.1 50.4 EQUIPTMENT Suppliers - MEAN: 17.6 11.1 7.6 5.6 1.7 1.5 8.8 14.5 42.7 WELL Services - MEAN 16.8 12.7 7.6 6.2 2.4 2.1 14.3 17.8 14.7

NOTES: - Net Debt / Equity (%) = Net Debt (short and long term borrowings less cash), plus pref. share capital treated as debt, divided by shareholders funds. - Values in red are considered outliers and not included in mean estimates

P/E (x) EV/EBITDA (x) P/BV (x) RoE %

Source: Deutsche Bank

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Appendix 1

Important Disclosures Additional information available upon request Disclosure checklist

Company Ticker Recent price* Disclosure

China Oilfield Services 2883.HK 20.05 (HKD) 7 Oct 13 NA

PetroChina 0857.HK 8.56 (HKD) 7 Oct 13 1,17,SD11 *Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies

Important Disclosures Required by U.S. Regulators

Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes.

1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees.

Important Disclosures Required by Non-U.S. Regulators

Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes.

1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees.

17. Deutsche Bank and or/its affiliate(s) has a significant Non-Equity financial interest (this can include Bonds, Convertible Bonds, Credit Derivatives and Traded Loans) where the aggregate net exposure to the following issuer(s), or issuer(s) group, is more than 25m Euros.

Special Disclosures

11. Deutsche Bank AG and/or an affiliate(s) acted as a Financial Advisor to PetroChina Company Limited on the acquisition of the entire share capital of Singapore Petroleum Company.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. David Hurd

7 October 2013

Oil & Gas



Historical recommendations and target price: China Oilfield Services (2883.HK) (as of 10/7/2013)

1

2 3

45

6 7

0.00

5.00

10.00

15.00

20.00

25.00

Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13

Sec

uri

ty P

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Date

Previous Recommendations

Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating

Current Recommendations

Buy Hold Sell Not Rated Suspended Rating

*New Recommendation Structure as of September 9,2002

1. 15/02/2012: Downgrade to Hold, Target Price Change HKD14.90 5. 05/05/2013: Upgrade to Buy, Target Price Change HKD17.50

2. 22/03/2012: Hold, Target Price Change HKD12.68 6. 05/08/2013: Downgrade to Hold, Target Price Change HKD17.69

3. 17/07/2012: Hold, Target Price Change HKD12.70 7. 20/08/2013: Hold, Target Price Change HKD18.11

4. 10/01/2013: Hold, Target Price Change HKD15.73

Historical recommendations and target price: PetroChina (0857.HK) (as of 10/7/2013)

1 2 3 4 56

7 8 9

10

1112 13

0.00

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Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13

Sec

uri

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Date

Previous Recommendations

Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating

Current Recommendations

Buy Hold Sell Not Rated Suspended Rating

*New Recommendation Structure as of September 9,2002


2. 15/05/2012: Upgrade to Buy, Target Price Change HKD12.03 9. 21/03/2013: Hold, Target Price Change HKD11.12

3. 03/07/2012: Downgrade to Hold, Target Price Change HKD10.85 10. 25/06/2013: Hold, Target Price Change HKD9.06




7. 01/11/2012: Hold, Target Price Change HKD11.28

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Oil & Gas



Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes:

1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were:

Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period

55 %

36 %

9 %24 %19 % 11 %

050

100150200250300350400450

Buy Hold Sell

Asia-Pacific Universe

Companies Covered Cos. w/ Banking Relationship

7 October 2013

Oil & Gas



Regulatory Disclosures

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GRCM2013PROD030429

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