FPSO: Perspectives from the equity market

FPSO: Perspectives from the equity market

September 2010

Erik Tø[email protected]+47 21 01 32 26+47 48 40 32 26

2

Agenda/key topics highlighted in this presentation

Market development: Is the situation in the market picking up?

How do investors and analysts look at the FPSO-sector? What are their evaluation criteria?

Is the market willing to finance new developments? Is the financing situation on the road to recovery?

What are the main concerns for investors in financing FPSO-projects and how can you achieve a win-win deal with project financiers?

3

Underlying market development: Growth has been good and steady, and will likely continue to be so

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78

11 13

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FPS (installed base)

84

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+9%

09

225

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2

SPARs

TLPs

Production Semi’s

FPSOs

CAGR of 9% last 10 years

Underlying rationale for floating production solutions is strong – deeper, further from shore, more marginal fields etc. FPSOs are cost-efficient and versatile solutions (for the oil companies at least)

FPSOs continue to dominate as the most widely used floating production solution

CAGR, number of units 1999-2009

Source: IMA; Arctic Securities

We expect floating production to continue to see healthy / strong growth rates for the foreseeable future

We expect floating production to continue to see healthy / strong growth rates for the foreseeable future

4

Recent market development: A strong upswing in FPSO contract-awards…

Source: IMA; Arctic Securities

Order intake, new Floating Production Units (FPUs) ordered

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4

3 3 3

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6 6

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11 11

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10

12

14

16

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Jun-

Sep

97

Oct

97

- Fe

b 98

Mar

- J

un 9

8

Jul -

Oct

98

Nov

98

- Fe

b 99

Mar

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ul 9

9

Aug

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Dec

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Mar

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Oct

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04 -

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Dec

06 -

Mar

07

Apr

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Dec

07 -

Mar

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Aug

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09 -

Dec

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10 -

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Jul -

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Nr

of F

PU o

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s

Even if excluding the eight pre-salt hulls for Petrobras, we are at 11 contracts YTD, representing a decent level. More to come with e.g. CLOV, OSX-2 and Frøy so far not announced

Even if excluding the eight pre-salt hulls for Petrobras, we are at 11 contracts YTD, representing a decent level. More to come with e.g. CLOV, OSX-2 and Frøy so far not announced

6 Projects awarded H2/09

1. Aseng to SBM 2. Papa Terra to BWO/Quip3. Chim Sao to EOC 4. TGT to Bumi Armada5. Aquila to Saipem6. Baleia Azul to SBM (redeployment)

19 Projects awarded so far in 2010:

1. Kitan to Bluewater(redeployment) 2. Guara to MODEC3. OSX-1 to OSX (old Nexus)4. Goliath EPC-contract to Hyundai 5. Athena LoI to BWO6. Huntington LoI to SEVAN (redeployment)7. Tupi Nordeste to SBM-consortium8. Sidon/Tiro to Teekay9. TSB to BWO 10. Aruana to Teekay(redeployment) 11. Pagerungan Utara to BLT (redeployment) 12.-19. Eight pre-salt FPSO-hulls (LoI to Engevix/GVA/ Cosco)

5

Floating Production Systems on order/under construction, Quarterly since Q3/96

31

37 3632

3533

30

2321

1721 22

27

37 37 38 3941

38 37 3734 34 35 34

4346 46

5760

6765

6056

49

41 4037

39

49

0

10

20

30

40

50

60

70

80

Q3/

96Q

1/97

Q2/

97Q

3/97

Q1/

98Q

3/98

Q4/

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Q1/

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3/08

Q4/

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Q3/

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Q1/

10Q

3/10

…Resulting in the order backlog (nr. of units under construction) at yards turning again

During Q1/10, order backlog increased again for the first time in eight quarters, following a steady drop

We expect order backlog to come up further: Demand is pent-up, and backlog should continue to build as FIDs (Final Investment Decisions) gain momentum

Average = 39

Note: Excludes storage-only units, MOPUs and LNG RVs (shuttle/regas vessels) Source: IMA; Arctic Securities

If excluding the 8 pre-salt hulls, order backlog would have been at 41 units, still confirming the turn (though more modestly)

6

Demand-side remains strong! In spite of many awards since Aug-09, number of projects in the Bid/final design phase remains steady Implying oil companies continue to move on projects, gradually progressing them to FID and contract-award

31323333

25

0

5

10

15

20

25

30

35Nr of units

CurrentSep-09Dec-08Oct-08 Nov-09

Source: IMA; Press; Arctic Securities

Number of projects in the Bid/Final Design phase describes projects that are close to FID and contract-award

In spite of 25 awards since Aug-09, this number remains fairly steady

This implies the number of projects progressing from “Planning” to “Bid/Final design” remains high; i.e. demand-side remains strong

We also believe it’s positive that this number remained fairly steady through the financial turmoil, demonstrating oil companies continued to mature projects

In short, we believe the demand-side is pent-up, and that conditions are now increasingly in place for more contract awards again

The oil price is steady (enabling planning) on back of healthy demand

Input-costs (steel, yard-capacity etc) have come down

Access to financing for smaller E&Ps and FPSO-operators has improved

Number of FPSO-projects in the bid/final design phase (see next two slides for details)

Of which FLNG units 1 1 1 1 2

7

Industry majors are increasingly positive – both amongst oil companies and major contractors

Source: Technip (Mar/Apr-10); Arctic Securities

We’re noticing more positive signals from most (all) of the companies, especially within subsea, field development and floating production

We’re noticing more positive signals from most (all) of the companies, especially within subsea, field development and floating production

8

Industry survey: Industry-players are more optimistic, reflecting higher tendering-levels and improved market-conditionsIndustry sees on average 12 contracts in 2010 and 15 contracts in 2011

Industry-players significantly more optimistic compared to last year’s survey

On average, the players expect a further increase in number of awards during 2011

“How many FPSO-lease contracts do you expect will be awarded across the industry next year?”

Note: Survey conducted in Q2/09 and Q2/10 respectively. Participants: MODEC, PROD, Maersk, FOP, SEVAN, BWO (10 only), SBM (09 only)Source: Companies; Arctic Securities

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75

25

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Low HighAverage

2009-results

2010-results

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HighAverageLow

2009-results

2010-results

“How many FPSO-lease contracts do you expect will be awarded across the industry by year-end?”

Competitive pressure reduced. Some players even comment being in single-source discussions for projects

Major input costs have dropped further since last year. Companies’ answers for 2010 vary significantly

How many bidders are there on average involved in projects you are tendering for?

How have input prices developed over the past 12 months? (%-change)

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HighAverageLow

2009-results

2010-results

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-3-3-3

-4

-7

-10

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-8

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-1

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Yard costs Other costsMajor topside equipment costs

2009-results

2010-results

9

High-end of the lease segment consolidates with BWO-PROD combining. Competitive pressure should be further reduced, boding well for returns

Note: Does not include turnkey FPSOs, i.e. only includes FPSOs owned and operated by the FPSO-companies Source: Companies; IMA; Arctic Securities

Company Number of lease FPSOs in operation or under construction

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

SBM

MODEC

Prosafe Production

BW Offshore

Bluewater

Maersk

Petrojarl (Teekay)

Sevan FPSO

Saipem

Bumi Armada

Fred. Olsen Production

Rubicon

Sea Production

Tanker Pacific (TPOT)

Single unit owners

Contracted FPSOs in operation

Contracted FPSOs in operation (operations only)

Contracted units under construction/conversion

Construction on speculation

Idle

Combining to one entityLimited

financial bidding capacity

Mainly N.Sea

Financial capacity?

Likely to take one more

project only?

To conclude, we believe it’s fair to say the market is picking up and that bargaining position for the remaining players has improved and continues to do so!

To conclude, we believe it’s fair to say the market is picking up and that bargaining position for the remaining players has improved and continues to do so!

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Few (equity) investors have a detailed understanding of the FPSO-segment

Hard to place all in one group. Many are generalists. Investment strategies and exposures vary - across industries, geographies and asset classes

Some are oil services “specialists” – even these sometimes have detailed knowledge of the floating production business

Available time to dedicate to detailed analysis of selected companies is limited

Valuation approaches are usually “simple”: Valuation metrics (multiples), relative to other segments, look at potential for earnings-upgrades/re-valuation. Some do modeling/DCF-analyses/more detailed work

History matters…

Opinions and momentum can turn rapidly – from loved by everyone to hated by everyone (usually infectious)

Source: Arctic Securities

12

The floating production segment has spooked investors – for obvious reasons

A string of disappointments…Shares have been a disaster – even in companies perceived to be “solid” and steady-performing businesses

BWO listed at NOK 25 May-06, currently at NOK 8.0PROD listed at NOK 36 Feb-08, currently at NOK 13.0 Add to this; Aker Floating Production, Sevan… - not a joyride for shareholders

Leading established players – e.g. SBM – have also disappointed with significant delays to EPC-contracts (rigs, Yme, Deep Panuke), and are trading at historically low P/B-levels

Speculative entrants (mainly originated out of Norway) didn’t help the situation Very hard to point to any success-stories. Massive value destruction Nexus, Petroprod, FPSOcean, MPF, Nortechs/Songa Floating Production

The financial community helped fuel the hype…“Floating Production is the new deepwater drilling”“If we assume two new contracts won per year at 15% IRR…”

…and failed to recognize fundamental aspects of the business No upside through e.g. rate-fluctuations – i.e. rate locked once capex is agreed upon/contract signed


A lot went wrong operationally (poor contracts, too low contingencies, supply-chain tightness delays & overruns etc.), and a lot of investors got burned

A lot went wrong operationally (poor contracts, too low contingencies, supply-chain tightness delays & overruns etc.), and a lot of investors got burned

13

Norwegian FPSO-peers: By far the worst segment during the recent meltdown…

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20

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120

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May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10

Drillers NOR Subsea NOR Supply NOR FPSO NOR Seismic NOR

Source: Factset; Arctic Securities

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…and clearly the laggard since the market started improving again

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Mar-09

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Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

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Sep-10

Drillers NOR Subsea NOR Supply NOR FPSO NOR Seismic NOR


Hard to get investors’ enthusiasm up when the segment has underperformed all other oil services segments

Hard to get investors’ enthusiasm up when the segment has underperformed all other oil services segments

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Adjusting for worst performers (AKFP & SEVAN), some of the FPSO-peers have performed more in line with other oil services segments since the market started coming up again

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Mar-09

Apr-09

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Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Drillers NOR Subsea NOR Supply NOR Seismic NOR BWO PROD FOP SBMO MODEC

BWO up strongly lately on back of

APL-sale

FOP in line with drillers and supply

PROD, SBM and MODEC under-

performing


A key question investors are asking themselves is: “Why should I invest in this, when there are so many other alternatives”

A key question investors are asking themselves is: “Why should I invest in this, when there are so many other alternatives”

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Creating value for shareholders…?

Source: Vitae Energy; Arctic Securities

Shareholders care about this… it’s more or less the only thing they care about! Shareholders care about this… it’s more or less the only thing they care about!

17

Sector shake-out: A lot of players have disappeared. Speculative newcomers likely gone for quite some time…

1. AKFP

2. BWO

3. FLNG

4. FPSO (FPSOcean)

5. FOP

6. MPF – bankrupt

7. NEXUS

8. PetroProd

9. PROD

10.SEAP (Sea Production)

11.SEVAN

12.SFLO (Songa Floating Production, ex. Nortechs FPSO)

Norwegian FPSO-segment – March-09 Norwegian FPSO-segment – Today

1. AKFP

2. BWO

3. FLNG

4. FPSO (FPSOcean) - bankrupt

5. FOP

6. MPF – bankrupt

7. NEXUS – NEXUS I sold to OSX

8. PetroProd - bankrupt

9. PROD

10.SEAP (Sea Production) – OTC/Rubicon/Ashmore

11.SEVAN

12.SFLO (Songa Floating Production, ex. NortechsFPSO) – Bankrupt

Source: Vitae Energy; Arctic Securities

Of the remaining players, equity more or less wiped out in AKFP and the company lacks funding for additional projects. FLNG needs significant further funding. PROD will not bid actively before year-end 2010 and SEVAN likely

lacks equity to take on new significant capex commitments for some time

Of the remaining players, equity more or less wiped out in AKFP and the company lacks funding for additional projects. FLNG needs significant further funding. PROD will not bid actively before year-end 2010 and SEVAN likely

lacks equity to take on new significant capex commitments for some time

18

Analysts and investors have moved from “euphoric” to sober. Maybe a bit too sober…

Trusting companies’ input on capex, time, targeted IRR in contracts

Assuming all contracts will be fully utilized, including options, and potentially beyond that

High residual values / redeployment opportunities

Including a high system value / value of expected further growth (“2 new contracts per year”)

Believing in potential “super-returns” due to the strong and appealing deepwater story (“after DW drilling comes production”)

Low WACCs (abundant cheap financing)

From To

Strongly fearing capex overruns – running sensitivity analyses, incorporating cost overruns and delays in estimates

NPV-analysis of firm contracts alone –options viewed as potential upside only

Modest residual values

Assigning no value to growth / system value, not even for large players

Assuming “super-returns” will never materialize

Increasing WACCs

Note: Does not necessarily apply to all analysts, but expresses our view on the perceived shift in attitude Source: Arctic Securities

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So, with a ”bad” track-record, but a positive market-outlook, what are the investors telling us?

”The FPSO-sector is still un-investable”

”I’m stuck with stocks in the worst segment in all of oil

services”

“The segment has been a disaster”

“We need to be able to believe in stronger IRRs to invest in this sector –

how is the industry going to be credible on this when they weren’t

capable of extracting stronger margins in the last super-cycle?”

“How is it possible that everything else in oil

services rallies and this segment is lagging so

significantly?”

On a more positive note: We are starting to notice increased interest again from investors. Partially as a result of the segment having lagged so significantly and partially as a result of the BWO-PROD situation –

potentially creating a larger and significantly more interesting entity for investors

On a more positive note: We are starting to notice increased interest again from investors. Partially as a result of the segment having lagged so significantly and partially as a result of the BWO-PROD situation –

potentially creating a larger and significantly more interesting entity for investors


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Established players have heard the message and started to increasingly address investors’ concerns It remains to be seen whether this will result in tangible, profitable projects

Our take: Credibility needs to be restored (also for industry majors). We are however more positive than we have been for quite some time and believe this is about to happen! Investor

interest is increasing

Our take: Credibility needs to be restored (also for industry majors). We are however more positive than we have been for quite some time and believe this is about to happen! Investor

interest is increasing

”Target good return FPSO projects”

”Will not agree to undue contractual risk”

Source: BW Offshore; Arctic Securities

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300

Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10

Oil Services/Equity markets have started improving again…

Philadelphia OSX since Sept-00, indexed


Global financial turmoil & steep oil price drop

Markets bottom out and start recovering

Macondo

Improving equity markets indicated increased risk appetite again. However; At this stage of the recovery, it’s our perception that investors are looking more for rebound opportunities in established

names (less risky), rather than being willing to venture into financing new developments

Improving equity markets indicated increased risk appetite again. However; At this stage of the recovery, it’s our perception that investors are looking more for rebound opportunities in established

names (less risky), rather than being willing to venture into financing new developments

23

0

200

400

600

800

1000

1200

1400

sep. 10apr. 10okt. 09mai. 09nov. 08jun. 08des. 07jul. 07jan. 07jul. 06feb. 06aug. 05

HY

Spre

ads

(bas

is p

oint

s)

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100

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250

IG S

prea

ds (

basi

s po

ints

)

High-Yield (RHS) Investment Grade (LHS)

Debt markets are also improving

Low default rates and high liquidity

secured record low spreads

Credit crunch, increased

volatility and low liquidity

Strong

recovery

PIIGS

Source: Bloomberg; Arctic Securities Credit Research

24

US High-Yield issue volumes YTD already above full-year 2009-level and significant increase from the low level seen in 2008

Companies issued about USD 120 billion of junk bonds in the first half of the year, up from USD 63 billion over the same period in 2009, according to data compiled by Bloomberg.

US High-YieldVolume issued (in USDbn)

0

20

40

60

80

100

120

140

160

180

1H 20101H 20091H 20081H 20071H 20061H 2005YTD2010

20092008200720062005

USD

bn


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0

200

400

600

800

1000

1200

1400

sep. 10apr. 10okt. 09mai. 09nov. 08jun. 08des. 07jul. 07jan. 07jul. 06feb. 06aug. 05

0

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40

50

60

70

80

90

High-Yield (RHS) VIX (LHS)

Risk aversion is decreasing / price of ”insurance” coming down

VIX reflects a market-estimate of future volatility (“fear index”), based on the weighted average of the implied volatilities for a wide range of strikes


26

At USD 70/bbl, fundamentals still look strong. Oil companies increase E&P-spending again Should ease financing-burden somewhat

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E

E&P

cape

x pe

r ba

rrel

pro

duce

d (U

SD)

Average supermajors Average majors (ex STL) Average Independents STL Petrobras

-

25,000

50,000

75,000

100,000

125,000

150,000

175,000

200,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E

E&P

spen

ding

(U

SDm

)

0

5

10

15

20

25

30

Aggr

egat

ed p

rodu

ctio

n (m

boep

d)

Supermajors Majors Independents Total production same co's

E&P spending 1998-2010e (top 23 companies)E&P spending 1998-2010e per

barrel produced, split by company type

Strong rebound in E&P-spending in 2010 (provided oil co’s use budgets)

First indications for 2011 point to +5-10% further increase from 2010-level

A sharp decline in oil price (down another 10-15 USD/bbl) likely required to “de-rail” the current upswing. Our oil analysts do not believe this is a likely scenario

A sharp decline in oil price (down another 10-15 USD/bbl) likely required to “de-rail” the current upswing. Our oil analysts do not believe this is a likely scenario

Source: Companies; Arctic Securities

27

Is the (equity) market willing to fund new developments?

Mid segment

More challenging. Few players can raise equity unless at (significant) discount

Needs to be backed by main owners + likely commitments from banks on the debt-side

Track-record must be in place, so should a plan for tangible return on capital to investors

High-yield market potentially becoming increasingly possible again

Newcomers / speculative

projects

Impossible?

At least extremely challenging. Speculative projects are likely gone for a long time

In addition to equity markets reluctance, banks are not willing to commit. Though not FPSO, Master Marine is a good example: Construction project on track (time and cost), 3Y firm contract in place with ConocoPhillips, still unable to raise remaining bank-funding

More advanced and structured financing required. Up-front payments/milestones from oil companies likely a way to go. More EPC-contracts. It makes more sense for the oil companies to come up with the

funding than for the FPSO-companies (lower funding cost)

More advanced and structured financing required. Up-front payments/milestones from oil companies likely a way to go. More EPC-contracts. It makes more sense for the oil companies to come up with the

funding than for the FPSO-companies (lower funding cost)


Top tier players (SBM, MODEC, BWO,

PROD)

Established players with track-record and firm contracts/existing operations can still raise equity funding at acceptable terms. SBM e.g. successfully raised EUR 181m Nov-09 through a book building process (price set at/near closing price for the day). MODEC recently raised more equity, but directed at main shareholders

Increasing equity requirements pose challenges (for all players)

BWO able to raise debt-funding for PROD-deal at decent terms

28






29

What are the main concerns for (equity) investors and how can you achieve a win-win situation with financiers?

Main concern: Receive decent return on invested capital

Both categories of investors: Secure decent yield on invested capital

Debt side: Avoid downside risk

Equity side: Focused on upside potential. This relates to 1) valuation/pricing and 2) shareholder return policy

Companies need to:

Define a credible strategy for how investors shall receive a satisfactory ROI

Vs. debt-investors: Convincing risk mitigation (contract coverage/backlog, strong contract-counterparties, guarantees, debt/value etc.)

Vs. equity-investors: Focus on shareholder (cash) return policy. Investors want to avoid “value traps”. Look to Fredriksen. Why is implicit value per DW rig in SDRL USD 1bn+, vs. USD ~470m in RIG, USD ~580m in PDE etc.?

In general, FPSO-sector is likely more debt-friendly than equity-friendly (capped upside)


30

DisclaimerThe information and views presented in this presentation are prepared by Arctic Securities ASA (“Arctic”) an investment banking firm domiciled in Norway, under the supervision of The Financial Supervisory Authority of Norway (Kredittilsynet), and member of The Oslo Stock Exchange. This document has been prepared in accordance with the guidelines from the Norwegian Securities Dealers Association.

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FPSO: Perspectives from the equity market

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Transcript of FPSO: Perspectives from the equity market