The five major businesses support the service capacity of the entire industry chain, and oil service recovery performance continues to pick up. As the only oilfield engineering technology service company under Sinopec, the company has formed five major business segments: geophysics, drilling engineering, exploration wells, underground special operations, and engineering construction, and has service capabilities covering the entire oil and gas industry chain. As the industry gradually picked up, the company relied on its competitive advantage of being comprehensive and resilient to risk to achieve a continuous recovery in revenue and profits.
Deepen reforms and go to battle lightly, and there are broad profit margins to reduce costs and increase efficiency. In 2019, the company continued to deepen reforms, various rates dropped significantly, and gross margin steadily rebounded. In the next year, the company expects the number of agency managers to be reduced by another 10% year over year. The total number of workers employed will be strictly controlled, all factor cost control will be strengthened, and the annual plan is to reduce costs by RMB 300 million and stabilize gross profit levels.
Oil prices are expected to reach an inflection point when a new production reduction agreement is reached, and energy security continues to drive the general trend. At the beginning of 2020, international crude oil prices plummeted due to the failure of negotiations in the OPEC+ Production Reduction Alliance and the double negative effects of the epidemic. On April 9, oil-producing countries reached a new production reduction agreement. We believe that with the improvement of the epidemic and the implementation of the new production reduction agreement, oil prices are expected to reach an inflection point. Furthermore, the country's policy to increase storage and production will not be disturbed by short-term oil price fluctuations, so there is still strong certainty that the three major oil companies will implement the “seven-year action plan”. In the medium to long term, the implementation of the energy security policy will still drive the performance of the domestic oil service industry to grow.
Relying on Sinopec's complete industrial chain, it is expected to benefit from the establishment of a pipeline network company. After the establishment of the new pipeline network company, the pipeline business of the three major oil companies increased in value. As a comprehensive service provider for petroleum engineering and oilfield technology controlled by Sinopec Group, Petrochemical Oil Service is located in the middle of the entire natural gas industry chain. It is expected that it will benefit from the added value added of Sinopec Group's pipeline business to obtain more tenders, which will promote the company's performance improvement.
Profit forecast and investment advice: Due to falling crude oil prices, the industry's recovery fell short of expectations. We lowered the 20-21 year profit forecast and added the 22-year profit forecast. The company's net profit for 2020-2022 is estimated to be 1,106/13.02/1,506 billion yuan, and EPS is 0.06/0.07/0.08 yuan respectively. However, low oil prices are difficult to sustain in the medium to long term, and considering the driving force of national policies and the deepening of internal corporate reforms, the company expects to benefit from the increase in upstream capital expenditure and the establishment of pipeline network companies, maintain the “increase in holdings” rating of A shares and maintain the “increase in holdings” rating of H shares.
Risk analysis: risk of falling crude oil prices; risk of international market operation; risk of technological innovation; risk of increasing market competition; risk of safety accidents and sudden natural disasters.