2008 acergy initiating coverage arctic sec
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01
Oil Services Arctic Sell Medium Risk Initiation of coverage Price NOK 117.50 11 April 2008 Target NOK 115.00
Acergy S.A.
Down to execution • Larger, deeper, riskier. Subsea projects are larger and more complex than ever,
leading to an unfavourable development in risk-reward for ACY. Cost inflation and larger share of revenues from less developed markets will make overallEBITDA margin expansion challenging. We estimate EBITDA margins of 16.7% for 2008, 17.6% for 2009 and 18.0% for 2010, well below consensus.
• Subsea market demand still strong, but expect delays in contract awards. Demand for Acergy’s services will stay strong across the board. However, subseaplayers have been growing capacity accordingly. We also expect to see moredelays in contract awards as clients are strained and struggle with cost inflation.The combined effect of this can be additional pressure on margins going forward.
• Q1 2008 slightly below consensus. ACY delivered revenues of USD 636m below consensus of USD 684m and EBITDA of USD 102m versus consensus of USD 108m. EBITDA margin was 16.0% in line with expected 15.8%. Management remainedbullish on long term outlook, but warned of continued short term cyclicality.
• Challenging valuation. We estimate end 2008 DCF of NOK 117.0 (WACC 9.5%).This assumes continued revenue growth and long term EBITDA margin of 18%,above historical average of 7-8% (1999-2006). ACY is currently trading at 17.7x 2008 P/E, a 16% unjustified premium to its subsea peers, SUB, SPM and TEC. Weinitiate coverage with an Arctic Sell recommendation and NOK 115 target.
Key figures Share price USDm 2006 2007 2008e 2009e 2010eSales 2,124 2,663 2,988 3,306 3,610EBITDA 358 441 500 580 649EBIT 285 347 394 467 529EBIT margin (%) 13.4 13.0 13.2 14.1 14.7Pre-tax profit 302 341 388 464 526Net IB debt (346) (196) (221) (461) (743)EPS reported (USD) 1.2 0.6 1.3 1.6 1.8EPS adj dil (USD) 1.2 0.6 1.3 1.6 1.8EPS adj growth (%) 57.0 (45.6) 102.4 21.7 11.8EV/Sales (x) 1.6 1.4 1.4 1.2 1.0EV/EBITDA (x) 9.6 8.7 8.3 6.7 5.6EV/EBIT (x) 12.1 11.0 10.5 8.4 6.9P/E adj (x) 16.4 32.9 17.7 14.5 13.0P/BV (x) 4.6 4.9 4.2 3.3 2.7FCFE yield (%) (1.8) 0.7 2.1 6.4 7.3ROE (%) 29.0 16.4 24.0 23.3 21.1DPS (USD) 0.0 0.0 0.0 0.0 0.0Div yield (%) 0.0 0.0 0.0 0.0 0.0
Erik Tønne (lead analyst) / erik.tonne@arcticsec.no / +47 21 01 32 26 Kjetil Garstad / kjetil.garstad@arcticsec.no / +47 21 01 32 24
NOK
90
100
110
120
130
140
150
160
170
180
Apr-07 Oct-07 Apr-08
ACY.OL / ACY NOOSEBX (Rebased)
Forecast changes
Old New Old New
USDm 2008e 2008e 2009e 2009e
Sales n.a. 2,988 n.a. 3,306
EBITDA n.a. 500 n.a. 580
EBIT n.a. 394 n.a. 467
EPS n.a. 1.3 n.a. 1.6
Performance
Change (%) (%) (%)
Last 1m 3m 12m
ACY 4.2 (1.5) (8.6)
OSEBX 4.9 (7.1) (7.4)
OSX 10.1 0.8 37.2
Arctic vs consensus
Arctic Cons Arctic Cons
USDm 2008e 2008e 2009e 2009e
Sales 2,988 3,159 3,306 3,538
EBITDA 500 555 580 662
EBIT 394 421 467 525
EPS 1.3 1.4 1.6 1.8
Key share data
Market cap (USDm) 4,370
Market cap (NOKm) 22,102
Free float (%) 89.7
Shares outstand (m) 188.10
Shares fully dil (m) 213.30
Avg volume (000s) 2,530
02
Contents
Investment summary 4 P&L 4 DCF valuation & valuation summary 6 Peer group valuation multiples 7 Valuation summary 7 Risk factors 8
Subsea Market: Executive summary 9 Market demand will stay strong 9 Capacity will be strained occasionally – people likely main bottleneck 9 Bidding, risk management, project execution and resource allocation key challenges 11
Company description 12
ACY & SUB: Comparison on key dimensions 14 Geographical exposure 14 Regional performance. Earnings margins 14 Subsea 7 currently outperforming Acergy on overall EBITDA performance 16 How important is seasonality for the two companies? 17 Subsea 7 has consistently weak Q4s 18 Projects’ profit booking procedure leads to quarterly lumpiness 18 Order intake (contract awards) and book-to-bill ratios 19 Backlog development 20 To what extent do contract announcements work as share price triggers? 23 Fleet comparison 24
Financials 27 P&L 27 Cash flow statement 28 Balance sheet 29 Quarterly P&L 29
Valuation 31 Peer group valuation multiples 31 12 months forward looking P/E and EV/EBITDA multiples 31 On average, analysts have been downgrading ACY and SUB EPS estimates since autumn 2006 32 DCF valuation 33 Valuation summary 35
Subsea Market: Introduction & industry overview 36 Overview of key players 36
Subsea Market: Global subsea capex will continue to grow 39 Estimated global subsea expenditure 39 Order backlog and company forecasts support strong growth forward 41 Company forecasts of key industry equipment signal strong growth 43 Africa, SA (Brazil), and Europe will continue to be the largest markets 44 Subsea capex breakdown on categories 46 Pipeline construction – the most important segment for subsea installation and construction companies 47 The customer side is changing – NOCs increasingly important 48
Subsea Market: The main areas and projects 50
03
The North-Sea represents the main subsea legacy area 50 West-Africa, GoM and Brazil are the world’s main deepwater regions 50 Overview of the world’s main offshore field development projects 51 Pazflor – an illustrative example of the increasing scope of subsea projects 53
Record strong deepwater activity will drive subsea 55 Deepwater constitute an increasing share of subsea activity 55 The subsea industry has continuously been breaking frontiers and moving to deeper waters 56 Deepwater E&P increasing importance for the oil industry 57 Brazil, West-Africa, US GoM and Asia-Pacific will continue to be dominating deep water areas 59 Petrobras is the leading deepwater operator 59 Record strong deepwater drilling backlog also supports strength in expected subsea demand going forward 60 Strong expected growth in floating production solutions further strengthen our growth assumption 61
Management and Board of Directors 64 Management 64 Board of Directors 65
Shareholders and share price performance 66
Appendix 1: Company description, Subsea 7 67
Appendix 2: Glossary of key subsea terms 69
Profit & loss statement 71
Balance sheet & Cash flow 72
Key ratios & Valuation 73
Disclaimer 74
Contact information 77
04
Investment summary
We initiate coverage on Acergy with an Arctic Sell recommendation and a share price target of NOK 115.
• We estimate weaker EBITDA margins than consensus and have a 16.7% EBITDA
margin for 2008 (versus consensus of 17.4%), 17.6% for 2009 (consensus 18.8%) and 18.0% for 2010 (consensus 19.1%).
• The share price target is in line with our DCF valuation of NOK 117.0. This
assumes a cyclical 20% revenue drop from 2012 to 2013, long term growth rate of 2.5% and a long term EBITDA margin of 18% (2010 and beyond). Long term EBITDA margin of 18.0% is high, compared to historic average (1999-2006) of around 7-8%, and conditioned on the industry managing to discipline bidding, capacity and execution going forward. We use a WACC of 9.5%, which could also be argued to be low, given current cost of capital and the fact that ACY are in a net cash position
• Acergy is about to take on larger projects than ever before in its history. This
implies more complexity and increases risk. At the same time, organization has grown substantially, implying relatively more inexperienced staff. Overall outcome space widens, and we don’t see expected project values increase accordingly. Thus – risk-reward develops unfavourably
• We also see the risk of further delays in large project sanctioning among
increasingly exhausted client organizations, where people are the bottleneck. Furthermore, oil companies’ decision-making is slower due to high cost inflation
• Margins seem to be flattening out in key markets. We do not expect to see
significant margin improvements forward, as projects have long lead times from bidding to execution, and cost inflation among sub-contractors has been increasing
• A larger share of revenues going forward will originate from areas that so far
have had poor margins, most notably Brazil. We also observe that single projects can be enough to erode overall margins (Mexilhao, Q4 2007)
• The NOC’s share of the client base is increasing, implying more bureaucracy and
potential of delays (ref e.g. Petrobras). Furthermore, this also usually involves increased complexity as these organizations outsource a larger part of the project scope. Finally, these clients also tend to demand a high share of local content in projects, something we believe yield increased risk
• We believe overall market demand will stay strong, but the subsea companies
have been growing capacity in line with this and we thus so far don’t see room for significant margin expansion due to a tight supply side
P&L We estimate 2008 revenues in line with Acergy’s guidance of USD 3.0 billion. As the company will also have high drydock levels during 2008, this leaves limited room for additional (unexpected) increase in revenues. ACY just delivered its Q1 results, somewhat below consensus expectations. Revenues came in at USD 636 million versus consensus of USD 684 million. Adjusted EBITDA came in at USD 102 million versus expected USD 108 million, thus adjusted EBITDA margin was 16.0% versus expected 15.8%. Management confirmed its guidance for 2008 topline (USD 3.0 billion) and margins (“moderate improvement over 2006 and 2007”). Management remained bullish on long term outlook, but warned of continued short term cyclicality.
We believe Acergy will likely meet its 2008 revenue guidance and estimate 2008 revenues to be around USD 3.0 billion
Arctic Sell recommendation. Target NOK 115
05
We estimate a 2008 adjusted EBITDA margin of 16.7%, in the lower end of consensus, and fairly in line with realized adjusted EBITDA margin for 2007 (2007 adjusted EBITDA margin came in 16.6% after transition to IFRS). Acergy has guided “moderate improvement on the adjusted EBITDA margin achieved in 2006 and targeted for 2007”, likely meaning 100-200 basis points. However, given previous disappointments to this, as well as ongoing challenges with the Mexilhao project, we estimate a flat margin development through 2008. Going forward, we are also in the lower range of consensus with regard to EBITDA margin estimates. We estimate an adjusted EBITDA margin of 17.6% in 2009 (versus consensus 18.8%) and 18.0% in 2010 (versus consensus 19.1%). We believe projects like Mexilhao, increasing share of revenues from Brazil, and some major projects to be executed in a high inflation environment going forward will poise challenges for Acergy’s ability to improve EBITDA short to medium term.
Assumptions for regional EBIT margin development and overall EBITDA margin development
-30
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
2004 2005 2006 2007 2008E 2009E 2010E
AFMED
NEC
SAM
AME
(%)
Income (loss) from operations (EBIT) margins per region, yearlyCorresponding EBITDA margin development (Actual, Arctic Securities estimates and consensus estimates)
-6
-3
0
3
6
9
12
15
18
21
2003 2004 2005 2006 2007 2008 2009 2010
-5,4-5,4
10,810,8
12,612,6
16,916,9 16,616,617,3
16,7
18,7
17,6
19,1
18,0
EBITDA margin (%)
EstimatesEstimates
Source: Arctic Securities
We don’t view it as realistic that Acergy will realize significant margin improvements in the North Sea region (NEC), as they have had a presence there for a long time already (i.e. likely hard to up prices), and as costs are rising. AFMED margins will depend on successful project execution on major projects, and we assume a moderate, but continuous improvement in margins in this region. SAM (Brazil) and AME are the “wildcards”, and significant improvements in these regions can lift overall margins. This especially applies to Brazil due to higher relative share of backlog. However, given continued poor performance in this region, both from Acergy and key peer Subsea 7, we don’t see this as an easy-fix improvement in the short-medium term. Longer term, Acergy may be able to improve EBITDA margins, in line with the company’s stated ambition. This will depend on positive closure on large West-Africa projects (Block 15 and Pazflor), continued improvement of bidding margins and strong execution, including management of sub-suppliers and cost inflation. We estimate a top line growth to around USD 3.3 billion for 2009E and further to USD 3.6 billion in 2010. Corresponding EBITDA is USD 500 million for 2008, USD 580 million for 2009 and USD 649 million for 2010.
We assume moderate margin improvement in NEC and AFMED
We believe it will be challenging for Acergy to improve EBITDA margins significantly
Improving Brazil will likely be challenging
06
P&L (USDm) 2005 2006 2007 2008E 2009E 2010E
Revenues 1,529 2,124 2,663 2,988 3,306 3,610
Operating expenses (1,284) (1,730) (2,121) (2,389) (2,638) (2,873)
Gross Profit 244 394 543 598 668 738
SG&A (120) (149) (228) (236) (248) (271)
Other operating costs and revenues (net) 7 0 0 (3) (3) (3)
Share of net income of non-consolidated JVs 27 41 32 35 50 65
Net Operating Income (EBIT) 157 287 347 394 467 529
Net financials (23) 15 (6) (6) (3) (3)
Net income before taxes from continuing operations 135 302 341 388 464 526
Income tax provision (13) (74) (212) (140) (162) (184)
Net Income from cont. Operations 111 221 129 248 302 342
Inc/loss from disc. Operations 10 (19) 6 3 4 0
Gain on disposal from cont. Operations 27 35 0 0 0 0
Net Income 149 237 135 251 306 342
Gross profit margin 16.0% 18.6% 20.4% 20.0% 20.2% 20.4%
EBITDA (adjusted) 193 358 441 500 580 649
EBITDA (adjusted) % 12.6% 16.9% 16.6% 16.7% 17.6% 18.0%
Source: Arctic Securities We estimate a 2008E EPS of USD 1.31, four per cent below consensus estimate. Our 2009E EPS estimate is at USD 1.60, some nine per cent below consensus of USD 1.76. For 2010E, we estimate an EPS of USD 1.79, around 13% below current consensus of USD 2.06. Arctic estimates versus consensus on key P&L items
2008E 2009E 2010E
Revenues (USDm)
Arctic Securities estimate 2,988 3,306 3,610
Consensus estimate 3,047 3,418 3,710
Deviation (59) (112) (99)
Deviation % -2% -3% -3%
EBITDA (USDm)
Arctic Securities estimate 500 580 649
Consensus estimate 531 642 710
Deviation (31) (61) (60)
Deviation % -6% -10% -9%
EPS (USD)
Arctic Securities estimate 1.31 1.60 1.79
Consensus estimate 1.38 1.76 2.06
Deviation (0.06) (0.16) (0.27)
Deviation % -4% -9% -13%
Note: All consensus numbers from Bloomberg. Prior to Q1 2008 presentation.
Source: Arctic Securities DCF valuation & valuation summary Our DCF valuation of Acergy is sensitive towards several key elements, mainly our overall assumption for cycle length, and long-term level for EBITDA margins. We have estimated a continued topline growth to and including 2012. After that, we assume a cyclical drop of -20% in revenues, affecting 2013 top line. In our estimates, this moves from around USD 4.2 billion in 2012 to about USD 3.3 billion in 2013. Our long term EBITDA margin is currently estimated to 18%, something we believe might be ambitious, given historical levels. On the other hand, the industry has overall demonstrated a consistent EBITDA margin improvement, and we expect to see these margins sustain. Using a WACC of 9.5%, we find an end 2008 DCF value per share in ACY of NOK 117.0.
End 2008 DCF value of NOK 117 per share
07
DCF summary (USDm) End-2008
WACC 9.5%
NPV forecast period 1,429
Terminal value 2,665
Net debt - adjusted for div. (246)
MV (USDm) 4,340
Shares 191.0
Equity value per share (USD) 22.7
Equity value per share (NOK) 117.0 Source: Arctic Securities Note that we have used a NOK/USD assumption of 5.15 in line with the current six months forward price. Peer group valuation multiples We identify a peer group for Acergy consisting of European offshore E&C companies (TEC, SPM), its key Norwegian competitor (SUB), and Norwegian and US based subsea equipment suppliers (AKVER, NOV, CAM, FTI and DRQ). ACY is currently trading at 17.8x 2008 and 14.6x 2009 P/E, and 8.3x 2008 and 6.8x 2009 EV/EBITDA. The peer group is currently trading at 15.0x 2008 and 12.5x 2009 P/E, and 8.5x 2008 and 6.9x 2009 EV/EBITDA. ACY is thus trading at a premium compared to peers. Comparing ACY to its key subsea peers (Subsea 7, Saipem and Technip), we note that ACY is currently trading at 17.8x 2008 P/E vs. a 15.0x average for the core peer group, implying an 16% premium. For 2009 and 2010, the premium is similar. We do not see this as justified by ACY’s recent performance.
Peer Group valuation table
Price MV Free cash flow yield
Name (local) (USDm) 2008E 2009E 2010E 2008E 2009E 2010E 2008E 2009E 2010E 2008E 2009E 2010E 2008 2009 2010
Aker Kvaerner Asa 124.5 6,785 (555) (881) (1,027) 12.0x 9.8x 8.5x 6.7x 5.4x 4.5x 7.4x 5.9x 5.1x 11.9% 14.0% 14.8%
National Oilwell Varco 69.6 24,918 (1,433) (3,281) (4,989) 14.9x 12.9x 11.0x 8.4x 6.8x 5.5x 9.1x 7.3x 6.0x 8.5% 10.6% 11.9%
Cameron International Corp. 46.5 10,165 (110) (347) (447) 18.2x 15.4x 13.2x 10.1x 8.6x 7.4x 11.5x 9.8x 8.2x 7.9% 9.1% na
Fmc Technologies Inc 62.6 8,107 (60) (560) (664) 21.6x 18.4x 15.6x 12.0x 9.7x 7.6x 13.7x 11.0x 8.9x 6.8% 8.3% na
Dril Quip 51.8 2,115 (246) (336) (428) 17.3x 14.6x 12.7x 10.3x 8.2x 7.1x 10.6x 8.9x 7.8x 7.7% 7.7% na
Saipem SpA (Ordinary) 27.1 18,887 3,670 4,280 3,778 17.2x 14.6x 11.5x 10.1x 8.5x 6.9x 13.7x 11.5x 9.3x 10.5% 13.0% 13.7%
Technip SA (FR Listing) 56.3 9,537 (2,449) (2,618) (3,181) 15.8x 13.9x 11.9x 6.0x 5.1x 4.2x 7.7x 6.8x 5.3x 10.0% 12.3% 11.9%
Subsea 7 Inc. 118.8 3,469 266 (4) (441) 13.6x 11.0x 9.8x 7.1x 5.5x 4.5x 8.8x 7.1x 5.5x 12.0% 14.0% 17.0%
DOF Subsea ASA 28.6 558 961 1,184 990 9.3x 5.0x 4.2x 8.4x 5.9x 4.7x 11.8x 7.8x 6.2x na na na
DeepOcean A/S 23.0 403 260 281 na 9.7x 8.8x 7.7x 6.2x 5.6x na 9.8x 8.8x na na na
Average all 15.0x 12.5x 10.6x 8.5x 6.9x 5.8x 10.4x 8.5x 6.9x 9.4% 11.1% 13.9%
Average - Equipment suppliers 18.0x 15.3x 13.1x 10.2x 8.3x 6.9x 11.2x 9.2x 7.7x 7.7% 8.9% 11.9%
Average - Subsea I&C 15.5x 13.2x 11.1x 7.7x 6.4x 5.2x 10.1x 8.5x 6.7x 10.8% 13.1% 14.2%
Acergy SA (Ordinary) 117.5 4,556 (221) (461) (743) 17.8x 14.6x 13.1x 8.3x 6.8x 5.6x 10.6x 8.4x 6.9x 2% 6% 7%
Premium/(discount) 16% 15% 19% -2% -2% -3% 2% -1% 0%
Net debt (USDm) P/E EV/EBITDA EV/EBIT
Source: Facset; Arctic Securities Valuation summary We initiate coverage on Acergy with an Arctic Sell recommendation and target of NOK 115, in line with our end 2008 DCF value of NOK 117.0. Acergy also seems expensive on key multiples compared to peers, and we would expect consensus to come down further.
Peer group consisting of Norwegian and European subsea installation and construction peers and key Norwegian and US subsea equipment peers
Arctic Sell. Target NOK 115
08
Risk factors Several risk factors apply to the Acergy investment case Commodity price risk The demand for Acergy’s services is dependent on oil and gas prices levels. If there was a sharp reduction in oil prices, it is likely that the global E&P spending levels would be reduced. This is likely to have a negative impact on the demand for Acergy’s services. Project execution Acergy is dependent on good execution of its backlog to realize profitable margins. Acergy’s projects are increasingly larger and more complex, something that increases risk of delays and cost overruns eroding margins. Large projects are mostly undertaken on turnkey basis with lump sum payments where price is negotiated up front. Faulty identification of risks and associated costs contingencies may increase risk of cost overruns. There is in general always risk with these types of projects as the repeat factor is relatively low. Cost inflation for input factors Acergy sells the majority of its services on a fixed price basis and has a great deal of sub-contracting. As the projects in most cases also have long lead times until delivery, controlling the cost levels of your input factors & sub-contractors is key to extract the budgeted margins.
09
Subsea Market: Executive summary
Market demand will stay strong We believe the market demand for subsea services will remain strong for a long time, driven by a combination of sustained demand from traditional petroleum basins and clients, and increased demand from deepwater basins, less traditional regions and new clients, primarily the NOCs and new smaller oil and gas companies. The world is about to embark on the most extensive deepwater exploration period in the history of mankind. At the same time, we are now witnessing some of the largest contracts ever awarded to the subsea companies. These are mainly a result of large deepwater discoveries outside the coast of West-Africa and Brazil. We believe the increased deepwater exploration efforts will lead to more such contracts for the industry, as new discoveries need to be brought on stream. Furthermore, these projects are increasingly more complex, adding to the demand for longer term subsea installation and construction support. At the same time as deepwater basins are becoming increasingly important, we note that demand for subsea services remains strong in traditional basins such as the North Sea. The customer side is changing, with IOCs forced into deeper waters and harsher environments, as NOCs and consortiums increasingly take control over home basins. This expands the total customer base, as the IOCs keep pushing for reserves replacement and growth and the NOCs require a broad spectre of services. In our view, all indicators we have investigated lead us to the conclusion that growth for the subsea industry will be strong for a long time to come:
• We estimate the oil price to stay high. Arctic Securities’ official oil price estimate is USD 85 per bbl through 2008, increasing thereafter by general inflation
• Contracted deepwater drilling backlog is record high with number of contracted drilling years having increased around 7 times for capacity over 5,000 feet and around 12 times for capacity over 7,500 feet. Backlog is currently at around 560 rig years > 5,000 feet (123 rigs) and around 425 rig years > 7,500 feet (80 rigs)
• Number of FPSOs (and other floating production solutions) are estimated to grow strongly forward, from 123 FPSOs end of 2007 to about 170 in 2011
• We estimate that around 1,700 subsea wells will be installed over the coming years in deepwater areas alone, with majority during 2008-2013/2014. To compare, global installed base today is around 2,700 (all water depths)
• Subsea capex estimates indicate further growth. Infield estimates global subsea capex to grow with about 2% annually over the period 2008-2012. We however expect an even stronger growth, based on record strong backlogs and multiple projects expected to be brought on stream over the period. Strong industry cost inflation should also lead to growth in subsea spending above Infield estimates
• Order backlog for the subsea companies is record strong and has grown substantially over the last five years. However, the largest contracts the industry has seen have just started to be awarded
To conclude, we see a strong demand side going forward, with few risk factors that can distort the picture. Capacity will be strained occasionally – people likely main bottleneck The subsea construction and installation companies have been growing capacity in terms of both assets and people over the last years in line with other oil services segments. Subsea 7 has allocated USD 1 billion for new vessel investments over the period 2006-2008, and expands its fleet with eight units 2007-2009, of which five are large CSVs (construction/pieplay vessels). The company has also put forward multiple recruiting and
Subsea construction and installation market will stay strong
Extensive deepwater exploration over the years to come… …and sustained demand from more mature, shallower areas
NOCs more important
Multiple indicators support strong demand side
Subsea I&C companies have grown capacity in line with demand and expected demand growth
10
training efforts to strengthen the people side, and currently has about 5,000 employees, of which about 3,400 are based in UK & Norway and another 1,100 in Brazil. Acergy has also expanded its fleet, though spending somewhat less than Subsea. Capex 2006-2008 is around USD 700 million, and the company will take delivery of six new vessels from 2007 to 2010, of which four are CSVs (construction/pipelay). Acergy has also grown its workforce, from around 4,000 people end of 2004 to about 8,000 people end of 2007. Looking at the estimated growth in number of units across key segments in oil services, we note that subsea installation capacity will grow more or less in line with other oil service segments. As such, we don’t view asset capacity in this segment as a potential bottleneck. People may however be a challenge for several of the companies, and we expect to see this differ from region to region over time. As large scale subsea construction projects require highly skilled project management, we see this as a potential bottleneck in certain periods when several projects in e.g. West-Africa and Brazil are scheduled to be brought on stream at the same time.
Global pipelay capacity seems to grow more or less in line with expected demand
2.400
2005
3.100
1.000
0
2006
3.300
2007
3.500
2008
4.100
2009
4.400
2010
4.500
2011
4.600
2.000
3.000
4.000
5.000
Km
+10%
2012
40403837
35
29
2525
0
5
10
15
20
25
30
35
40
45 +7%
2012201120102009200820072005 2006
Nr. of ships
0
30
60
90
120
150
180
2005 2006 2007 2008 2009 2010 2011 2012
Acergy estimate Acergy estimate Arctic Securities illustration based on Acergy estimates
Km pipe per vessel, assuming even distribution
Source: Acergy; Arctic Securities
Fleet expansion should be capable of handling expected pipelay demand
People will be a potential bottle-neck, especially qualified project management
11
Estimated asset growth across key segments of the oil services value chain
48%67%
49%
84%
40%31%
106%
020406080
100120
Floating production
(FPSO)
Supply (AHTS) Supply (PSV)
N/A
Subsea equipement
Subseaconstruction &
pipleay
Seismic(3D vessels)
Drilling (Jackups)
Drilling (Floaters)
% change in fleet
Seismic Drilling Production Supply Subseaequipment
Subseainstallation
Change
Fleet ’11
Fleet ’05
+13+450+634+78+80+118+36
401126194017128050370
2767613069320038534
Change
Fleet ’11
Fleet ’05
+13+450+634+78+80+118+36
401126194017128050370
2767613069320038534
Note: Subsea construction and pipelay fleet defined as key enabling assets for pipelaying, mainly from ACY, SUB, TEC and SPM. Numbers do not include
various barges etc. under construction for a wide range of companies.
Source: ODS-Petrodata, Clarkson, Arctic Securities
Bidding, risk management, project execution and resource allocation key challenges We see execution in all parts of the business, as well as resource allocation as key challenges for the subsea companies going forward. With a record strong demand for subsea services, as well as equipment and services provided by sub-suppliers, bidding EPIC projects at the right levels in the one end and controlling cost inflation in the other end becomes more and more central for the companies. Lump sum EPIC projects have a long lead time. Projects like Pazflor being bid in during 2007 and where the contract is announced late 2007 often start offshore execution 2-3 years later. This makes execution extremely important and challenging. Furthermore, the projects currently in the backlogs of the subsea installation and construction companies are far more complex than previously, increasing the risk of overruns, delays and overall poor project execution. The subsea construction and installation industry has yet to prove that it can deliver sustained high margins. Proper resource allocation – people and vessels – becomes another challenge as the total demand side grows, and as projects in different regions progress with varying pace. Both Acergy and Subsea 7 have experienced the challenges faulty resource allocation can yield. As size of projects, and hence complexity also grows, this becomes increasingly important.
Execution is critical, and becomes even more important as project complexity increases
12
Company description
Acergy is a subsea construction and installation player with global presence. The company has four business areas: SURF, IMR, Conventional and Trunklines
• SURF (Subsea, Umbilicals, Risers and Flowlines): Engineering and construction associated with subsea field developments, pipeline and riser systems together with associated services.
• Trunklines: Installation of large diameter pipes over long distances from the pipelay barge Acergy Piper.
• Conventional: Fabrication and installation of fixed offshore platforms and associated pipelines in West Africa.
• IMR (Inspection, Maintenance and Repair): Examination by divers and ROVs (Remotely Operated Vehicles) of offshore facilities. Undertaking repairs as necessary.
SURF is by far the largest business area, as illustrated by EoY 2007 order backlog. Acergy’s backlog grew to USD 3,972 million over Q1 2008.
2007 end of year order backlog per business area, USD million and share
4
100
0
20
40
60
80
100Share (%)
IMR
715
ConventionalTrunklinesSURF
74
Total
127
2.500
3.500
USDm
3.175
Total
2.350
SURF
476
Trunklines
222
Conventional IMR
0
1.000
500
3.000
2.000
1.500
Source: Acergy; Arctic Securities
Majority of Acergy’s revenues over the last years has come from West Africa and the North Sea. During 2007, 53% of the company’s revenues came from then AFMED (Africa and Middle East region), mainly West-Africa, and 34% from the NEC (Northern Europe and Canada) region, mainly the North Sea. Remaining revenues came from other regions,. Of which Brazil (SAM) was the most significant. Share of revenues from Brazil have been growing steadily over the period.
Revenue distribution and share of revenues per region, 2005-2007
11081 38
83130
2.124
2006
1.398
908
3
1034
2.663
2007
248
3.000
714
579
9550
1.529
2005
1.045
827
USDm
2.500
2.000
1.500
500
0
+32%
1.000
AFMED
NEC
NAMEX
SAM Other
AMEAFMED
NEC
NAMEX
SAM Other
AME
0%1%2%
0%10%20%30%40%50%60%70%80%90%
100%
47%
38%
6%3%
5%
2005
49%
39%
4%6%
2006
53%
34%
0%9%
4%0%
2007
Share (%)
Note: AFMED = Africa and Mediterranean, NEC = Northern Europe & Canada, NAMEX = North America and Mexico, SAM = South America and AME = Asia and
Middle East
Source: Acergy; Arctic Securities
Acergy has a fleet of 19 existing vessels, and is expecting delivery of four newbuilds, of which two in 2008 and two in 2010. Including newbuilds, the vessels are distributed as follows: 12 pure CSVs, one CSV/DSV, one heavylift/CSV, one DSV, three Barges (pipe-
Acergy is mainly a SURF player with about 74% of EoY 2007 backlog within this business area
Majority of revenues from West-Africa
Acergy’s fleet consists of 19 vessels, and will grow with two more units in 2008 and additional two in 2010
13
/derricklaying) and five IMR vessels. Acergy’s DSV business is very limited (the pure DSV mentioned above is a newbuild), whereas Subsea 7 still has some focus on this business.
14
ACY & SUB: Comparison on key dimensions
Geographical exposure Revenue breakdown on geographies for the two companies illustrate that Acergy has a larger share of relative exposure to West-Africa and that overall, AFMED and NEC has constituted a large share of the companies revenues. For 2007, Acergy had 53% from AFMED and 34% from NEC (mainly North Sea). South-America (Brazil) was the third most important region, with around 9% of revenues. Subsea 7’s revenues are generally somewhat more diversified, with a larger share of revenues over the last three years from Brazil, Asia-Pacific and US GoM. We believe the diversification is positive for the company, securing operational experience in these regions and potentially to some extent reducing risks. However, we are concerned about the large and increasing Brazil exposure, unless the company starts delivering more positive margins in this region. The North Sea is still by far the most important area for Subsea 7, and contributed with 47% of revenues for 2007. Africa, mainly West-Africa, is the second-most important region, with 24% of 2007 revenues. For 2007, Brazil accounted for 15% of revenues, and the region has accounted for about 10-20% of revenues over the last three years. Given the maturity of the North Sea, it is interesting to note the continued strong relative importance of the area for both these companies. We think this is a strong indicator for the overall industry growth that should be expected going forward, as new growth areas come on stream in a stronger way and at the same time activity continues to be high in more mature areas.
Acergy and Subsea 7: Comparison of geographical exposure
53% AFMED34%
AMESAM3%NAMEX
6%
NEC
4%5%
6%
47% AFMED
38%
AMESAMNAMEX 3%
NEC
6%
49% AFMED
39%
AMESAMNAMEX
4%
NEC
2%
4%
53% AFMED34%
AMESAM
NAMEX 9%
NEC
0%
20042004
Ace
rgy
Subs
ea7
20052005 20062006 20072007
8%
7%
28%Africa
46%
Asia-Pac
Brazil
GoM
12%
N. Sea
8%
6%
23%
Africa
46%
Asia-Pac
Brazil
GoM
18%
N. Sea
8%
7%
24%
Africa
47%
Asia-Pac
Brazil
GoM
15%
N. Sea Note (1): AFMED = Africa and Mediterranean, NEC = Northern Europe & Canada, NAMEX = North America and Mexico, SAM = South America and AME = Asia
and Middle East
Note (2): ACY and SUB use somewhat different definitions, however these are to a large extent overlapping, i.e. NEC in ACY’s definition is mainly North
Sea, SAM is mainly Brazil etc.
Source: Acergy; Subsea 7; Arctic Securities
Regional performance. Earnings margins Acergy and Subsea 7 use different reporting parameters when reporting on regional performance. However, both measures provide a rather accurate view of regional performance for the two companies, as well as what level of earnings margins that can be expected in the various regions.
Acergy has its largest share of revenues from Africa, with 53% of 2007 revenues from AFMED region
Subsea 7 has its largest share of revenues from the North Sea
The North Sea is the legacy area for both companies
15
Acergy on a regional basis reports “Income (loss) from operations” or EBIT, whereas Subsea 7 reports “Profit (loss) before tax” or PTP. The illustrations below utilize the two companies’ reported measures.
Earnings margins per region Subsea 7:
-30-25
-20-15-10
-505
101520
2530
Q1/05 Q2/05 Q3/05 Q4/05 Q1/06 Q2/06 Q3/06 Q4/06 Q1/07 Q2/07 Q3/07 Q4/07
North Sea
Africa
Brazil
GoM
Asia-Pac
PBT (%)
-30-25
-20-15-10
-505
101520
2530
2005 2006 2007
North Sea
Africa
Brazil
GoM
Asia-Pac
PBT (%)
Margins per region, quarter by quarterMargins per region, quarter by quarter Margins per region, yearlyMargins per region, yearly Company margin, yearlyCompany margin, yearly
-30-25
-20-15-10
-505
101520
2530
2005 2006 2007
7,0
12,414,7
PBT (%)
Acergy: Margins per region, quarter by quarterMargins per region, quarter by quarter Margins per region, yearlyMargins per region, yearly Company margin, yearlyCompany margin, yearly
-50
-40
-30
-20
-10
0
10
20
30
Q1/05 Q2/05 Q3/05 Q4/05 Q1/06 Q2/06 Q3/06 Q4/06 Q1/07 Q2/07 Q3/07 Q4/07
AFMED
NEC
SAM
AME
Ops. Inc. (%)
-30-25
-20-15-10
-505
101520
2530
2005 2006 2007
AFMED
NEC
SAM
AME
Ops. Inc. (%)
-30-25
-20-15-10
-505
101520
2530
2005 2006 2007
5,910,3
13,0
Ops. Inc. (%)
Source: Acergy; Subsea 7, Arctic Securities
The development in margins above illustrate some clear observations • Margins are very lumpy on a quarterly basis. This is partly related to how
these companies book earnings and illustrated that it is challenging to evaluate the performance of the companies on a quarterly basis.
• North Sea and Africa are the only two regions with consistently positive margins. Subsea 7 has had the strongest development in the North Sea, whereas Acergy seems to have had a somewhat stronger development in Africa. For both Subsea 7 and Acergy, the North Sea is also the legacy area, and the companies history, track record and strong relations in this area may explain some of the reason for why margins are so good here.
• Both companies struggle in Brazil, demonstrating that they so far consistently do not manage to realize positive earnings on annual basis in this market. This calls for caution when evaluating both companies, especially as they have both increased their backlogs in this area. On the other hand, increased backlog may implicate more revenues to partly cover a larger fixed cost base in the area, following both companies gradual build up of capacity.
• Acergy also has challenges realizing positive margins in its AME region and development has so far been negative. For Subsea 7, the opposite has been the case, with strongly improving margins over the last years. However, both companies have limited revenues in the region and are in a build-up phase. We believe Asia will be important going forward, as growth is expected to stay high for a number of years.
• Subsea 7 in general demonstrates a stronger operational performance in majority of regions, with Brazil currently being the only challenge.
• It is hard to see evidence of further strong margin expansion going forward, purely from development, though margins have been developing favourably so far. Both Acergy and Subsea 7 have been arguing the case that the industry “deserves” stronger margins than what is currently being realized. We think this
Quarterly margins are lumpy. Both companies struggle in Brazil. The North Sea and Africa are the best regions in terms of operational performance
16
may be realistic over time through improving project bidding margins, but looking purely at margin development so far, we rather see these as stabilizing/increasing marginally rather than continuing to realize strong margin expansion.
Acergy’s Q1 2008 regional margins did not display any significant changes (as these margins are volatile on a quarterly basis). However, the NEC region came in significantly lower than expected (at -5%) and SAM surprised on the positive side with a positive margin of 7%.
Subsea 7 currently outperforming Acergy on overall EBITDA performance Subsea 7’s operational performance in the different regions also demonstrates that the company has lately been outperforming Acergy on overall EBITDA margin development. Acergy has also recently not met its guiding on EBITDA margin, and has been forced to adjust this on some occasions. This has been explained by management as due to weak performance on certain key projects (most lately the Mexhilao trunkline project in Brazil). During Acergy’s pre-close trading update and outlook 29 November 2006 the company guided an adjusted EBITDA margin of “at least 16%” and under outlook for 2007 stated that we should see “continued improvement in EBITDA margin”. Acergy delivered an adjusted EBITDA margin of 16.8% for 2006. During the same session for 2007, Acergy was forced to guide down their statement on continuous improvement somewhat, stating that “meeting the group’s adjusted EBITDA expectation will be dependent on the positive closure of projects and insurance claims through the reporting period”. Acergy disappointed the market by delivering an EBITDA margin of 16.4% for 2007, down from 2006. Acergy’s management still claims that the company will deliver consistently improving margins (and over time significantly stronger than today’s level). Currently, we assume a cautious stance towards this and estimate EBITDA margins to come in at the lower end of guidance. Furthermore, though strong execution and profit realization on significant projects are important for overall margins we are concerned about seeing parts of single projects (e.g. Mexilhao) driving down the company’s overall EBITDA margin to such extent. Acergy delivered EBITDA margin of 16.6% for FY 2007 (16.5% prior to change to IFRS), while Subsea 7 delivered 17.9%, demonstrating continuous improvement. Following the year end results, analysts consequently upgraded EBITDA expectations for Subsea 7 somewhat and downgraded expectations for Acergy, thus expecting a widening gap forward.
Subsea 7’s EBITDA margin development so far seems more gradual and steady than Acergy’s
Acergy has struggled with meeting its guidance on EBITDA margins
Management claims that margins will improve
Acergy delivered an EBITDA margin of 16.6% for 2007 (16.5% under US GAAP) versus Subsea 7’s 17.9%
17
Delivered EBITDA margin and consensus estimates for EBITDA margin development Consensus EBITDA estimates prior to Q4… …and after Q4 (with actual EBITDA% for 2007 full year)
-6
-3
0
3
6
9
12
15
18
21
2003 2004 2005 2006 2007 2008 2009
5,2
-5,4
9,2
10,8
13,012,6
15,916,9
17,916,6
19,0
18,4
19,9
19,6
EBITDA margin (%)
SUB
ACY
SUB
ACY
-6
-3
0
3
6
9
12
15
18
21
2003 2004 2005 2006 2007 2008 2009
5,2
-5,4
9,2
10,8
13,012,6
15,916,9
17,916,6
19,1
17,3
20,4
18,7
EBITDA margin (%)
SUB
ACY
SUB
ACY
Note: 2007 numbers display actual EBITDA margins for both companies. 2008 and 2009 numbers are average consensus estimates
Source: Acergy; Subsea 7; Facset; Arctic Securities
How important is seasonality for the two companies? Operational performance for the companies overall and per region on a quarterly basis displays limited seasonality effect for the two companies. The North Sea is the only exception to this, mainly due to the harsh weather in the winter season. The North Sea seasonality effect is more visible in Subsea 7, which has its majority of revenues from the region. Illustration of cyclicality in the North Sea (North Sea revenues and operational profits only)
223
339299
163177
231217
136130
188167
96
0
50
100
150
200
250
300
350
Q1/05
Q2/05
Q3/05
Q4/05
Q1/06
Q2/06
Q3/06
Q4/06
Q1/07
Q2/07
Q3/07
Q4/07
USDm
Subsea 7, North Sea revenues
15
29
24
16
3
2723
17
8
1817
2
0
5
10
15
20
25
30
Q1/05
Q2/05
Q3/05
Q4/05
Q1/06
Q2/06
Q3/06
Q4/06
Q1/07
Q2/07
Q3/07
Q4/07
(%)
Subsea 7, North Sea margins
173
281
216238
217
295
214
101
165183
149
83
0
50
100
150
200
250
300
Q1/05
Q2/05
Q3/05
Q4/05
Q1/06
Q2/06
Q3/06
Q4/06
Q1/07
Q2/07
Q3/07
Q4/07
USDm
Acergy, NEC revenues
-1
21
1517
12
20
14
7
1614
12
-5-10
-5
0
5
10
15
20
25
Q1/05
Q2/05
Q3/05
Q4/05
Q1/06
Q2/06
Q3/06
Q4/06
Q1/07
Q2/07
Q3/07
Q4/07
(%)
Acergy, NEC margins
Source: Subsea 7; Acergy; Arctic Securities
North Sea only area with consistent seasonality effect; usually weaker Q4s and Q1s due to harsh winter weather
18
Subsea 7 has consistently weak Q4s For Subsea 7, Q4s overall (i.e. not just North Sea region) are consistently the weakest quarters. No such pattern is evident for Acergy’s overall results. We do not see Subsea 7’s weak Q4s as due to an industry trend, and looking at revenues by quarterly share of annual revenues, this is not due to seasonality in revenues, i.e. lower revenues in Q4. We hence assume this is due to specific accounting measures done by the company related to year-end.
Subsea 7: Q4 profits generally weaker than rest of year. Not due to lower revenues during Q4s Quarterly revenues as share of year total revenues since Q1 2005 (%):
26
28
2422
2425
28
24
282626
21
Q1 Q2 Q3 Q1 Q2 Q3 Q4Q3 Q4Q1 Q2Q4
14
19
15
10
2
1717
13
6
910
1
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q3 Q4Q2Q1 Q1
Quarterly profit (loss) margins since Q1 2005 (%):
2005 2006 2007 2005 2006 2007
Source: Subsea 7; Arctic Securities Projects’ profit booking procedure leads to quarterly lumpiness As previously mentioned, results are generally lumpy for these companies on quarterly basis. This is partly due to the revenue and profit recognition process of large projects. Majority of revenues and profit is booked towards the end of projects, leading to significant variations in profit margins, as contingencies (related to pre-identified risks during the bidding process) are released or additional costs occur, depending on project execution. This also implicates that for many projects, it is hard to judge profitability prior to the last phases and/or completion of the project at hand. Acergy has provided a simplified illustration of this process, displayed below.
Subsea 7 has consistently reported weak Q4s. This is not driven by revenue fluctuation alone.
Majority of revenues and profits in large projects booked towards end of the project phase
19
Revenue & profit recognition in major projects – illustration
Source: Acergy Order intake (contract awards) and book-to-bill ratios Looking at the contract awards that have built the backlog, and the companies’ book-to-bill ratios we see some observations worth commenting. Firstly, over the last two to three years, projects and contracts to both Acergy and Subsea 7 have gotten larger (this is also the fact for Technip & Saipem). This implies that going forward, both companies shall execute larger and more complex projects than they have ever done before. These large projects open up for potential for significant profits, but also increase the risk taken by the companies, as especially project management becomes more complex. Furthermore, these projects depend on several counterparties, and hence risk of delays/sliding of project sanctioning increase. Among key large scale project contract awards over the last years worth noticing are the USD 700 million contract for Acergy on Pazflor, the USD 670 million contract on Block 15, Angola and the USD 400 million contract on the Mexilhao project. Acergy was approximately 12% into execution on the Mexilhao project end of 2007, and is currently negotiating with Petrobras for altered terms on this (challenging) contract. Offshore installation on Block 15 is scheduled to start Q4 2008, and on Pazfloor mid 2010. For Subsea 7, the main large project contracts are the USD 290 million contract on Tombua Landana (Angola) with offshore installation late 2008 and/or early 2009, the USD 390 million extension to the “Hybrid Vessel” contract in Brazil, and the recently announced USD 200 million contract in Santos Basin. The two very large contracts (USD 700 million and USD 400 million respectively) illustrated in 2006, are six years charter contracts with Shell in the North Sea (i.e. not project specific). Looking at accumulated contract value over the last years, Subsea 7 and Acergy has announced almost the same value of contracts, when including contracts announced in 2008. Subsea 7 has announced contracts of an accumulated value of USD 6,590 million since 2004 and Acergy USD 6,618 million. Subsea 7 is however growing from a smaller base, and in light of this outperforming Acergy.
Orders are getting larger. This increases profit opportunities, but also ups risk due to increased complexity
Acergy’s largest contract wins last three years are Pazflor (USD 700 million) Block 15 (USD 670 million) & Mexilhao (USD 400 million)
Subsea 7 and Acergy have both announced contracts for an accumulated value of around USD 6.6 billion each since 2004
20
Order intake since 2002 (ACY) and 2004 (SUB) per order and accumulated per year
2002
2003
2004
2005
2006
2007
20082002
2003
2004
2005
2006
2007
2008
200
50
14012580
390
45
280275
80
250290
200128
50
700
400
60
160
286485
3055723
3237
4050
60115
29
150
5618
150
670
150
6012
250
2445
29
270
20
110140
1825
0
100
200
300
400
500
600
700
18 3080 55 70
11561
Avg.112
Contract value USD Million
250
1,236
2,890
1,235979
0
500
1,000
1,500
2,000
2,500
3,000
2002 2005 2006 20082007
USD Million
20042003
Subs
ea7
6060
150195
700670
58120
175
85
400
28
14012060
6540
150
40
125
245
35
125145
140
16
90
250
5550
280
36507540
4050120
200
7050
150
4055
550
250
70
300
70
0
100
200
300
400
500
600
700
Contract value USD Million
80140 Avg.
143
1,165
1,936
1,2761,246995
320370
0
500
1,000
1,500
2,000
2,500
3,000
20072006
USD Million
20082002 2003 2004 2005
Accumulated contract value per yearAccumulated contract value per year
Acer
gy
Source: Subsea 7; Acergy; Arctic Securities
Book-to-bill ratios for the two companies illustrate high quarterly volatility for both companies, depending on when major contracts come in and are announced.
Order intake and book-to-bill ratios
0
50
100
150(%)
868
380428
260315
125
391
671
205170
200
445
0
100
200
300
400
500
600
700
800
900
Q1/05Q2/05Q3/05Q4/05Q1/06Q2/06Q3/06Q4/06Q1/07Q2/07Q3/07Q4/07
USDm
0
50
100
150
200
250
300
350
400(%)
265
515456
0
895
140252
419350
244222
Q1/05Q2/05Q3/05Q4/05Q1/06Q2/06
1.603
Q3/06Q4/06Q1/07Q2/07Q3/07Q4/07
0
1.000
1.200
1.400
1.600
1.800
200
400
600
800
USDm
Subsea 7: Quarterly order intake and book-to-bill ratioSubsea 7: Quarterly order intake and book-to-bill ratio
Order intake
Book-to-bill ratio
Order intake
Book-to-bill ratio
Acergy: Quarterly order intake and book-to-bill ratioAcergy: Quarterly order intake and book-to-bill ratio
Order intake
Book-to-bill ratio
Order intake
Book-to-bill ratio
Note: Book-to-bill ratio here is calculated as quarterly order intake divided by quarterly revenues (illustrated in %, right hand axis)
Source: Subsea 7; Acergy; Arctic Securities
Backlog development Acergy and Subsea 7 have both seen a very strong order intake and growth in backlog over the last years. Subsea 7 currently had the largest backlog, USD 4,215 million at the end of Q4 2007, and has announced contract awards of USD 250 million so far in 2008. Subsea 7 has also seen the strongest growth in backlog over the last years, with its
Subsea 7’s backlog has increased more than 3x since 2005 from USD 1,354 to USD 4,215 million end of 2007
21
backlog increasing more than 3x since 2005 from USD 1,354 million to USD 4,215 million end of 2007. Acergy’s reported backlog at end of Q4 (30 November) was USD 3,175 million, and the company has announced contract awards of another USD 1,165 million since then. Acergy’s backlog has grown about 1.4x 2005-2007 from USD 2,194 million to USD 3,175 million. (Note however that this increases to about 2.0x when including new contracts awarded since Q4 2007, if assuming that existing backlog has not been reduced). At the end of Q1 2008, Acergy’s order backlog stood at USD 3,972 million, an increase over the quarter of USD 797 million. A large share of Subsea 7’s backlog growth over the last years are constituted by two large frame agreements with Shell worth a total of USD 1.1 billion, running for six years with 4x1 year options for each of the contracts. Acergy has some similar contracts, mainly three vessels chartered to Petrobras (the Pertinacia, the Condor and the Harrier running to Q1 2012 and 2x Q4 2010 respectively), constituting a total announced contract value of USD 530 million. In addition, Acergy has two frame-agreements in the North Sea, at a total announced contract value of USD 160 million.
Quarterly backlog development per region Q105 – Q407
0%
20%
40%
60%
80%
100%
Q2/05Q1/05 Q3/05 Q4/05 Q1/06 Q2/06 Q3/06 Q4/06 Q1/07 Q2/07 Q3/07 Q4/07
Share (%)
Q3/06
3.748
Q4/06
3.809
Q1/07
3.938
Q2/07
4.228
Q3/07
4.215
Q4/07
+11%
0
1.000
1.5002.000
2.500
3.5004.000
4.500
500
USDm
3.466
1.374
Q1/05
1.342
Q2/05
1.623
Q3/05
1.6261.354
Q4/05
1.445
Q1/06 Q2/06
3.000
North Sea
Africa
Brazil
GoM
Other
Asia-Pac.
North SeaNorth Sea
AfricaAfrica
BrazilBrazil
GoMGoM
OtherOther
Asia-Pac.Asia-Pac.
Subs
ea7
Ace
rgy
Q1/05 Q2/05
1.866
Q3/05
2.194
Q4/05
2.286
Q1/06
2.470
1.715
Q2/06
2.618
+5%
Q4/07
3.175
Q3/07
2.745
Q2/07
3.031
Q1/07
2.557
Q3/06
2.576
Q4/06
1.500
0
2.500
1.000
2.000 1.802
4.000
500
4.500
3.000
3.500
USDm
AFMED
NEC
NAMEX
SAM
Total
AME
AFMEDAFMED
NECNEC
NAMEXNAMEX
SAMSAM
TotalTotal
AMEAME
0%
20%
40%
60%
80%
100%
Q2/05Q1/05 Q3/05 Q4/05 Q1/06 Q2/06 Q3/06 Q4/06 Q1/07 Q2/07 Q3/07 Q4/07
Share (%)
Source: Subsea 7, Acergy, Arctic Securities
In terms of geographical exposure, Subsea 7 has seen the largest relative increase in the North Sea over the last three years. This is mainly due to the large charter contracts with Shell. We view this as positive, as the company generally has secured strong margins in this market. Acergy’s backlog to the end of 2007 saw the strongest relative increase in the SAM region, i.e. Brazil, whereas AFMED’s relative share was reduced. This will likely change somewhat when Q1 2008 numbers are included, as this will include the USD 700 million Pazflor contract. Both companies have significantly increased the backlog in Brazil over the last three years, and majority of these contracts are moving into execution now, or have already started. Acergy and Subsea 7 both need to improve execution in this market for this not to affect overall margins in a negative direction.
Acergy’s is growing from a larger base and has increased its backlog 1.4x over the period 2005-2007, from USD 2,194 to USD 3,175 million end of 2007
Subsea 7 has seen the strongest relative increase in its North Sea backlog
Brazil and Wesrt-Africa most important in Acergy’s backlog
Both companies have increased Brazil backlog significantly. We need to see strong execution on these projects
22
Annual backlog development per region 2005-2007
35%
22% 31%
2%3%6%0%
20%
40%
60%
80%
100%
2005 2006 2007
18%
3%
55%
8%
4%
Share (%)
33%
18%
8%
54%
North Sea
Africa
Brazil
GoM
Other
Asia-Pac.
North SeaNorth Sea
AfricaAfrica
BrazilBrazil
GoMGoM
OtherOther
Asia-Pac.Asia-Pac.
Subs
ea7
Ace
rgy
AFMED
NEC
NAMEX
SAM
Total
AME
AFMEDAFMED
NECNEC
NAMEXNAMEX
SAMSAM
TotalTotal
AMEAME1%
0%
20%
40%
60%
80%
100%
0%18%
48%
4%14%
64%
17%30%
Share (%)
200720062005
6%
34%
0%20%
40%
4%
4.500
2.194
2005
2.576
2006
3.175
2007
0
1.000
1.5002.000
2.5003.000
3.500
500
4.000
USDm
0
1.000
1.500
2.500
3.000
3.500
4.000
4.500
500
2.000
USDm
2005
3.748
2006
4.215
2007
1.354
Source: Subsea 7; Acergy; Arctic Securities Over the period 2005-2007, Subsea 7’s backlog has increased substantially faster than revenues, whereas Acergy’s increase in backlog has been more in line with revenue increase.
Annual revenues and year end backlog 2005-2007
USDm
1.000
4.000
3.000
5.000
2.000
0
2007
4.215
2.187
2006
3.748
1.6701.3541.300
2005
Subsea 7
Revenues
Year end backlog
Revenues
Year end backlog1.529
2.194
2005
2.1242.576
2006
2.6633.175
2007
0
2.000
5.000
3.000
USDm
1.000
4.000
Acergy
Source: Subsea 7; Acergy; Arctic Securities Subsea 7’s backlog distribution is also more evenly distributed going forward, whereas the majority of Acergy’s backlog consists of work to be conducted in 2008. Acergy is larger than Subsea 7 revenue wise, and as such also “eats into” its backlog faster, even in a zero growth scenario. Acergy’s 2007 revenue level constitutes as much as 84% of its backlog end of year 2007, versus 52% for Subsea 7. Still assuming no growth, Acergy has as much as 83% of revenues booked for 2008 through scheduled backlog work, versus 78% for Subsea 7.
Acergy ”consumes” its backlog more rapidly than Subsea 7
23
Distribution of EoY 2007 backlog going forward Subsea 7
4.215
2007
1.710
2008
1.017
2009
647
2010
841
2011
0
1.000
USD Million
2.000
5.000
3.000
4.0003.175
2007
2.223
2008
667
2009
286
2010
0
1.000
2.000
3.000
4.000
5.000
USD MillionAcergy
Source: Subsea 7; Acergy; Arctic Securities To what extent do contract announcements work as share price triggers? Looking at the largest contracts announced by Subsea 7 and Acergy over the last two years does not provide clear evidence of very strong share price reactions after contract announcement. It actually looks more like the share prices seem to react some time prior to contract announcements. This could be due to a lot of attention related to soon-to-come contract awards in advance with market participants identifying “most likely” winners for the specific tender at hand.
Subsea 7: Share price reactions to the 10 largest announced contracts since 2006
1.56%0.16%-0.29%1.08%0.44%1.52%3.11%Average top 10 contracts
10.85%4.40%3.52%1.79%0.30%2.10%8.60%NEC23-Mar-06160
-0.82%-0.44%-0.66%0.30%0.30%0.59%3.21%Average all contracts 2006-2008 (27)
na.3.48%2.17%0.66%1.11%1.77%3.37%SAM31-Mar-08200
-6.67%1.56%0.89%1.35%-1.11%0.22%-4.46%AFMED15-Sep-06200
0.42%2.08%-0.42%2.78%1.97%4.80%7.14%SAM20-Oct-06250
5.26%0.00%-0.48%-3.24%-0.92%-4.13%-0.48%NEC17-Jul-06255
0.22%-0.22%-0.87%-1.08%0.87%-0.22%-6.71%SAM18-Dec-06275
5.90%-1.89%-3.30%0.24%0.71%0.95%-7.22%AFMED2-Oct-06290
4.43%-0.40%-0.40%1.43%1.87%3.33%1.84%NEC15-May-07341
-11.95%-6.38%-6.71%3.56%-0.67%2.86%11.09%SAM23-Jul-07390
5.62%-0.98%2.69%3.28%0.25%3.54%17.87%na.3-Jul-061100
10 days after
2 days after
1 day afterIntraday1 day ahead
2 days ahead
10 days ahead
Region DateContract
value (USDm)
1.56%0.16%-0.29%1.08%0.44%1.52%3.11%Average top 10 contracts
10.85%4.40%3.52%1.79%0.30%2.10%8.60%NEC23-Mar-06160
-0.82%-0.44%-0.66%0.30%0.30%0.59%3.21%Average all contracts 2006-2008 (27)
na.3.48%2.17%0.66%1.11%1.77%3.37%SAM31-Mar-08200
-6.67%1.56%0.89%1.35%-1.11%0.22%-4.46%AFMED15-Sep-06200
0.42%2.08%-0.42%2.78%1.97%4.80%7.14%SAM20-Oct-06250
5.26%0.00%-0.48%-3.24%-0.92%-4.13%-0.48%NEC17-Jul-06255
0.22%-0.22%-0.87%-1.08%0.87%-0.22%-6.71%SAM18-Dec-06275
5.90%-1.89%-3.30%0.24%0.71%0.95%-7.22%AFMED2-Oct-06290
4.43%-0.40%-0.40%1.43%1.87%3.33%1.84%NEC15-May-07341
-11.95%-6.38%-6.71%3.56%-0.67%2.86%11.09%SAM23-Jul-07390
5.62%-0.98%2.69%3.28%0.25%3.54%17.87%na.3-Jul-061100
10 days after
2 days after
1 day afterIntraday1 day ahead
2 days ahead
10 days ahead
Region DateContract
value (USDm)
Source: Subsea 7; Arctic Securities
Contract announcement do not seem to trigger share price appreciation – shares rise more prior to announcements
24
Acergy: Share price reactions to the 10 largest announced contracts since 2006
0.52%-1.38%-0.27%0.00%0.66%0.65%2.48%Average top 10 contracts
-15.06%-2.56%-0.64%-0.95%1.61%0.65%1.13%SAM30-Oct-07140
1.07%0.39%0.73%0.45%0.40%0.82%2.83%Average all contracts 2006-2008 (28)
-4.23%1.01%-0.20%0.20%-0.60%-0.40%3.33%NEC05-Feb-07140
-8.56%-4.38%-2.30%3.68%2.44%6.21%3.68%AFMED05-Sep-06150
12.35%-1.94%0.88%-3.08%0.86%-2.24%7.79%AME06-Jul-07175
22.22%4.76%1.59%-0.32%-1.86%-2.17%-10.00%SAM20-Jun-06245
11.28%0.00%0.61%-2.67%0.30%-2.38%-3.24%SAM14-Feb-06301
7.35%0.47%3.32%6.67%1.75%8.54%7.22%NEC13-Feb-08345
-1.55%-0.19%-0.19%1.18%-1.93%-0.77%7.97%SAM03-Apr-07400
-5.16%-10.32%-5.95%-7.18%4.02%-3.45%-4.00%AFMED29-Nov-07670
-13.48%-0.60%0.20%2.47%0.00%2.47%10.94%AFMED02-Jan-08700
10 days after
2 days after
1 day afterIntraday1 day ahead
2 days ahead
10 days ahead
Region DateContract
value (USDm)
0.52%-1.38%-0.27%0.00%0.66%0.65%2.48%Average top 10 contracts
-15.06%-2.56%-0.64%-0.95%1.61%0.65%1.13%SAM30-Oct-07140
1.07%0.39%0.73%0.45%0.40%0.82%2.83%Average all contracts 2006-2008 (28)
-4.23%1.01%-0.20%0.20%-0.60%-0.40%3.33%NEC05-Feb-07140
-8.56%-4.38%-2.30%3.68%2.44%6.21%3.68%AFMED05-Sep-06150
12.35%-1.94%0.88%-3.08%0.86%-2.24%7.79%AME06-Jul-07175
22.22%4.76%1.59%-0.32%-1.86%-2.17%-10.00%SAM20-Jun-06245
11.28%0.00%0.61%-2.67%0.30%-2.38%-3.24%SAM14-Feb-06301
7.35%0.47%3.32%6.67%1.75%8.54%7.22%NEC13-Feb-08345
-1.55%-0.19%-0.19%1.18%-1.93%-0.77%7.97%SAM03-Apr-07400
-5.16%-10.32%-5.95%-7.18%4.02%-3.45%-4.00%AFMED29-Nov-07670
-13.48%-0.60%0.20%2.47%0.00%2.47%10.94%AFMED02-Jan-08700
10 days after
2 days after
1 day afterIntraday1 day ahead
2 days ahead
10 days ahead
Region DateContract
value (USDm)
Source: Acergy; Factset; Arctic Securities
Fleet comparison Including units under construction, Subsea 7 has a fleet of 22 units. Of these, five are still under construction and will be delivered during 2008. The company has conducted significant investments over the last years, resulting in a relative modern fleet with an average age of around seven years. Including newbuilds, Subsea 7’s fleet consists of 12 CSVs, (pipelay and multipurpose support), five ROVs and five DSVs.
Subsea 7 has a fleet of 22 vessels, including newbuilds not yet delivered
25
Subsea 7: Fleet overview Vessel Vessel Year built/ Size Owned/
Vessel name main type sub-category converted (length m) leased
Existing fleet1 Rockwater 1 DSV Diving 1983 98 Owned2 Rockwater 2 DSV Diving 1984 119 Owned3 Pelican DSV Diving 1985 94 Owned4 Kommandor Subsea ROV ROV support 1986 69 Owned5 Seisranger ROV ROV support 1993 85 Charter6 Kommandor Subsea 2000 ROV ROV support 1996 78 Owned7 Toisa Perseus CSV Pipelay 1998 114 Charter8 Kommandor 3000 CSV Flexible pipelay 1999 118 Owned9 Skandi Navica CSV Pipelay 1999 109 Charter10 Subsea Viking CSV Multipurpose support 1999 103 Charter11 Toisa Polaris DSV Diving 1999 114 Charter12 Lochnagar CSV Pipelay 2005 105 Owned13 Skandi Neptun CSV Pipelay 2005 104 Charter14 Amazonia CSV Survey/subsea support 2005 74 Charter15 Skandi Bergen ROV ROV support 2007 106 Charter16 Normand Seven CSV Pipelay 2007 130 Charter17 Seven Oceans CSV Pipelay 2007 157 Owned
Ordered/under construction18 Seven Seas CSV Flexible pipelay 2008 154 Owned19 Seven Sister CSV Multipurpose light construction 2008 104 Charter20 Normand Subsea 7 ROV ROV support 2008 113 Charter21 Skandi Seven CSV Construction/maintenance 2008 121 Charter22 Seven Atlantic DSV Diving 2009 145 Owned
Source: Subsea 7; Clarksons; Arctic Securities Acergy has also invested in rejuvenating its fleet over the last years, taking delivery of three newbuilds/modified vessels in 2007, the Sapura 3000 in Q1 2008, and aiming to take delivery of another three vessels during 2008-2010, bringing its total fleet (including JV assets) to 23 vessels. Including newbuilds, Acergy’s fleet consists of 12 pure CSVs, one heavylift/CSV, one CSV/DSV, one pure DSV, three barges (pipe-/derricklaying) and five IMR vessels.
Acergy has a fleet of 23 units when including newbuilds not yet delivered. Acergy’s fleet is on average about 4 years older than Subsea 7’s (approximately 11 versus seven years)
26
Acergy: Fleet overview Vessel Vessel Year built/ Size Owned/
Vessel name main type sub-category converted (length m) leased
Existing fleet1 Acergy Piper Barge Pipelay 1975 Owned2 Acergy Orion Barge Derrick lay 1977 Owned3 Acergy Hawk CSV Construction support 1978 94 Owned4 Acergy Polaris Barge Pipelay 1979 Owned5 Acergy Osprey CSV/DSV Construction support/diving 1984 102 Owned6 Acergy Harrier CSV Construction support 1985 83 Owned7 Acergy Legend CSV Construction support 1988 64 Owned8 Acergy Discovery CSV Subsea construction 1990 125 Owned9 Acergy Falcon CSV Rigid pipelay 1997 153 Owned10 Acergy Eagle CSV Subsea construction 1997 142 Owned11 Polar Bjørn IMR IMR/Survey 2001 90 Charter12 Far Saga IMR IMR/Survey 2001 89 Charter13 Acergy Condor CSV Flexible pipelay 2002 145 Owned14 Toisa Proteus CSV Subsea construction 2002 132 Charter15 Normand Mermaid IMR IMR/Survey 2002 90 Charter16 Acergy Petrel IMR IMR/Survey 2003 77 Charter17 Pertinacia CSV Flexible pipelay 2007 130 Charter18 Polar Queen CSV Subsea construction 2007 148 Charter19 Acergy Viking IMR IMR/Survey 2007 98 Charter
Ordered/under construction20 Sapura 3000 CSV Heavy lift/pipelay 2008 151 Owned21 Skandi Acergy CSV Subsea construction 2008 157 Charter22 Acergy Havila DSV Diving 2010 120 Owned23 Oleg Strashnov CSV Heavy lift 2010 NA Owned
Source: Acergy; Clarksons; Arctic Securities
27
Financials
P&L We estimate 2008 revenues in line with Acergy’s guidance of USD 3.0 billion, as there are several large scale projects coming towards completion through the year, and furthermore as Acergy will take delivery of only one new vessel through the year. As such, Acergy should have a fairly good overview of full year estimates for 2008. The company will also have high drydock levels during 2008, leaving limited room for additional (unexpected) increase in revenues. For 2007 (during its regular Pre-close Trading update and outlook 29 November 2006) Acergy first guided a topline “in the region of USD 2.3 billion”, but then had to upgrade this in its Q2 presentation to USD 2.7-2.8 billion. We see limited (upside) risk of this happening through 2008. We estimate a 2008 adjusted EBITDA margin of 16.7%, in the lower end of consensus, and fairly in line with realized adjusted EBITDA margin for 2007. Acergy has guided “moderate improvement on the adjusted EBITDA margin achieved in 2006 and targeted for 2007”, likely meaning 100-200 basis points. However, given previous disappointments to this, as well as ongoing challenges with the Mexilhao project, we estimate a flat margin development through 2008. Going forward, we are also in the lower range of consensus with regard to EBITDA margin estimates. We estimate an adjusted EBITDA margin of 17.6% in 2009 (versus consensus 18.8%) and 18.0% in 2010 (versus consensus 19.1%). We believe projects like Mexilhao, increasing share of revenues from Brazil, and some major projects to be executed in a high inflation environment going forward will poise challenges for Acergy’s ability to improve EBITDA short to medium term. Still, our estimates are based on gradual improvement in all of the regions where Acergy operates. Our estimates for development in regional EBIT (Net Operating Income) margins per region, as well as the correspondent development in overall EBITDA margin versus consensus expectations, are illustrated below. We don’t view it as realistic that Acergy will realize significant margin improvements in the North Sea region (NEC), as they have had a presence there for a long time already (i.e. likely hard to up prices), and as costs are rising. AFMED margins will depend on successful project execution on major projects, and we assume a moderate, but continuous improvement in margins in this region. SAM (Brazil) and AME are the “wildcards”, and significant improvements in these regions, can lift overall margins. This especially applies to Brazil due to higher relative share of backlog. However, given continued poor performance in this region, both from Acergy and key peer Subsea 7, we don’t see this as an easy-fix improvement in the short-medium term. Overall, Acergy’s operational expenses have been fairly stable and moved in line with revenues. This also applies to SG&A levels. To us, this indicates a so far limited scale effect in Acergy’s business, and as such, we so far see limited grounds for estimating significant cost improvements.
We believe Acergy will likely meet its 2008 revenue guidance and estimate 2008 revenues to be around USD 3.0 billion
We assume moderate margin improvement in NEC and AFMED
Improving performance in Brazil is one of the key areas to lift overall earnings
Limited history of scalability (or opex improvements) so far
We believe it will be challenging for Acergy to improve EBITDA margins significantly and estimate a somewhat conservative margin development going forward
28
Assumptions for regional EBIT margin development and overall EBITDA margin development
-30
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
2004 2005 2006 2007 2008E 2009E 2010E
AFMED
NEC
SAM
AME
(%)
Income (loss) from operations (EBIT) margins per region, yearlyCorresponding EBITDA margin development (Actual, Arctic Securities estimates and consensus estimates)
-6
-3
0
3
6
9
12
15
18
21
2003 2004 2005 2006 2007 2008 2009 2010
-5,4-5,4
10,810,8
12,612,6
16,916,9 16,616,617,3
16,7
18,7
17,6
19,1
18,0
EBITDA margin (%)
EstimatesEstimates
Source: Arctic Securities
Longer term, Acergy may be able to improve EBITDA margins, in line with the company’s stated ambition. This will depend on positive closure on large West-Africa projects (Block 15 and Pazflor), continued improvement of bidding margins and strong execution, including management of sub-suppliers and cost inflation. We estimate a top line growth to around USD 3.3 billion for 2009E and further to USD 3.6 billion in 2010. Corresponding EBITDA is USD 500 million for 2008, USD 580 million for 2009 and USD 649 million for 2010. P&L (USDm) 2005 2006 2007 2008E 2009E 2010E
Revenues 1,529 2,124 2,663 2,988 3,306 3,610
Operating expenses (1,284) (1,730) (2,121) (2,389) (2,638) (2,873)
Gross Profit 244 394 543 598 668 738
SG&A (120) (149) (228) (236) (248) (271)
Other operating costs and revenues (net) 7 0 0 (3) (3) (3)
Share of net income of non-consolidated JVs 27 41 32 35 50 65
Net Operating Income (EBIT) 157 287 347 394 467 529
Net financials (23) 15 (6) (6) (3) (3)
Net income before taxes from continuing operations 135 302 341 388 464 526
Income tax provision (13) (74) (212) (140) (162) (184)
Net Income from cont. Operations 111 221 129 248 302 342
Inc/loss from disc. Operations 10 (19) 6 3 4 0
Gain on disposal from cont. Operations 27 35 0 0 0 0
Net Income 149 237 135 251 306 342
Gross profit margin 16.0% 18.6% 20.4% 20.0% 20.2% 20.4%
EBITDA (adjusted) 193 358 441 500 580 649
EBITDA (adjusted) % 12.6% 16.9% 16.6% 16.7% 17.6% 18.0%
Source: Arctic Securities Cash flow statement Acergy has changed its reporting from US GAAP to IFRS effective from Q1 2008. As such, we do not put too much emphasis on historic cash flows, and thus have only included the 2007 CF below. One of the most important elements to pay attention to in Acergy’s cash flow is the development in net operating assets, or working capital, as Acergy has fairly large current assets and current liabilities items in its balance sheet. This is due to the nature of large lump sum projects and controlling working capital is important.
29
We estimate a capex of USD 300 million for 2008, in line with company guidance after changing to IFRS (2008 capex is somewhat up compared to previous guidance, due to re-classification of some maintenance costs). We estimate a capex of USD 175 million for 2009 and 2010. Furthermore, we expect the company to continue to pay out dividends, with an annual level of around USD 38-40 million. This excludes share buybacks. Cash flow statement (USDm) 2007 2008E 2009E 2010E
Net Profit 135 251 306 342
D&A and impairments 94 106 113 120
WC - Other current assets (trade and other receivables) (174) (104) (102) (97)
WC - Current liabilities (ST liabilities) 174 130 127 122
Chg. Assets held for sale (other current assets) 16 1 0 0
Chg. Other non-current liabilities (non int bearing) 17 10 10 9
Cashflow from operating act. 261 394 454 495
Net investment (235) (300) (175) (175)
Chg. Other non-current assets (45) (44) 0 0
Cashflow from investing act. (280) (344) (175) (175)
Net debt 15 3 0 0
Net equity / dividend (131) (25) (38) (38)
Cash flow from financing act. (116) (22) (38) (38)
Change in cash (135) 28 240 282
Source: Arctic Securities Balance sheet Acergy has a healthy balance sheet with net cash of around USD 200 million at the end of 2007. The company has limited long term debt and significant assets. Acergy owns roughly half of its fleet of 23 vessels (including newbuilds). The remaining vessels are chartered on long term contracts. Other important items on Acergy’s balance sheet are short term assets and short term liabilities. Given a strong performance and gradual limitations to future capex, Acergy should have a decent dividend capacity. Balance sheet (USDm) 2007 2008E 2009E 2010E
Cash and cash equivalents 583 611 851 1,133
Other current assets (trade and other receivables) 818 922 1,023 1,121
Assets held for sale 1 0 0 0
Fixed assets (PPE) 814 1,008 1,070 1,125
Other non-current assets 211 255 255 255
Total assets 2,427 2,796 3,200 3,634
Current liabilities (ST liabilities) 1,100 1,230 1,357 1,479
Other non-current liabilities (non int bearing) 121 131 140 149
Long term debt 387 390 390 390
Shareholders equity 819 1,045 1,313 1,616
Total equity and liabilities 2,427 2,796 3,200 3,634
Net debt (196) (221) (461) (743)
Source: Arctic Securities Quarterly P&L As mentioned previously, quarters are lumpy for Acergy’s business. This is due to uneven recognition of revenues and profits on major projects. We have expected quarterly seasonality to continue in the North Sea due to harsh weather in the winter season (usually). Furthermore, we have noticed that Q4 numbers for the AFMED region historically have been somewhat stronger than other quarters, and we have expected this to continue forward. These two effects lead to some seasonality in our quarterly P&L estimates.
30
ACY just delivered its Q1 results, somewhat below consensus expectations. Revenues came in at USD 636 million versus consensus of USD 684 million. Adjusted EBITDA came in at USD 102 million versus expected USD 108 million, thus adjusted EBITDA margin was 16.0% versus expected 15.8%. Management confirmed its guidance for 2008 topline (USD 3.0 billion) and margins (“moderate improvement over 2006 and 2007”). Management remained bullish on long term outlook, but warned of continued short term cyclicality.
Quarterly P&L (USDm) Q1/07 Q2/07 Q3/07 Q4/07 Q1/08E Q2/08E Q3/08E Q4/08E
Revenues 566 634 709 754 636 715 781 856
Operating expenses (470) (509) (547) (595) (513) (576) (627) (674)
Gross Profit 96 125 163 160 123 139 155 182
SG&A (48) (56) (56) (67) (60) (54) (59) (64)
Other operating costs and revenues (net) 0 0 (0) 0 (1) (1) (1) (1)
Share of net income of non-consolidated JVs 2 14 11 5 11 8 8 8
Net Operating Income (EBIT) 50 83 117 98 74 93 103 125
Net financials 0 8 1 (15) (4) (1) (1) (1)
Net income before taxes from continuing operations 50 91 117 83 70 92 102 124
Income tax provision (16) (43) (40) (113) (29) (32) (36) (43)
Net Income from cont. Operations 34 48 77 (30) 41 60 67 81
Inc/loss from disc. Operations 4 1 0 1 0 1 1 1
Gain on disposal from cont. Operations 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net Income 38.2 48.8 76.8 (29.3) 41.1 60.6 67.6 81.7
Gross profit margin 16.9% 19.7% 22.9% 21.2% 19.4% 19.4% 19.8% 21.2%
EBITDA (adjusted) 71 105 141 124 102 119 129 151
EBITDA (adjusted) % 12.5% 16.6% 19.8% 16.5% 16.0% 16.6% 16.6% 17.6%
Source: Arctic Securities
31
Valuation
We have valued Acergy using both peer group multiples and DCF. Peer group valuation multiples We identify a peer group for Acergy consisting of European offshore E&C companies (TEC, SPM), its key Norwegian competitor (SUB), and Norwegian and US based subsea equipment suppliers (AKVER, NOV, CAM, FTI and DRQ). ACY is currently trading at 17.8x 2008 and 14.6x 2009 P/E, and 8.3x 2008 and 6.8x 2009 EV/EBITDA. The peer group is currently trading at 15.0x 2008 and 12.5x 2009 P/E, and 8.5x 2008 and 6.9x 2009 EV/EBITDA. ACY is thus trading at a premium compared to peers on P/E and in line on EV/EBITDA. Comparing ACY to its key subsea peers (Subsea 7, Saipem and Technip), we note that ACY is currently trading at 17.8x 2008 P/E vs. a 15.0x 2009 P/E average for the core peer group, implying an 16% premium. We do not see this as justified by ACY’s recent performance.
Peer Group valuation table Price MV Free cash flow yield
Name (local) (USDm) 2008E 2009E 2010E 2008E 2009E 2010E 2008E 2009E 2010E 2008E 2009E 2010E 2008 2009 2010
Aker Kvaerner Asa 124.5 6,785 (555) (881) (1,027) 12.0x 9.8x 8.5x 6.7x 5.4x 4.5x 7.4x 5.9x 5.1x 11.9% 14.0% 14.8%
National Oilwell Varco 69.6 24,918 (1,433) (3,281) (4,989) 14.9x 12.9x 11.0x 8.4x 6.8x 5.5x 9.1x 7.3x 6.0x 8.5% 10.6% 11.9%
Cameron International Corp. 46.5 10,165 (110) (347) (447) 18.2x 15.4x 13.2x 10.1x 8.6x 7.4x 11.5x 9.8x 8.2x 7.9% 9.1% na
Fmc Technologies Inc 62.6 8,107 (60) (560) (664) 21.6x 18.4x 15.6x 12.0x 9.7x 7.6x 13.7x 11.0x 8.9x 6.8% 8.3% na
Dril Quip 51.8 2,115 (246) (336) (428) 17.3x 14.6x 12.7x 10.3x 8.2x 7.1x 10.6x 8.9x 7.8x 7.7% 7.7% na
Saipem SpA (Ordinary) 27.1 18,887 3,670 4,280 3,778 17.2x 14.6x 11.5x 10.1x 8.5x 6.9x 13.7x 11.5x 9.3x 10.5% 13.0% 13.7%
Technip SA (FR Listing) 56.3 9,537 (2,449) (2,618) (3,181) 15.8x 13.9x 11.9x 6.0x 5.1x 4.2x 7.7x 6.8x 5.3x 10.0% 12.3% 11.9%
Subsea 7 Inc. 118.8 3,469 266 (4) (441) 13.6x 11.0x 9.8x 7.1x 5.5x 4.5x 8.8x 7.1x 5.5x 12.0% 14.0% 17.0%
DOF Subsea ASA 28.6 558 961 1,184 990 9.3x 5.0x 4.2x 8.4x 5.9x 4.7x 11.8x 7.8x 6.2x na na na
DeepOcean A/S 23.0 403 260 281 na 9.7x 8.8x 7.7x 6.2x 5.6x na 9.8x 8.8x na na na
Average all 15.0x 12.5x 10.6x 8.5x 6.9x 5.8x 10.4x 8.5x 6.9x 9.4% 11.1% 13.9%
Average - Equipment suppliers 18.0x 15.3x 13.1x 10.2x 8.3x 6.9x 11.2x 9.2x 7.7x 7.7% 8.9% 11.9%
Average - Subsea I&C 15.5x 13.2x 11.1x 7.7x 6.4x 5.2x 10.1x 8.5x 6.7x 10.8% 13.1% 14.2%
Acergy SA (Ordinary) 117.5 4,556 (221) (461) (743) 17.8x 14.6x 13.1x 8.3x 6.8x 5.6x 10.6x 8.4x 6.9x 2% 6% 7%
Premium/(discount) 16% 15% 19% -2% -2% -3% 2% -1% 0%
Net debt (USDm) P/E EV/EBITDA EV/EBIT
Source: Facset; Arctic Securities
12 months forward looking P/E and EV/EBITDA multiples Looking at 12 months forward P/E and EV/EBITDA multiples, we note that both Acergy and its closest peer, Subsea 7, are trading at low levels compared to historic numbers. Acergy is currently trading at about P/E 17.8x for 2008 (15.4x on consensus estimates), after having come somewhat up from all-time low 12 month forward P/E of around 12x. Based on our estimates, ACY is currently trading at a 12 month forward P/E of around 16.5x (14.2x on consensus estimates). The low trading level indicates that the market may be pricing in an ending of the cycle, something we don’t view as very likely, given our strong belief in a continued boom for deepwater activity, and the fact the subsea companies tend to be late-cyclical. On the other hand, we don’t see much room for significant further appreciation, unless performance improves going forward. Margin improvements should however if they occur provide room for multiple-expansion.
Acergy and Subsea 7 are trading in the low range compared to historic numbers
Peer group consisting of Norwegian and European subsea installation and construction peers and key Norwegian and US subsea equipment peers
32
12 months forward looking P/E and EV/EBITDA multiples since 2003
14
6
8
P/E
16
26
28
18
20
22
12
30
0
10
24
2003 2004 200820062005 20072003 2004 200820062005 2007
7
6
5
4
14
13
12
11
10
EV/EBITDA
9
8
0
2003 2004 200820062005 20072003 2004 200820062005 2007
SUB
ACY
SUB
ACY
SUB
ACY
SUB
ACY
Source: Factset; Arctic Securities
12 months forward looking P/E multiples since January 2006
0
11
12
13
14
15
16
17
18
19
20
P/E
Jan-06 Apr-06 Jul-06 Jul-07Jan-07 Jan-08Oct-06 Apr-07 Oct-07 Apr-08Jan-06 Apr-06 Jul-06 Jul-07Jan-07 Jan-08Oct-06 Apr-07 Oct-07 Apr-08
SUB
ACY
SUB
ACY
Source: Factset; Arctic Securities
On average, analysts have been downgrading ACY and SUB EPS estimates since autumn 2006 Looking at development in consensus EPS estimates for ACY and SUB, we note that analysts systematically have been downgrading these more or less continuously since around September 2007 for Acergy. For Subsea 7, the picture is more mixed, with what seems to be a first session of downgrades from October/November 2006 to April/May 2007. Thereafter followed a short period of upgrades, before SUB again was downgraded in line with Acergy from around September 2007.
Analysts have consistently been downgrading EPS estimates since October/ November2006
33
Since EPS estimates peaked, ACY’s 2008 consensus EPS estimate is down about 17% from USD 1.7 to USD 1.4, the 2009 estimate is down 19% from USD 2.1 to USD 1.7 and the 2010 estimate down 16% from USD 2.4 to USD 2.1. Corresponding for SUB, expected EPS for 2008 is down 24% from USD 2.3 (Oct/Nov 2006) to USD 1.7, 2009 estimate is down 24% from USD 2.7 (January 2007) to USD 2.0 and the 2010 estimate is down 8% from USD 2.6 to USD 2.4.
Acergy: Development in consensus EPS estimates since February 2006
1,3
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
1,7
2,1
2,4
Sep-07
Jun-06
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
1,4
1,7
2,1
45d
1,0
1,5
2,0
2,5
1,0
EPS (USD)
1,0
Feb-06
Mar-06
Apr-06
Oct-07
May-06
Jul-06
Aug-06
Sep-06
Oct-06
3,0
-16%
-19%
-17%
Adjustment from peak to now (%)
2008 2009 201020082008 20092009 20102010
Source: Factset; Arctic Securities
Subsea 7: Development in consensus EPS estimates since February 2006
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
2,6
Sep-07
1,9
1,4
Feb-06
Mar-06
Aug-07
May-06
Jun-06
Jul-06
Aug-06
2,1
Sep-06
Apr-06
Oct-06
2,3
Nov-06
Dec-06
2,7
Jan-07
Oct-07
Nov-07
Dec-07
Jan-08
Apr-08
1,7
2,0
2,4
Feb-08
Mar-08
45d
1,0
1,5
2,0
2,5
3,0
EPS (USD)
2008 2009 201020082008 20092009 20102010
-8%
-24%
-24%
Adjustment from peak to now (%)
Source: Factset; Arctic Securities We believe ACY consensus will have to come further down as margin growth expectations are too positive given complexity of projects, industry cost inflation, a larger share of revenues in Brazil and from other NOC-dominated areas. DCF valuation Our DCF valuation of Acergy is sensitive towards several key elements, mainly our overall assumption for cycle length, and long-term level for EBITDA margins. We have estimated a continued topline growth to and including 2012. After that, we assume a cyclical drop of -20% in revenues, affecting 2013 top line. In our estimates, this moves from around USD 4.2 billion in 2012 to about USD 3.3 billion in 2013. We assume a long term growth rate of 2.5%.
We expect consensus to come down further
34
Our long term EBITDA margin is currently estimated to 18%, something we believe might be ambitious, given historical levels of around 7-8% over the period 1999-2006. On the other hand, the industry has overall demonstrated a consistent EBITDA margin improvement, and we expect to see these margins sustain. However, should numbers from the sector companies start indicating lower margins, we will adjust this quickly. As mentioned, our DCF valuation is sensitive towards EBITDA margin assumptions, and we have therefore illustrated a sensitivity curve for this below.
DCF assumptions (USDm) 2008 2009 2010 2011 2012 2013 2014
Revenues 2,988 3,306 3,610 3,881 4,172 3,338 3,588
Revenue growth YoY 12.2% 10.7% 9.2% 7.5% 7.5% -20.0% 7.5%
EBITDA 500 580 649 698 750 601 646
EBITDA margins 16.7% 17.6% 18.0% 18.0% 18.0% 18.0% 18.0%
D&A (106) (113) (120) (126) (132) (138) (144)
EBIT 394 467 529 572 618 463 502
Tax on EBIT (164) (185) (200) (216) (162) (176)
Capex (300) (175) (175) (139) (145) (152) (158)
Change in WC 37 35 34 2 2 (6) 2
Cash flow 277 322 361 391 281 314
Terminal value - - - - - 4,594
Source: Arctic Securities
Using a WACC of 9.5%, we find an end 2008 DCF value per share in ACY of NOK 117.0. DCF summary (USDm) End-2008
WACC 9.5%
NPV forecast period 1,429
Terminal value 2,665
Net debt - adjusted for div. (246)
MV (USDm) 4,340
Shares 191.0
Equity value per share (USD) 22.7
Equity value per share (NOK) 117.0 Source: Arctic Securities Note that we have used a NOK/USD assumption of 5.15, in line with six months forward price.
35
Long term EBITDA margin assumption sensitivity The DCF valuation of ACY is sensitive to long term EBITDA margins. If long term margins fall to 10%, we see and end 2008 DCF value of NOK 69.4 per share. DCF value sensitivity to long term EBITDA margin assumption
0
20
40
60
80
100
120
140Share price
1011121314151618 171920
Long term EBITDA margin assumption (%)
Source: Arctic Securities Valuation summary We initiate coverage on Acergy with an Arctic Sell recommendation and target of NOK 115, in line with our end 2008 DCF value of NOK 117.0. Acergy also seems expensive on key multiples compared to peers, and we would expect consensus to come down further.
Arctic Sell. Target NOK 115
36
Subsea Market: Introduction & industry overview
The subsea sector covers subsea equipment manufacturers, subsea installation companies, as well as other service companies. Equipment manufacturers produce relevant subsea infrastructure (the “hardware”), while service companies mainly focus on subsea construction and installation of this, in addition to trenching and pipelay work, and IMR services (Inspection, Maintenance and Repair). The main activities within the subsea space often fall in-between drilling and installation for production. Expected E&P/drilling activity and expected growth in floating production solutions are hence important indicators for subsea activity (and often easier to track). Illustrative oil service value chain
Seismic Drilling Subsea Production
• PGS • TGS Nopec • Western Geco • CGG Veritas
• Seadrill• Awilco• Transocean • FOE
• Acergy • Subsea 7 • Technip• Aker Kværner• FMC
• SBM • Modec • Prosafe • BW Offshore
Value chain illustration:
Company examples:
Source: Arctic Securities Even though subsea activity is highly related to field development, other important drivers such as IMR-activity, life-of-field management and EOR measures also affect the growth and activity of subsea companies. As such, it is difficult to place the subsea segment strictly in a linear value chain order, and the activity of the subsea companies spans several parts of the value chain. Overview of key players The subsea construction and installation business is dominated by four companies: Saipem, Technip, Acergy and Subsea 7. Of these, the latter two are mainly pure play SURF (Subsea, Umbilical, Risers and Flowlines) focused, though both still have IMR business, while Saipem and Technip are large, integrated E&C companies that typically take on large scale field developments. The subsea equipment manufacturing space is also dominated by four publicly traded companies; Aker Kværner, FMC Tehcnologies, Cameron and DrilQuip, and Vetco Gray which is owned by GE. Of the four publicly traded companies, FMC and Cameron are the largest. Aker Kværner covers a broad scope of activities such as large scale EPC contracts and the production of drilling equipment for drilling rigs, in addition to subsea activities. Within subsea, Aker Kværner delivers a full scope of subsea production systems and is the only player that also offers umbilicals. DrilQuip is the smallest of the companies, and more of a niche player. The subsea companies often overlap each other with regard to the product and service spectre they offer. The most pure head to head competitors are Acergy and Subsea 7. On large scale projects, the companies often cooperate, even though they are competitors, as large scale field developments are resource intensive and often require a combination of assets, production capacity and people. A good example is the Pazflor project, where FMC Technologies will produce the subsea production and processing equipment, and Technip and Acergy produce and install the flowlines, umbilicals and risers. In this case, Technip and Acergy will both install water
Subsea includes equipment manufacturers, subsea installation and construction companies and other service companies
Saipem, Technip, Acergy and Subsea 7 are the leading global subsea construction and installation players
The subsea companies’ services overlap each other and the companies often cooperate on projects
37
injection lines, production flowlines and umbilicals, as well as provide two subsea vessels each for the installation work. Below we have provided and overview of the main subsea players within the two key subsea segments.
38
Overview of the subsea industry
Serv
ice
com
pani
es (
subs
eain
stal
lati
on a
nd c
onst
ruct
ion)
Equi
pmen
t co
mpa
nies
(su
bsea
hard
war
e pr
oduc
ers)
Companies
7,88
3,06
3,71
16,96
Market cap. USD billion
9,05
6,63
1,95
6,05
Main shareholders
SiemIndustries (38.2%)
ENI (42.9%)
Aker Holding AS (40.3%)
Pure subseafocus (share of revenues) Short description & key focus areas
• Pure play subsea installation and construction company with focus on the SURF segment
• Main geographic stronghold in West Africa and the North Sea
• Subsea installation and construction company with focus on the SURF segment
• Also has IRM business• Main geographic stronghold in the North Sea
• Integrated engineering, tech. and construction company• Focus on the oil/gas and petrochemicals industries • Revenue distribution: ~32% subsea, 17% offshore, ~51%
onshore
• Large, integrated turnkey contractor experienced in taking on large scale field development projects
• Three global business units: Onshore, Offshore & Drilling
• Integrated EPC/turnkey engineering provider. Focus on large scale project developments
• Subsea division includes production of Christmas trees, manifolds and umbilicals
• Highly specialized subsea equipment manufacturer and world leading on several technological breakthroughs
• 79% of revenues from Energy Systems division, of which most is subsea
• Provide fully integrated subsea equipment packages • Provide subsea systems, flow control technology, valves,
surface systems etc.
• Highly focused subsea equipment manufacturer • Three divisions: Subsea, Surface and Offshore Rig Equip. • Subsea related equipment majority of revenues
• Oil & gas business with USD 6.8 billion in 2007 revenues • Six BA’s: Subsea drilling systems, subsea production
systems, mud line equipment, drilling equipment, floating production solutions and surface drilling & production
Not listed separately. Part of GE Oil & Gas
GE (100%)
Note: Pure subsea focus (Harvey balls) roughly estimated
Source: Companies; Arctic Securities
39
Subsea Market: Global subsea capex will continue to grow
We estimate the global subsea market to continue to display strong growth going forward, based on key macroeconomic and industry specific drivers, as well as estimates for subsea capex going forward:
• The oil market will continue to be tight and oil prices will remain high. We forecast an average oil price of USD 85 per bbl, growing thereafter in line with inflation
• Deepwater activity will increase strongly, resulting in discoveries that need subsea development. Contracted deepwater drilling years (>5,000 ft), have increased around 7x from January 2005 to February 2008 and current backlog is around 560 rig years (distributed on about 123 rigs). Infield estimates global subsea capex to grow 2% annually over 2008-2012, from USD 19.1 billion in 2007 to USD 22.9 billion in 2012. We think the risk to this is on the upside and expect even stronger growth, also supported by strong industry cost inflation which should also contribute to growth in subsea spending above Infield estimates
• Discoveries are continuously smaller and in deeper waters, making them more suitable for subsea developments combined with floating production solutions rather than large scale infrastructure investments
• Reservoirs are deeper and more complex to handle, requiring increasingly complex wells and injection systems to produce oil and gas efficiently
• Petroleum provinces around the world are maturing rapidly, resulting in increased need for EOR (IOR) measures. These measures usually rely heavily in subsea services
To a large extent, estimated subsea spending over the coming years is a result of significant deepwater discoveries in recent years, especially offshore West-Africa and Brazil. Currently, the world is about to embark on the greatest deepwater E&P cycle in the history of mankind, as e.g. evident by the record strong backlog of already contracted deepwater drilling years. This will yield discoveries that will contribute to a long term strong demand for the subsea sector. Estimated global subsea expenditure We estimate the total global subsea expenditure to continue to grow going forward. The average annual growth in global subsea expenditure over the last five years has been around 19.5% based on estimates from Infield. Global subsea expenditure grew from USD 9.3 billion in 2003 to USD 19.1 billion in 2007. This takes into account both volume growth and industry cost inflation. Going forward, Infield estimates a growth in subsea expenditure of around 2% annually over the period 2008-2012. Global expenditure is estimated to from USD 19.1 billion in 2007 to USD 21.9 billion in 2012. The forecasted annual expenditure is however kept fixed in 2006 value terms, hence illustrating only the expected volume growth. Taking into account cost inflation, we would expect to see significantly higher growth in nominal terms. Furthermore, the strong growth from 2003 reflects that the growth over 2003-2007 has come from a small base, whereas annual expenditure is now expected to stabilize at a higher level. During 2003-2007, we have also seen significant projects brought on stream. The continued high level illustrates the expectation that this will continue, with new, significant projects continuing to be developed. A factor that potentially will limit the volume growth is supply side growth limitations. Although a relatively large number of vessels are ordered lately, the contractor industry to a certain degree remains sold out. Furthermore, strained organizational capacity on the customer side (oil companies and other oil service companies) may also contribute to hold back growth somewhat. Many oil companies have been capacity constrained over
Global subsea capex will continue to grow
Deepwater discoveries made over the last couple of years are key in driving continued growth in subsea spending
Infield estimates global subsea capex to grow 2% annually during the period 2008-2012
40
the last two-three years, especially on the people-side, and this may cause delays in project sanctioning and execution. Global subsea expenditure has grown 20% annually over the last 5 years
0
2
4
6
8
10
12
14
16
18
20
22
12.3
8.69.3
North America
M. East & Caspian
South & Latin America
Europe
Australasia
Asia
Africa
201220112003 2004 2005 2008
USD billion
19.5%
2007
21.921.7
19.921.2
20.419.1
15.0
201020092006
1.9%
Global subsea expenditure 2003-2012, USD billion
Note: Data includes four categories: Drilling and Comletions, Equipment, Pipelines and Control Lines (umbilicals)
Source: Infield Subsea Market Update 2008-2012; Arctic Securities Though we believe Infield is a reliable data source on the subsea market, we believe their growth forecasts are conservative and that the risk is on the upside. This is based on the observed strength of underlying drivers: Overview of large future projects, upcoming known contract awards, signals & forecasts from market participants and our estimates for growth in the floater sector. In addition, Infield has over the years jacked up their estimates consistently, both as a result of stronger than expected inflation, and as a result of higher than expected activity (see illustration below). Previous subsea forecasts have continuously been undershooting observed growth
Source: Infield Subsea Market Update 2008-2012; Arctic Securities
We believe Infield’s growth estimate is conservative
41
Order backlog and company forecasts support strong growth forward The main subsea companies have all experienced strong revenue growth over the last few years. The current record strong (and still growing) order backlog is however more interesting for the future revenue growth. Many subsea projects, especially the large scale ones, are ordered and scheduled for several years ahead. As companies usually book revenues and profits according to progress with a large share towards project completion, we expect revenues to continue to grow going forward.
Order backlogs for the subsea companies have demonstrated very strong growth
10,9519,706
10,6188,8388,7758,704
6,719
4,008
0
2,000
4,000
6,000
8,000
10,000
12,000
Q1/06Q2/06Q3/06Q4/06Q1/07Q2/07
NOK million +15%
Q4/07Q3/07
3,700
2,700
1,9001,500
1,000900
0
1,000
2,000
3,000
4,000
5,000
2002 2003 2004 2005 2006 2007
+33%
USD million
4,2153,748
1,3551,242
0
1,000
2,000
3,000
4,000
5,000
2004 2005 2006 2007
+50%USD million
AKVER Subsea FMC Technologies
Acergy Subsea 7
3,2002,587
2,1941,788
1,026
0
1,000
2,000
3,000
4,000
5,000
2003 2004 2005 2006 2007
+33%
USD million
CAGR 02-07
CAGR 03-07
CAGR 04-07
Equi
pmen
tCo
nstr
ucti
on &
inst
alla
tion
CAGR Q1/06-Q4/07
Source: FMC Technologies; Aker Kværner ; Acergy; Subsea 7; Arctic Securities
The existing order backlogs are at record levels for the subsea players, but still they continue to secure more contracts and grow backlogs further. We expect this to continue, as e.g. several large West-African projects in Angola and Nigeria start awarding contracts. Acergy’s order intake so far in 2008 is a good example of continued building of backlog, the company having secured as much as USD 1,165 million in new contracts over three months.
Subsea companies’ order backlogs are at record levels, supporting strong revenue growth forward
Order intake is still large and major West-Africa contracts are still to be awarded
During the first three months of 2008, Acergy has seen an order intake of USD 1,165 million
42
Acergy: Order intake per year
1,165
1,936
1,2761,246
995
320370
0
500
1,000
1,500
2,000
2002 2003 2004 2005 2006 2007 2008
USD Million
Contracts secured during the first 3 months of 2008
Source: Acergy; Arctic Securities The order backlogs of the subsea companies also provide visibility with regard to expected revenues going forward, as the companies quarterly provide an overview of how the revenues are distributed going forward. At end of year 2007, Acergy reported a distribution of 70% of backlog to be realized during 2008, 21% in 2009 and 9% in 2010. Subsea 7’s backlog ranges one year longer into the future and distribution were 41% for 2008, 24% for 2009, 15% for 2010, and 20% for 2011 and beyond. A part of Subsea 7’s long backlog duration is due to two long term charters with Shell in the North Sea, running to 2012. Acergy and Subsea 7: Contract backlog split over coming years
Subsea 7: Distribution of order backlog
647
4.000
1.500
3.000
2011
1.000
0
4.500
1.710
4.215
841500
2.000 1.017
2009
USD Million
3.500
2010
2.500
2007 2008
Total revenues 2007: USD 2,187 million
Acergy: Distribution of order backlog
4.500
4.000
0
1.000
1.500
2.000
2.500
3.000
500
USD Million
3.500 3.175
2009
2.223
2008
667
2007 2010
286
Total revenues 2007: USD 2,663 million
Source: Acergy; Subsea 7; Arctic Securities Given the long term nature of the backlog work to be realized, and also the long term nature of field development planning & coherent negotiations between oil companies and sub-contractors, we believe the subsea companies generally have a rather good overview of the future outlook of their industry. Furthermore, contracts such as some of the large West-Africa contracts entered into now are for work running through 2010 and 2011, providing a rather good visibility with regard to outlook. The main risk factors that can distort the future outlook are macro-economic shocks affecting the industry, such as sudden and material changes in oil price outlook. This will naturally change the outlook of the entire oil services industry. Another key risk factor for the subsea companies are delays in contract awards and project sanctioning/FID among the oil companies, as this may cause pre-mature allocation of fleet and resources to specific areas. Except from these two main risk factors, we believe the subsea companies have a fairly good understanding of the future demand outlook. As such, we are re-assured on the market demand side by the recent guiding from several of the industry leaders. Acergy,
If assuming revenues in line with 2007 level (i.e. no growth), Acergy had some 83% of revenues “in the bag” already at year end 2007. Corresponding number for Subsea 7 was 78%
Macro-economic shocks and sharp oil price decline are the key risk factors that can distort the future outlook for the subsea companies
43
Subsea 7, FMC Technologies and Aker Kværner have all recently commented that they see strong markets for several years to come. Acergy’s CEO e.g. stated during the company’s Q4 presentation that “Market fundamentals remain as strong as ever” and that “we see strong growth going forward to 2010 and beyond”. Company forecasts of key industry equipment signal strong growth Company forecasts of key industry equipment yield additional support to our assumption of continued strong growth for the subsea companies. FMC has estimated a significant growth in the use of subsea wells, with installed base growing from about 1,000 subsea wells in the 1990s, to more than 3,500 during the 2000s. This is further supported by Infield that sees a demand of about 500 Christmas trees per year globally over the period 2008-2012. Another industry player, DrillQuip has put forward estimates that indicate a growth of 77% for floating production products, 61% for subsea tree products and 46% for floating drilling products over the period 2007-2011.
Company estimates for growth in subsea wells, subsea trees and floating production and drilling solutions
FMC: Estimated growth in use of subsea wellsDrilQuip: Estimated market growth
2007-2011 for key subsea related equipment
46
61
77Floating production products
Subsea tree products
Floating drilling products
0 10 15 20 25 30 35 40 455 50 55 60 65 70 75 80
Market growth (%)
1.100
1.500
2.200
50 100 400
60s 70s 80s 90s 2000s
0
1.000
1.500
2.000
2.500
3.000
3.500
4.000
500
Nr. of wells
# subsea trees completions
# subsea trees forecast (normalized)
Source: FMC Technologies; Quest Offshore; DrilQuip; Arctic Securities
Looking at Aker Kværner Subsea’s forecast for the market for Steel Tube Umbilicals (STUs), both with regard to value and volume, further underpins the estimated growth going forward. Over the period 2007-2011, then STU market is expected to grow between 79% and 3,300% (depending on region) compared to the period 2003-2006. Note that the strongest growth is from a very small base (virtually zero) in South America. It is however more interesting to note that both North Sea and the US GoM, which are more mature regions, are both expected to continue to grow strongly.
Several of the subsea companies have stated that they see a strong market for years to come
Subsea wells estimated to increase from around 1,000 in the 1990s to more than 3,500 during the 2000s
44
Expected market turnover in USD million for the STU market 2007-2011 vs. 2003-2006, growth and STU km installed
824
460
2003-2006 2007-2011
+79%
0
1.000
200
400
600
800
USD million
1184
2003-2006 2007-2011
+3.271%
0
1.000
200
400
600
800
USD million
955
303
2003-2006 2007-2011
+215%
0
1.000
200
400
600
800
USD million
519
81
2003-2006 2007-2011
+541%
0
1.000
200
400
600
800
USD million
689
356
2003-2006 2007-2011
+94%
0
1.000
200
400
600
800
USD million
1488 1684
19 315
988 1931253 1049
1168 1405
Market turnover, Steel Tube Umbilicals, 2003-2006
Market turnover, Steel Tube Umbilicals, 2007-2011
Km umbilicals installed
Market turnover, Steel Tube Umbilicals, 2003-2006
Market turnover, Steel Tube Umbilicals, 2007-2011
Km umbilicals installed
Source: Aker Kværner; Quest Offshore
Africa, SA (Brazil), and Europe will continue to be the largest markets Looking at a geographical breakdown of estimated global subsea expenditures going forward, we note that Africa (mainly West-Africa), South/Latin-America (for all practical purposes Brazil) Asia-Pacific and Europe continue to be the most important markets near term. At the end of 2007, Africa constituted an estimated 27% of the global market, South/Latin-America around 19% and Europe around 21%. Africa Africa’s relative share will grow going forward to 2012 and constitute around 30%. Africa also constitutes around 30% of the accumulated estimated subsea capex over the coming five-year period (2008-2012). The continent’s large share of expected subsea expenditures is mainly driven by large West-African projects to be developed over the next couple of years. West-Africa constitutes an estimated 83% of the capex spending in Africa, while the rest is North Africa, mainly Egypt. North America North America will be the second most important region, with around 20% of total spending when looking at accumulated spending over 2008-2012. This is driven by large projects in deepwater GoM (US side). North America’s relative share is the largest during 2008, and the relative importance of the region will be reduced towards the end of the forecasting horizon. This might change with additional discoveries and field development plans, though we mainly expect to see the impact of such potential events after 2012. Europe Though a mature region, Europe is still the third largest over the 2008-2012-period in terms of accumulated spending. This is driven by the North Sea. UK and Norway account for 48% and 45% of the estimated spending respectively. As the North Sea is maturing and average field sizes are decreasing, oil companies increase their EOR (IOR) efforts to
At the end of 2007, Africa constituted about 27% of global subsea capex
Africa’s relative share of the global subsea market is expected to grow to about 30% in 2012
Europe is a fairly mature subsea market, but is still the world’s third largest region in terms of spending
45
extract as much as possible of the remaining hydrocarbons. This contributes strongly to increased subsea activity, and is also one of the key reasons behind our rational for a continued strong subsea market also in the longer term (as long as oil prices don’t come down significantly). Another aspect that applies to more mature petroleum basins is the increased number of players (often smaller E&P companies) that usually explore more aggressively and to a larger extent pursue development of smaller prospects. This also contributes to sustained subsea activity in such areas. Looking at the North Sea (Europe in the chart below), it is interesting to note that this region’s share of subsea spending has been high during the period 2003-2007 and is also estimated to stay at high levels. We interpret this as a strong indication of the likely remaining subsea investments yet to be made also in less mature regions, as well as an indication of the sustainability of subsea spending in mature regions. South/Latin-America (mainly Brazil) Brazil is already one of the world’s most established subsea markets, and has seen many fields developed with subsea solutions. Brazil accounts for 96% of the forecasted capex in this region, driven by Petrobras. South/Latin America is estimated to account for around 17% of the world’s estimated total capex spending 2008-2012. Asia-Pacific Asia-Pacific will likely experience strong growth, but in relative terms, the size and importance of this region will first start to kick in towards the end of the forecasting period. This is also in line with the expectations of major subsea construction and installation operators such as Saipem, Acergy and Subsea 7. Several of these have put forward Asia-Pacific as a future focus area, and several have also already dedicated vessels, such as Acergy with the Sapura 3000 (JV with SapuraCrest Petroleum). Combining Asia and Australasia in the graph below, we note that the Asia-Pacific region accounts for about 16% of the accumulated spending over 2008-2012. The largest relative share of this is as mentioned from 2010/2011 and onwards.
Geographical distribution of global subsea spending on key regions Share of global subsea expenditure 2003-2012 (%)Share of global subsea expenditure 2003-2012 (%)
23% 28%27%
25% 21% 17% 17%20%
18%
6% 7% 11%
7% 6%
0%
19%
1% 4%3%1%1% 2%
19%
27%
45
2004
28%
3%
9%
32%
30
2005
30%
4%
17%
0%
21%
100
2006
27%
5%
19%
1%
23%
100
2007
27%
8%
14%1%
27%
100
2008
28%
0%19%
1%
23%
100
2009
29%
4%
17%
0%
20%
100
2010
33%
9%
15%
0%
17%
25%
2%
16%
0%
33%
23
2003
23%
100
2011
31%
10%
19%
2%
6%
100
2012
Africa
Asia
Australasia
Europe
South & Latin America
M. East & Caspian
North America
13%
18%
8%
30%
8%
17%
1%
20%
23
Total 2008-12
Source: Infield Subsea Market Update 2008-2012; Arctic Securities
Increased number of players help drive subsea activity
Brazil (Petrobras) accounts for 96% of South American subsea spending
Asia Pacific is commonly regarded as the key growth region going forward for the subsea companies – however, growth is mainly assumed to kick in for full from about 2010
46
Subsea capex breakdown on categories Pipelines is the largest sub-category within subsea expenditures, closely followed by drilling and completion, based on data from Infield. The sub-categories are defined as follows:
• Equipment: Procurement, installation and hook-up of Manifolds, PLEMS, Templates and Christmas trees.
• Pipelines: Mainly fluid transfer lines. Refers to all lines that are directly connected to a subsea unit
• Control lines: Mainly umbilicals that can transfer electric signals and control/hydraulic fluids in the same lines
• Drilling and Completions: Refers to the drilling and completion of wells on the seabed. Majority of this is not relevant for the subsea companies, as this mainly covers drilling costs
Pipelines/fluid transfer lines has been the largest sub-category continuously over time, and is also forecasted to continue to be so. It accounts for roughly 40% of the capex. We believe this, in addition to equipment and control lines are the three most relevant categories to look at, as drilling and completion, though accounting for a large share of subsea expenditure, contains a mixture of drilling related services (including drilling rig costs).
Pipelines is the largest sub-category within subsea expenditure
Global subsea expenditure per sub-category, 2003-2012, USD billionGlobal subsea expenditure per sub-category, 2003-2012, USD billion Sub-categories share of global subsea expenditure, 2003-2012 (%)Sub-categories share of global subsea expenditure, 2003-2012 (%)
39% 49% 51% 49%40% 38% 38%
46% 39% 43%
6%
20%
2003
32%
16%
4%
2004
27%
16%
5%
2005
32%
14%
5%
2006
37%
19%
5%
2007
34%
19%
5%
2008
39%
19%
4%
2009
35%
15%
5%
2010
38%
18%
5%
2011
35%
18%
4%
2012
39%
0
2
4
6
8
10
12
14
16
18
20
22
Pipelines
Drilling & completion
21.921.720.9
9.3
2003
Control lines
8.6
2004
12.3Equipment
2005
15.0
2006
19.0
20122007
20.4
2008 2011
21.2
2009 2010
USD billion
41%
37%
18%
Total 2008-12
4%
Source: Infield; Arctic Securities
Looking at estimated global subsea expenditure per sub-category and excluding the “Drilling and completion” sub-category, we note that pipelines account for 65% of accumulated spending 2008-2012, control lines another 7% and equipment 28%. We also note that the estimated growth over the period 2008-2012 is around 3% per year, compared to about 2% when including the category.
Subsea expenditure per sub-category, excluding “Drilling & completion” Global subsea expenditure per sub-category, 2003-2012, USD billionGlobal subsea expenditure per sub-category, 2003-2012, USD billion Sub-categories share of global subsea expenditure, 2003-2012 (%)Sub-categories share of global subsea expenditure, 2003-2012 (%)
9% 6% 7% 8% 8% 7% 7% 7% 7% 6%
60% 71% 71% 71%63% 61% 62%
70% 63% 66%
2009
23%
2010
30%
2011
28%
2012
31%
2003
23%
2004
22%
2005
21%
2006
29%
2007
31%
2008
31%
0
5
10
15
6.1
2003
5.9
2004
9.0
2005
10.3
2006
12.1
2007
12.5
2008
12.9
2009
13.7
2010
13.5
2011
14.2
2012
Equipment
Pipelines
Control lines
3.1%USD billion
7%
65%
28%
Total 2008-12
Source: Infield; Arctic Securities
Pipelines (i.e. subsea construction and installation of pipelines) is the largest subse capex sub-category
When xxcluding drilling and comopletion, pipelines accounted for about 65% of accumulated subsea spending 2008-2012
47
Pipeline construction – the most important segment for subsea installation and construction companies Construction and installation of pipelines is the most important sub-segment within subsea construction and installation. This is where both Acergy and Subsea 7 have the majority of their fleet, and the pipelaying assets (CSVs) are also the most important assets for these companies to achieve high utilization on. Pipeline construction and installation volume has been growing steadily over the last couple of years (2005-2007), in line with other subsea equipment and construction & installation services. About 4,500 miles of pipelines were installed during 2005. During 2007, this had grown to around 6,200 miles, something which is also expected as a minimum for 2008. For 2009 and 2010, about 4,900 and 4,000 miles are expected respectively. This is based on what is already either under construction or planned, and we would expect planned volumes to increase further beyond this as additional projects are being further developed (i.e. we don’t believe in a drop as illustrated below). Geographical distribution of volumes under construction and planned for 2008-2010 illustrates that West-Africa will be the largest region, with 2,600 miles of pipelines, corresponding to about 17% of total volume over the period. NW Europe and SE Asia regions are almost as large, with 2,400 miles of pipelines to be installed. Asia is a very large region, and by using e.g. Subsea 7’s term for geographical reporting, “Asia-Pacific”, and grouping e.g. SE Asia, ANZ and Indian Ocean below, we see that this would constitute as much as 4,650 miles of pipelines. Hence, we would not underestimate the importance of the Asian region for these companies going forward.
Offshore pipeline construction
2010
4.000
0
2008
6.2006.200
5.600
4.5004.900
4.000
2009200720062005
6.000
Pipeline miles
1.000
7.000
3.000
5.000
2.000
Offshore pipeline construction by year and nr. of miles
100
500
1.600Middle East
1.150GoM
1.050
NW Europe
South America
2.600
Central America
2.5001.500
1.700
SE Asia 2.400
1.050
Indian Ocean 550
Canada
500 3.0002.0001.0000
Med/Black Sea
West Africa
2.400
ANZ
Offshore pipeline construction by region 2008-2010
Installed Under construction PlannedInstalled Under construction Planned Installed Under construction PlannedInstalled Under construction Planned
Source: ODS Petrodata Offshore Construction Locator; Arctic Securities
Acergy has compiled data from the key players within offshore construction and installation to come up with a global pipelay forecast and a asset growth forecast, illustrating growth in “key enabling assets”, mainly CSVs/large scale pipelaying capacity. These numbers illustrate an average 10% growth over the period 2005-2012 in installed pipe per year, and an average asset growth of 7%. Taking a simplified assumption of even distribution of both pieplay needs and vessels (i.e. vessels move where there is pipe that needs to be laid), we note that development in km/vessel is fairly flat. This is in line with our assumption that asset growth in this segment is in accordance with demand.
West Africa will be the largest region for pipeline installation over the next three years
Newbuilds coming into the pipelaying market will balance demand and level of pipelaying km per vessel displays a rather flat development
48
Global pipelay forecast, growth in pipelay assets and km pipe per vessel, assuming even distribution
2.400
2005
3.100
1.000
0
2006
3.300
2007
3.500
2008
4.100
2009
4.400
2010
4.500
2011
4.600
2.000
3.000
4.000
5.000
Km
+10%
2012
40403837
35
29
2525
0
5
10
15
20
25
30
35
40
45 +7%
2012201120102009200820072005 2006
Nr. of ships
0
30
60
90
120
150
180
2005 2006 2007 2008 2009 2010 2011 2012
Acergy estimate Acergy estimate Arctic Securities illustration based on Acergy estimates
Km pipe per vessel, assuming even distribution
Note: Discrepancy between Acergy data and ODS data is likely due to different definitions used
Source: Acergy, Arctic Securities
The customer side is changing – NOCs increasingly important As within other sectors of the oil and oil services industries, the increasing importance of the NOCs (National Oil Companies) going forward will also make an impact on the subsea sector. Looking at global offshore reserves expected to be brought on stream during the coming five-year period (2008-2012), we see a very large increase in the share of reserves being developed by NOCs, consortiums and operator subsidiaries. The latter two of these categories are also highly influenced by the NOCs, and hence, the increased relative importance of the NOCs is even more significant than displayed in the illustration below. Consortiums involve IOCs and NOCs producing alongside each other (partnerships), whereas the operator subsidiaries category is highly influenced by Gazprom and NIOC operating more flexibly to encourage foreign investments. NOCs are increasing their relative share from 18% to 29% from 2008-2012 without taking into account indirect shares through consortiums and operator subsidiaries. The IOCs relative importance is forecasted to be reduced significantly, as their share drops from 59% to 33%. It is difficult to forecast the overall impact of these changes on the customer side for the subsea operators. However, we would expect to see some more bureaucracy on the client side, whether it is a pure NOC or a consortium, potentially leading to increased share of delays in project sanctioning and execution. All this represents increased risk for contractors such as ACY and SUB, and none of these companies have e.g. been able to realize positive profit margins in Brazil on an annual basis. On an aggregate level, we view the changes one the customer side as positive, as we believe the IOCs will continue to be active and as the overall customer base grows. However, we will watch execution in projects dominated by NOCs closely.
NOC’s share of reserves is increasing significantly, making these customers more important for the subsea companies
Total customer base increasing, as IOCs are not likely to stop pursuing development activities
Large share of revenues from NOCs represents more risk for the subsea companies
49
Customer mix changes going forward
14%
11%
9%
33%
Independent
100%100%
Operator subsidiary
Consortium
NOCs
13%
59%
IOCs
13%
2008-2012
29%
2003-2007
1%
18%
Breakdown of global offshore reserves on-stream 2008-2012
Source: Infield; Arctic Securities
50
Subsea Market: The main areas and projects
West-Africa, North America (US GoM), the North Sea, Brazil and Asia Pacific waters are the world’s most important subsea regions. Of these, the North Sea is the legacy area, West-Africa, Brazil and GoM are the current hot-spots and key deepwater areas, while Asia-Pacific waters are expected to grow strongly going forward. The North-Sea represents the main subsea legacy area Northern Europe, and mainly the North Sea has always been at the frontier of offshore and subsea development, and the region continues to be important for all subsea companies. For the equipment players, this is one of the areas where they conduct groundbreaking R&D, testing, and pioneer work like recently exemplified by the Ormen Lange development and the world’s first subsea separation, boosting and injection system at the Tordis field. For the service companies, the region involves a lot of steady work, as well as continuous new challenges, especially with regard to operations in harsh weather conditions. For 2007, the North Sea still contributed with as much as 47% and 34% of revenues for Subsea 7 and Acergy respectively. Corresponding numbers for 2006 were 46% and 39% respectively.
Number of installed subsea wells clearly illustrates the North Sea as the legacy area of the subsea industry
North Sea
1.210
0
1.000
1.200
1.400
200
Subsea wells
400
600800
376
1.000
200
North America
600
1.200
800
0
400
Subsea wells
1.400
538
1.000
200
South America (mainl Brazil)
600
1.200
800
0
400
Subsea wells
1.400
381
1.000
200
Africa
600
1.200
800
0
400
Subsea wells
1.400
168
1.000
200
Asia Pacific
600
1.200
800
0
400
Subsea wells
1.400
Total installed base ~2700 wellsTotal installed base ~2700 wells
Worldwide distribution of installed subsea wells as per September 2007
Source: FMC Technologies; Arctic Securities
West-Africa, GoM and Brazil are the world’s main deepwater regions West-Africa, GoM, and Brazil are the world’s leading deepwater regions with regard to reserves that have been brought on stream since 2000. These three regions will also continue to be of significant importance when looking at planned reserves to be brought into production during the years going forward to 2015. In addition to these regions, the Asia-Pacific region is expected to grow strongly, mainly from 2010 and forward.
The North Sea is the subsea industry’s legacy area, with more than 1,200 installed subsea wells
Looking at deepwater reserves, West Africa, US GoM and Brazil stand out as the most important areas
51
This is also in line with the expectations of Acergy and Subsea 7, who both recently stated that they continue to see West-Africa, GoM and Brazil as key deepwater regions, and expect stronger growth in Asia-Pacific from around 2010 and onwards. Note that the illustration below is based on the known reserves to be brought on stream – i.e. this represents already planned and/or sanctioned deepwater field developments. We expect deepwater reserves estimates to continue to grow also for the years going forward from 2015, as the oil companies continue to discover resources and plan additional field developments.
Overview of the key deepwater (>500 meters) regions of the world and production brought on stream 2000-2007 and estimated to be brought on stream 2008-2015
0
2,000
4,000
6,000
091011121314150706050403 08020100
0
2,000
4,000
6,000
00 01 0203 04 0506 07 080910 11 1213 14 15
0
2,000
4,000
6,000
00010203040506070809101112131415
Reserves to come on stream
Reserves on stream
0
2,000
4,000
6,000
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
0
2,000
4,000
6,000
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
0
2,000
4,000
6,000
00 01 02 03 04 141312111009080705 06 15
Note: Includes only deepwater projects. All data based on Infield. Reserves to come on stream 2008-2015 are estimates and dependent on the operators
carrying out projects according to announced plans
Source: Infield; Arctic Securities
Overview of the world’s main offshore field development projects Currently there are as many as 120 major ongoing offshore field developments globally that will still require a lot of subsea work. West-Africa, Brazil and Asia-Pacific are those regions that are estimated to bring the largest reserves volumes on stream over the coming years. Several of the projects listed below are already on stream and producing, but still require a lot of subsea work, i.e. several more wells are scheduled for drilling, with coherent installment of Christmas trees and hook up to existing subsea infrastructure. Others again, such as the Pazflor project, are giant projects where subsea work has not yet begun. The majority of these projects are planned on stream from now and until 2013/2014, and a large share of the subsea work related to these projects are yet to be contracted. This gives us confidence that the subsea market will be strong also beyond 2010. We also think this potentially could lead to significant tightness in subsea construction and installation in periods if many of the projects award work to be conducted in the same time intervals.
More than 120 major offshore projects under development or scheduled to be developed going forward
Giant projects, similar to Pazflor, that await sanctioning gives us confidence in the strong subsea demand for years to come
52
The world’s currently most important offshore field development projects Field Name Year on strean mboe
Al Shaheen 1995/2009 780
Scarab-Saffron 2002 680
ACG 2005/2007/2008 5,400
Serpent 2007 264
Solar 2007 176
Sequoia 2009 176
Tengiz expansion 2009 9,000
Gaza Marine 2010 311
Abu Sir 2010 181
Saurus 2010 176
El Max 2010 176
Taalab/Tennin (EDDM) 2010 141
Pelican (Block 7) 2011 135
Raven 2011 755
NEMED KG45-1/KJ49-1 & LA52-1 2012 234
Giza North 2012 186
Taurus (North Alexandria HJ-1X) 2012 133
Libra 2013 148
Simian Sienna 2015 512
Tiof/Tiof West 2011/2014 301
Mediterrainian & Middle East
Field Name Year on strean mboe
Elgin Franklin 2001 692
Grane 2003 700
Clair Ridge 2005 250
Ormen Lange 2007 2,500
Snøhvit 2007 1,144
Buzzard 2007 550
Statfjord Late Life 2008 250
Kristin Tyrihans 2009 380
Shtokman 2010 20,000
Gjøa 2010 300
Skarv 2011 360
Suilven 2011 185
Laggan 2012 122
Lochnagar/Rosebank 2013 530
Laxford 2014 106
Conival 2015 294
Luva 2016 247
Stetind 2018 182
Haltenbanken (Hvitveis) 2018 171
Tobermory 2016 88
NW Europe
Field Name Year on strean mboe
Girassol 2000 700
Amenam Kpono 2003/2008 588
Clov (Block 17) 2003/2010-2013 871
Tombua Landana (Block 14) 2006/2009 1,200
Block 18 2007/2008-2001 1,034
Kizomba (A, C, D) (Block 15) 2007/2008-2011 2,092
Agbami 2008/2011 1,431
Moho Bilondo 2008/2011 535
Akpo 2008/2015 1,455
Bonga (N, NW, SW) 2009/2011 1,167
Block 31 2010-2017 2,111
Chota Preowe 2011-2016 958
Bosi 2011 1,082
Usan/Usan West 2011/2014 648
Pazflor 2011 533
Block 32 2012-2018 1,821
Ngolo (OML 135 Ex OPL 219) 2013 405
Nnwa Doro 2013/2014 2,000
Egina 2013/2017 417
Bilah 2015 717
West Africa
Field Name Year on strean mboe
Peng Lai (Phase 2) 2008 600
Tangguh 2008 3,100
Angel 2008 1,200
JDA 2008/2012 770
Kikeh 2009 812
Ichtys 2009 N/A
Pluto (WA-350-P) 2010 765
Scarborough (WA-1-R) 2011 1,058
Liwan LW 03-1-1 (Block 29/26) 2012 622
Malampaya 2001/2009 1,455
Bayu Undan 2004/2006 920
Sakhalin 1&2 2005/2009 9,500
D6 2008-2015 2,624
Krishna 2008-2015 670
Gumsut Kakap 2010/2011 582
Greater Gorgon Area 2011-2020 6,642
Browse 2013-2015 3,400
Evans Shoal N/A 1,150
Xihu trough N/A N/A
Shwe N/A 820
Asia-Pacific
Field Name Year on strean mboe
Roncador 2000 2,927
Marlim Sul 2001 1,467
Albacora Leste 2006 825
Espardarte 2007 375
Corocoro 2008 790
Frade 2009 518
Marlim Leste 2009/2012 420
Area Do 2009-2015 450
Golfinho 2009/2012 354
Peregrino 2010 400
BC-10 2010-2012 515
Tupi (Pilot, Phase1 & 2, South West) 2010-2017 8,000
Papa Terra 2011 750
Brazil BS-400 (1-SPS-36) 2011 450
Jubarte Phase 2 2011 572
Baleia Franca 2012 648
Jupiter 2014 5,000
Xerelete 2014/2017 393
Mariscal Sucre N/A 1,870
Platforma Deltana N/A 1,200
South America
Field Name Year on strean mboe
Mad Dog 2005/2009 474
Thunder Horse 2008/2009 1,512
Walker Ridge Jack 2013 428
Mississippi Canyon Hawkes 2013 353
Mississippi Canyon Tubular Bells 2013 294
DeSoto Canyon Vicksburg 2013 153
Keathley Canyon Kaskida 2012 471
Green Canyon Pony (Knotty Head North) 2012 243
Green Canyon Puma 2012 236
Walker Ridge St Malo 2012 193
Walker Ridge Big Foot 2012 176
Alaminos Canyon Great White 2010 578
Chinook Cascade 2010 353
Green Canyon Tahiti 2009 503
Green Canyon Shenzi 2009 353
Mississippi Canyon Thunder Hawk 2008 186
Mississippi Canyon Blind Faith 2008 155
Atwater Valley Neptune 2007 161
Mississippi Canyon Europa 2000 175
Green Canyon Genesis 1999 160
US GoM
Source: Infield; Arctic Securities
Many of the projects above are large scale with regard to subsea field developments, and require larger and more complex subsea solutions than the vast majority of historical projects. This will involve record sized contracts for construction and installation companies such as Acergy and Subsea 7. As an example, Acergy’s share of the Pazflor contract is USD 700 million, versus an average contract size for Acergy over the last six years of around USD 150 million. Over the same period, Acergy has only had two other contracts larger than USD 500 million (equivalent to 4% of number of contracts) and only nine contracts over USD 200 million (18% of number of contracts awarded). Pazflor requires 49 subsea wells with coherent installation of 49 Christmas trees as well as a large scope of other subsea equipment. Several of the above listed projects scheduled to be brought on stream are of similar size, and have not yet contracted subsea equipment and/or construction/installation services. Kizomba requires 53 future subsea wells, Bonga 44, and Usan 44 in West Africa (Cameron was recently awarded the Christmas tree contract sized at USD 650 million for 44 trees). Similar projects exist in Brazil and Asia-Pacific. Below we have illustrated the number of known future subsea wells to be constructed going forward, split on regions and projects. These are all deepwater wells only, and we expect there to be market demand also in shallower waters, as these areas will still constitute around 40% of subsea capex. The total estimated number of deepwater subsea wells over the period is around 1,700 wells. To compare, global installed base of subsea wells today is around 2,700.
Many of the projects we have reviewed require far more extensive and complex subsea solutions than historic projects
Pazflor requires 49 subsea wells, Kizomba 53, Bonga 44 and Usan 44. These are all West Africa projects, but similar projects exist also in other regions
53
Estimated number of future subsea wells to be installed per region going forward
121213131818202021222324
333742444953
83144
Azurite MarineOrquidea (Block 17)
Tulipa (Block 17)Negage (Block 14)
Mahogany (Jubilee East)Akpo
Uge (OPL 214)Bosi (OML 133 Ex OPL 209)
Nnwa DoroEgina
AgbamiBlock 18
ClovChota Preowe
Usan/Usan West (OPL 222)Bonga
PazflorKizomba (A, C, D)
Block 32Block 31
56666810101212
18192020
283133
3747
67
Albacora LesteFrade
EspardarteCanapu
CachaloteUrugua (Brazil BS-500) Carioca (Brazil BM-S-9)
BC-10Brazil BS-400 (1-SPS-36)Atlanta (Ex Brazil BS-4)
XereleteMarlim LestePapa Terra
Albacora (Phase III)Jubarte Phase 2
RoncadorTupi (Pilot, Phas 1&2)
PeregrinoArea Do
Marlim Sul
44444
66667777889
162324
49
Hijau BesarGula
BangkaKrishna
Annapurna Malampaya
Kikeh Kecil (SB-K)M Field (KG-DWN-98/2)
Liwan LW 03-1-1 Kamunsu
West SenoPluto (WA-350-P)
Laverda (WA-271-P)Tulip
Merah BesarAster
Scarborough (WA-1-R)D6
Gumsut KakapGreater Gorgon Area
Asia-PacificWest Africa Brazil
5555666678899101010
1213
1830
NabMississippi Canyon, Thunder Hawk
Mississippi Canyon, Blind FaithAtwater Valley, Neptune
Atwater Valley, SturgisAlaminos Canyon, TridentAlaminos Canyon, Tobago
Alaminos Canyon, Silvertip Green Canyon, Puma
LakachKeathley Canyon, Kaskida
Chinook CascadeGreen Canyon, TahitiWalker Ridge, St Malo
Walker Ridge, Big FootAlaminos Canyon, Gotcha
Walker Ridge, JackGreen Canyon, Shenzi
Mississippi Canyon Tubular BellsThunder Horse
111
233
44
68
11121212
1317
TorridonNortheas Foinaven (Cullin C & S)
AlliginLaxford
TormoreStetind
TobermoryLuva (Nordland 6707/10 Nykhigh)
LagganConivalGrane
Tyrihans - tyinn til KristinSuilven
Lochnagar/RosebankGjoa
Ormen Lange
122222
333
44444455
66
21
SerpentOr 1 (Med)Noa (Med)
SolarPolaris (WMDW)
Al BahigTaurus (North Alexandria)
Taalab/Tennin (EDDM)Libra (North Alexandria K-1X)
Chinguetti (Block 4 PSC-B)Rovesti/Giove/Medusa
SaurusNEMED KG45-1/KJ49-1 & LA52-1
Giza North (North Alexandria)El Max
Gaza MarineEl King
Raven (North Alexandria R-1X)Abu Sir
Tiof/Tiof West
Med and MEGoM Northern Europe
Note: Distribution over time follows timing of field development on major fields as illustrated previously. I.e. majority of these wells will be installed over
the period from today to 2013/2014. However, there are some assumptions and the latest wells scheduled here will be installed as late as around 2020.
Source: Infield; Arctic Securities
Pazflor – an illustrative example of the increasing scope of subsea projects The Pazflor project in Angola (Block 17) is illustrative for the increasing size and complexity of subsea developments contributing to our belief in a continued strong market development for the subsea sector. The project is also one of the giant projects leading to major contracts for subsea equipment providers and providers of subsea construction and installation services. So far, project subsea contracts of close to USD 3 billion have been awarded, split between a USD 980 million contract to FMC Technologies for the subsea processing and production system and a USD 1.86 billion contract to Technip (about USD 1.16 billion) and Acergy (about USD 700 million) for the production and installation of flowlines, umbilicals and risers. Pazfloor illustration from FMC Technologies
Source: FMC Technologies; Arctic Securities
Subsea contracts worth around USD 3 billion has been awarded for Pazflor, of which the installation contract constitutes USD 1.86 billion
54
Pazflor is located 150 km from the Angola shore in water depths 600-1,200 meters. The scope and complexity of the subsea work is illustrative for the large scale subsea developments of recent West-Africa projects. Project scope includes:
• 49 subsea wells connected via subsea production, injection lines and risers to an FPSO
• 49 Christmas trees and wellhead systems • 3 four slot production manifold systems • 3 gas/liquid separation systems, including subsea pumps, control system and
umbilicals • Production controls system and umbilical distribution system • Gas export system • Topside control system designed to accommodate another 21 wells and a fourth
subsea separation unit • Subsea construction and installation services, involving the use of at least 4
subsea construction vessels (Acergy Polaris and Polar Queen from Acergy and Deep Blue and Deep Pioneer from Technip)
The project targets oil in two independent reservoir structures
• Reservoir one is at 600-900 meters water depth and contains heavy oil to be recovered using subsea gas/liquid separation and liquid boosting
• Reservoir two is at 1,000-1,200 meters water depth and contains light oil to be developed using a production loop including riser bottom gas lift
The Pazflor project requires 49 Christmas trees, three manifolds and three gas/liquid separators. The project will demand at least four construction vessels with offshore installation scheduled to start in 2010
55
Record strong deepwater activity will drive subsea
The current expected strong flow of new contracts for the subsea companies in deepwater areas are a result of exploration and significant discoveries over the last years, e.g. outside the coast of West-Africa and Brazil. Currently, the world is about to embark on the greatest deepwater exploration cycle ever seen. This will likely lead to new discoveries that will need to be developed – in most cases likely with a combination of subsea solutions and floaters. Deepwater constitute an increasing share of subsea activity Worldwide deepwater activity will continue to be strong, as offshore share of newly discovered oil continues to increase, and as deeper waters constitute an ever increasing share of offshore discoveries. The increased deepwater activity will continue to drive subsea activity. This section of the report is focused on deepwater as a key driver for the subsea industry. However, a lot of historic subsea activity has also taken place in shallower waters such as the North Sea. Even though shallow water areas are generally more mature, we still expect these areas to strongly contribute to continued high subsea activity. We believe the shallow-water subsea activity will continue to constitute a strong fundament for subsea companies’ revenues while the increasing scope and level of complexity in deep water projects will contribute significantly to drive the growth going forward. An overview of forecasted subsea tree installations going forward, illustrate the increasing importance of deeper waters. Demand in shallow waters is expected to sustain or grow moderately going forward, from about 200 trees in 2007 to about 220 trees in 2012. Deeper waters are expected to drive growth, with annual levels deep and ultra deep water at about 300-330 trees. For the overall subsea activity level, this is highly positive, especially as the sustained shallow-water activity illustrated below is only related to installation of new trees (i.e. new activity/modifications to existing production solutions), and not so much to well-interventions, EOR measures and IMR activity, i.e. other activities that are relevant for more mature areas. As such, shallow water activity in total should display even stronger development than illustrated below.
Development in number of subsea trees according to year installed and water depth
80 90 100
80100 110
0
100
200
300
400
500
600
150
170
270
200
230
250
230
260
220
200
220
240
240
220
30
150
120
20
130
90
10
150
130
240290
340
590
500560 570570
300
2003 2004 2005
20
2007 2008 2009 20102006 2012
Year installed
Nr. of trees
550
2011
Ultra deep
Deep
Shallow
Ultra deep
Deep
Shallow
Deepter waters will drive growth going forward, while shallow water demand still grows moderately
Source: Infield; Arctic Securities
Large deepwater exploration activity going forward will lead to strong subsea activity
Deepwater will be a key growth area for subsea companies going forward, but shallow water will still be important
Of annual expected demand levels of about 600 Christmas trees for the period 2008-2012, more than half will come from deepwater areas
56
The increasing importance of deepwater areas is further illustrated by the pipeline capex according to water depth. More than 60% of the expected pipelines capex over the period 2008-2012 is expected to be spent on water depths greater than 500 meters. In addition to the generally increased deepwater activity driving subsea activity, we also note that the often increased complexity of deepwater operations contribute further to increased activity especially for the subsea construction and installation companies, as they have to be engaged longer and cover a wider scope for each assignment.
Pipeline capex according to water depth and time Share of pipeline capex by water depth 2008-2012Pipeline capex by water depth 2003-2012
Source: Infield; Arctic Securities
The subsea industry has continuously been breaking frontiers and moving to deeper waters The subsea industry is central for the oil industry’s ability to develop assets in increasingly complex environments. Ultra deep waters and arctic environments have been described as the last frontiers of the oil industry, and subsea developments are currently being pursued in such areas, with projects such as Pazflor, Snøhvit and Shtokman. The illustration below from FMC Technologies illustrates how the industry has gradually advanced towards deeper waters. FMC’s first Christmas trees were installed at around 190 meters water depth in 1980, while the latest instalments have been at as much as 2,700 meters.
More than 60% of the expected pipeline capex over the period 2008-2012 is expected to origin from deepwater areas
The subsea industry has gradually advanced towards deeper waters, and the world’s deepest subsea tree installation today is at about 2,700 meters
57
FMC Technologies’ Christmas trees installed at ever increasing water depths is illustrative for the industry’s development
Source: FMC Technologies; Arctic Securities
Deepwater E&P increasing importance for the oil industry The drive towards deeper water developments is evident not only in the level of total major oil and gas discoveries coming from offshore, as seen in the graph below, but also that deeper water discoveries (here defined as above 300 meters vs. generally used definition of above 500 meters) have grown rapidly since the early 1990s. Furthermore, the deepwater share has increased even more over the latter part of the period. During 2004 and 2005, the deep water (>300m) share was 67% and 75% respectively. Several of these discoveries are currently under development, and have already chosen or are likely to choose a subsea production solution combined with a floater.
Offshore fields account for majority of discoveries last 10 years. Moving towards deeper waters
58
Majority of discoveries last 10 years have been offshore Deepwater share of discoveries have increased steadily Mboe
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Onshore
Offshore
0
5.000
10.000
15.000
20.000
25.000
30.000
35.000
40.000
45.000
Mboe
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
0 - 300 m
> 300 m
0
40.000
20.000
15.000
10.000
5.000
25.000
35.000
30.000
Source: ODS-Petrodata; Arctic Securities Source: ODS-Petrodata; Arctic Securities
Using data from Infield we see that the number of projects developed on water depths of 500 meters or more is expected to grow rapidly from virtually none in the early nineties, to 57 in 2012. Data here on an aggregated level beyond 2012 do not provide meaningful interpretations due to the limited visibility of the oil companies planning horizon.
Number of projects on stream by year and water depth
0
5
10
15
20
25
30
35
40
45
50
55
60
2001
12
2002
11
2003
10
2004
5
2005
2
2006 2007 2008 2009 2010 2011 2012
2500-3000 (m)
2000-2500 (m)
1500-2000 (m)
1000-1500 (m)
500-1000 (m)
Projects per year
24
18
22
40
48 49
2
1988
4
1989
0
1990
1
1991
1
1992
1
1993
24
1994
57
1995
51
1996
41
1
1998
21
1999
14
2000
10
1997
Note: Including fixed platforms, floating production, subsea and projects with no currently planned development scheme
Source: Infield; Arctic Securities
Looking at the same data accumulated, we see a strong growth in deepwater fields above 500m water depths estimated to be developed over the coming years.
Developed projects below 500 meter water depths increasing from close to zero in early 1990s to 57 in 2012
59
Accumulated number of projects on stream by year and water depth
0
50
100
150
200
250
300
350
400
450
500
1991
271
1992
223
1993
183
1994
161
1995
143
1996
119
1997
95
1998
74
1999
60
2000
50
2001
38
2002
27
2003
17
2004
12
2005
10
2006
8
2007
4
2008
4
2009
3
2010
2
2011
469
2012
2500-3000 (m)
2000-2500 (m)
1500-2000 (m)
1000-1500 (m)
500-1000 (m)
1
1988
412
1989
361
1990
320
Accumulated numberof projects
Note: Including fixed platforms, floating production, subsea and projects with no currently planned development scheme
Source: Infield; Arctic Securities
Brazil, West-Africa, US GoM and Asia-Pacific will continue to be dominating deep water areas Geographical distribution of recent deepwater discoveries and estimated future deepwater production indicate what will be the future growth regions for the subsea sector. Looking at the global deepwater discoveries in the graph below, we see that Angola and Nigeria were two important areas in the late 1990s and early 2000s. However, large deep water discoveries were also made in Brazil, US GoM and Asia Pacific.
Annual global deepwater discoveries by geographical region/area
0
1
2
3
4
5
6
7
1992 1993 1994 1995 1996 1997 1998 1999 2000 20011984 2003 2004 2005
Other Africa
Asia-Pacific
US GoM
Nigeria
Angola
Brazil
Bn bbl
1985 1986 1987 1988 1989 1990 1991 2002 Source: Phd Thesis “Giant Oil Fields – the Highway to Oil” by Fredrik Robelius (2007); Arctic Securities
Petrobras is the leading deepwater operator Petrobras will be the world’s leading deepwater operator going forward, measured by number of projects to be brought on stream. Petrobras plans to bring as many as 44 projects on stream over the coming years. Chevron, Total and BP rank as the immediate followers of Petrobras with 42, 39 and 38 projects respectively. Looking at the overview of the top 10 deepwater operators, we note that only one of them is a NOC, while the rest of them are IOCs. This is in line with
Majority of deep water discoveries in WA, Brazil, GoM and Asia Pacific
Petrobras will be the world’s leading deepwater operator going forward
60
our above mentioned observation that the IOCs are increasingly forced to deeper waters, and that a large share of the reserves to be brought on stream is operated by consortiums and/or operator subsidiaries. Top 10 deepwater operators, measured by nr. of projects to come on stream 2008-2021
9
11
14
14
17
25
38
39
42
44
0 10 20 30 40 50
Nr. of projects
Petrobras
Chevron
Total E&P
BP
Shell
Anadarko
Esso
Reliance
Elf Petroleum Nigeria Limited
Murphy
Source: Infield; Arctic Securities Record strong deepwater drilling backlog also supports strength in expected subsea demand going forward This stipulated growth in deepwater E&P is backed by the strong increase in dayrates for ultra deepwater drilling rigs and contract backlog for these as we show below. Looking at developments in dayrates for deepwater drillships and semis, these started increasing in 2005, something which has lead to significant contracting of newbuilds that again has increased rig year backlogs substantially.
Finally, looking at the overall development in the deepwater fleet, we see that the backlog for drilling rigs capable of drilling in water depths above 5,000ft has increased more than sixfold since January 2005. Today's deepwater drilling fleet, including newbuilds capable of drilling in water depths above 5,000ft., is around 560 rig years including options, up from 83 rig years for the total fleet in 2005. If only looking at rigs and drillship capable of drilling above 7,500ft, the rig year backlog increases from 37 years in 2005, to 425 years today, an almost 12x increase. As contracting activity for deepwater rigs continues to be strong and there are several deepwater rigs under construction, which have not yet received contracts upon delivery, this backlog is expected to increase further.
Deep water drilling backlog has increased from 1.4 years per unit in 2005 to 4.9 years per unit in 2007 for drilling below 7500ft water depth, a 3.5x increase in two years
61
Contracted rig years in deep waters have increased significantly last two years
5.34.61.41.5Avg. years of backlog per unit
801232757Number of rigs
425.1559.736.683.4Total years
89.9113.13.814.8Options
335.2446.632.868.6Firm rig years
> 7,500 ft.> 5,000 ft.> 7,500 ft.> 5,000 ft.
Feb-2008Jan-2005
5.34.61.41.5Avg. years of backlog per unit
801232757Number of rigs
425.1559.736.683.4Total years
89.9113.13.814.8Options
335.2446.632.868.6Firm rig years
> 7,500 ft.> 5,000 ft.> 7,500 ft.> 5,000 ft.
Feb-2008Jan-2005
~6.7 x~6.7 x
~11.6 x~11.6 x
Source: ODS Petrodata; Arctic Securities
We believe that this evident strong focus on deepwater exploration and development in the years to come, will alone lead to long term strong demand for subsea equipment and services as discoveries move into field developments. Strong expected growth in floating production solutions further strengthen our growth assumption Subsea field developments and the demand for subsea equipment, construction and installation services have historically displayed a close correlation with the growth in number of floating production solutions. Each floating production solution needs flowlines, umbilicals, risers and other subsea equipment, and as such, we view expected growth in floating production solutions also as a good indication going forward. Furthermore, estimates for floating production solutions are also somewhat easier to monitor, than growth in subsea equipment and services directly.
Growth in floating production units and subsea expenditures go hand in hand
0
50
100
150
200
250
300Floaters
0
2
4
6
8
10
12
14
16
18
20
22
9.3
2003
8.6
2004
12.3
2005
15.0
2006
19.1
2007
USD billion
Africa
Europe
North America
Asia
South & Latin America
Australasia
M. East & Caspian
Africa
Europe
North America
Asia
South & Latin America
Australasia
M. East & Caspian
218,0236,0
254,0269,0
302,0
Note 1: Numbers for floating production units include units under construction/conversion, idle, in yard and working. Includes FPSOs, FSOs, Semis, Spars, and TLPs
Note 2: Subsea expenditures include drilling and completions, equipment, pipelines and control lines
Source: Infield; ODS Petrodata; IMA; Arctic Securities
Subsea solutions are often combined with the use of floating production solutions (FPSOs most common)
62
Going forward, we may see more pure “subsea to beach with subsea processing solutions”, without any surface/topside facilities, e.g. Ormen Lange. FMC Technologies has described this as the “field development of the future”. However, we think this development will be gradual and that floating production facilities combined with subsea installations will still be the dominating production solution for deepwater assets. The expected growth in number of FPSOs going forward is another key argument for why we believe the subsea sector will continue to be strong. The historic annual growth in number of FPSOs has been around 12%, and we don’t see any reasons for why this growth should slow going forward. The number of FPSOs is expected to grow from 123 end of 2007 to 150 end of 2008, and 161 end of 2009. The graph below only displays ordered units, and as such the apparent leveling off in growth from 2009/2010 is due to average lead time from order to delivery of about 18-24 months, as well as the limited visibility caused by the planning horizon of the oil companies.
FPSO fleet growing at a CAGR of 10% last 10 years. Fleet will continue to grow strongly
4333 600000
20
40
60
80
100
120
140
160
180
8
1986
58
1987
58
1988
59
1989
7
13
1990
88
16
1991
89
17
1992
810
18
1993
8
14
22
1994
10
15
25
1995
11
19
30
1996
23
40
1997
20
27
47
1998
27
32
59
1999
17
00
1982
00
1983
11
1984
11
1985
28
34
62
2000
30
38
68
2001
34
42
76
2002
40
47
87
2003
44
49
93
2004
47
57
5
2005
50
60
110
2006
61
62
123
2007
81
69
150
2008
89
72
104
2009
94
73
167
2010
97
74
171
2011
FPSO operators
Oil companies
+41% +97%+12%
FPSOs
161
CAGR 97-07
Source: ODS Petrodata; IMA; Arctic Securities
Taking a look at the short term expectations for number of FPSOs as displayed by ongoing and planned tendering activity, we get further evidence that demand for FPSOs, and implicitly also the demand for subsea services will stay strong. In an “Early scenario” for possible year of first oil for FPSO projects, we note that as many as 75 projects are either in the “Bidding/Final design” or “Planned/Being studied” phase (Note that “Final design” here corresponds to final design of field development). This is up from 66 in October 2007, when we released the Arctic Securities FPSO Sector Initiation coverage. The majority of these projects are expected to produce first oil in 2010, 2011 and beyond, and we expect to see additional projects for first oil in later years to be added over time. Looking at a late scenario for the same projects we still observe majority of first oil projects in 2010 and 2011, but with some more projects being pushed towards first oil in 2013 and 2014.
Ongoing and planned tendering activity further underpins strong growth assumption
Pure subsea to beach solution being described as the field development of the future
FPSO sector will still see strong growth
63
Year of possible first oil FPSO projects, early scenario Year of possible first oil FPSO projects, late scenario
0
5
10
15
20
25
8
11
19
0
20152010
6
05
15
21
2008 2011
1
2
4
13
14
6
2012
10
2009
10
2013
Bidding or final design
Planned or being studied
FPSO projects
2014
5
0
5
10
15
20
25
311
1
9
19
2009
5
2011
4
10
2013
4
2
6
12
2008
7
7
2
14
2010 20142012
7
8
1
7
2015
Bidding or final design
Planned or being studied
FPSO projects
11
Source: IMA; ODS Petrodata; Arctic Securities Source: IMA; ODS Petrodata; Arctic Securities
64
Management and Board of Directors
Management Jean P. Cahuzac (CEO) Mr. Cahuzac joins Acergy in April 2008, coming from the position as Executive Vice President Assets with Transocean. He has more than 25 years of experience from the oil and gas industry and has held various senior positions including COO, President and Executive President of Transocean. Prior to this he spent several years with Schlumberger holding technical and managerial positions globally, including President of Engineering, Vice President Europe & Africa Business Unit and President Sedco Forex. Mr. Cahuzac is a graduate from Ecole des Mines Saint Etienne and the French Petroleum Institute. Stuart Jackson (CFO) Mr. Jackson joined Acergy as CFO in 2003, coming from NRG Energy U.K., where he was the Managing Director. Mr. Jackson has previously headed finance, commercial and HR functions in the power sector and worked with Marathon Oil and LASMO in London, North Africa and the Far East. He is an Honours Graduate from Loughborough University of Technology and a Chartered Management Accountant. Bruno Chabas (COO) Mr. Chabas joined Acergy in 1992 and was appointed COO in 2002. He has held various positions in the UK., France and the US., including CFO. Mr Chabas holds a MA in Economics and an MBA from Babson College in Massachusetts. Jean-Luc Laloë (Corporate VP Strategic Planning) Mr. Laloë has more than 25 years of experience from the offshore oil and gas construction industry. He has previously worked with Stena Offshore and Coflexip Stena. Mr. Laloë joined the Acergy management team in 2003 coming from Technip, where he held various positions including Executive VP-North America, Managing Director-UK and VP Special Operations in Paris. He holds a Masters degree in Aeronautical & Space Engineering. Mark Preece (Corporate VP Business Development & Marine) Mr. Preece joined the Acergy management team in 2004. He has previously worked with Bibby Line, Stena Offshore, Coflexip Stena and Technip holding various senior management positions. Mr. Preece is a Marine Superintendent and hols an MBA from Henley Management College. Keith Tipson (Corporate VP Human Resources) Mr. Tipson joined the Acergy management team in 2003 and has previously worked with the Dowty Group and lately Alstom, holding the positon as Senior Vice President HR, Power Sector. Mr. Tipson has a Business Degree from Thames Valley University, London. Johan Rasmussen (Corporate VP and General Counsel) Mr. Rasmussen joined Acergy in 1988 and was appointed General Counsel in 1996. He has previously worked within a subdivision of the Norwegian Ministry of Defence and as a Deputy Judge with Haugesund District Court. Mr. Rasmussen holds a Masters Degree in Law. Allen Leatt (CTO & Corporate Vice President Global Performance) Mr. Leatt was appointed CTO in 2003 coming from the position as the Executive Vice President of the SURF Product Line with Acergy. He has also previously worked with what is now Technip and John Laing Construction. Mr. Leatt holds a first degree in Civil Engineering, an MBA and he is a Chartered Civil Engineer in the U.K.
65
Board of Directors Mark Woolveridge (Chairman) Mr. Woolveridge was appointed Chairman in 2005, after serving as Deputy Chairman since 2002 and non-executive Director since 1993. He retired from the position as CEO of BP Engineering in 1992 after being with the company since 1968, holding various positions including General Manager Oil and Gas Developments. He has also served on the Board of BP Oil. Mr. Woolveridge holds a Masters degree from Cambridge University and is a Fellow of the Royal Academy of Engineering and of the Institute of Mechanical Engineers. James B. Hurlock (Deputy Chairman) Mr. Hurlock was appointed Deputy Chairman in 2005, after serving as a Non-excecutive Director since 2002. He is a retired partner from the law firm White & Case LLP, serving as Chairman of its Management Committee for 20 years. He was a part of the founding and served on the Board of Directors of Northern Offshore. Mr. Hurlock holds a BA degree from Princeton University, an MA in Jurisprudence from Oxford University and a JD from Harward Law School. George Doremus (Board member) Mr. Doremus has served as a non-executive Director since 2004 and currently works with Gulf Energy Technologies, holding the position as CEO. He has previously worked with Aker Kværner as a EVP Oil and Gas Process International and President of Houston region operations. Tom Ehret (Board memeber) Mr. Ehret has more than 30 years of experience from the offshore oil and gas business. He joined Acergy as CEO in 2003 and stepped down in 2008. He came from the position as Vice Chairman Technip-Coflexip and President its offshore branch. Mr. Ehret has previously worked for Comex, FMC Corporation, Stena Offshore, Coflexip Stena and Technip in various management positions. Mr. Ehret is a trained mechanical engineer. J. Frithjof Skouverøe (Board member) Mr. Skouverøe has more than 30 years of experience from the offshore business and has served on the Acergy board since 1993. He previously held the position as CEO of Stolt-Nielse Seaway and has been serving on the board of Ocean Rig since 1996. Mr Skouverøe holds an MBA from INSEAD and an MSc from the Technical University of Norway. Trond Ø. Westlie (Board member) Mr. Westlie currently holds the position as Executive Vice President and CFO of the Telenor Group. He has previously worked with Aker Kværner as the Group Executive Vice President and CFO, Aker Maritime as CFO and Executive Vice President, and Aker RGI as Executive Vice President Business Development. Mr Westlie is a State Authorised Public Author, Norges Handelshøyskole. Sir Peter Mason KBE (Board member) Sir Peter Mason retired as CEO of AMEC in 2006, after holding the postion since 1996. He has previously worked with BICC, holding various management positions including Executive Director. Sir Peter Mason is serving as a Non-executive Director of BAE Systems and as a non-executive capacity on the Board of the Olympic Delivery Authority. He is a Fellow of The Institution of Civil Engineers and holds a Bachelor of Science in Engineering.
66
Shareholders and share price performance
Top 10 shareholders Name Shares Ownership
DWS Investments 19,218,430 9.9%
GE Asset Management 18,845,293 9.7%
Artisan Partners 18,752,800 9.6%
Fidelity International 8,743,303 4.5%
Fidelity Investments Luxembourg 6,185,928 3.2%
Fidelity Management & Research 2,576,052 1.3%
Fidelity Investments Services 2,439,262 1.3%
Hartford Investment Financials 2,289,000 1.2%
Teachers Advisors 2,266,877 1.2%
DWS Investment 1,532,274 0.8%
Other 112,104,753 57.5%
Total number of shares 194,953,972 100.0%
Source: VPS Acergy share price performance
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
OBX (rebased)
OSX (rebased)
ACY
Volume
0
100
120
140
160
180
80
NOK Volume
Jan-06 Apr-06 Jul-06 Jul-07Jan-07 Jan-08Oct-06 Apr-07 Oct-07 Apr-08
Source: Factset
67
Appendix 1: Company description, Subsea 7
Subsea 7 is mainly a pure-play subsea construction and installation company that also has some IRM activities. Subsea 7 competes primarily with Acergy, and also Technip and Saipem, though the latter two are significantly larger in size. Subsea 7 has global operations, currently with the largest share of its revenues in the North Sea. During 2007, the company had 47% of its revenues from the North Sea market, 24% from Africa, and 15% from Brazil. Remaining revenues were distributed between GoM and Asia Pacific. For 2006, the mix was 35% from the North Sea, 17% from Africa and 14% from Brazil. The company currently has a fleet of 17 vessels, and will take delivery of another four vessels during 2008 and one vessel in 2009. Including newbuilds, 12 of the vessels are CSVs (pipelay & multipurpose support), five are ROVs and five are DSVs.
Revenue distribution and share of revenues per region, 2005-2007
300323
9140
1.000
1.500
2.000
2.500
500
USDm
5
581
357
1479297
1.287
2005
761
377
97
2006
1.6701.025
514
152
+30%
167
2.187
2007
126
North Sea
Africa
Brazil
GoM Other
Asia-Pac.North Sea
Africa
Brazil
GoM Other
Asia-Pac.
11% 18% 15%
0%10%20%30%40%50%60%70%80%90%
100%
45%
28%
7%8%
1%
2005
46%
23%
6%8%1%
2006
47%
24%
7%8%0%
2007
Share (%)
Source: Subsea 7; Arctic Securities
Brief history Subsea 7 was created in 2002 from the existing businesses of Halliburton Subsea and DSND (Søndenfjeldske). The company has been through an active restructuring and development phase ever since, restructuring and re-focusing its business activities 2002-2005 and then pursuing aggressive fleet growth from 2005 and onwards. The ongoing fleet expansion/capital expenditure program initiated in 2005 is set to be completed during 2008, and the company will then enter a more “normal” capital expenditure phase with annual maintenance capex around USD 100 million. Below, we have listed some of the key milestones in the company’s history. Up to 2005, Subsea 7 was mainly a player in the North Sea & Brazil. This changed in 2006 with the establishment of a JV with Technip to operate offshore subsea activities in Asia-Pacific & coherently the first contracts for the JV in this area, as well as the first large contracts for Subsea 7 in Nigeria and Angola. This marked the steps to a ore internationally diversified company, though the North Sea is still its stronghold.
Subsea 7 has its largest share of revenues from the North Sea
Major fleet expansion program set to be completed in 2008
68
Key company milestones 2002 – 2007
Company milestones (2002 – 2007)Company milestones (2002 – 2007)
2003
2004
2005
2006
2002
2007
May: DSND Inc. (Søndenfjeldske) and Haliburton Subsea combine resources and establish Subsea 7
Sold its Geotechnical business to Fugro
DSND Inc renamed to Siem Offshore Inc (later Siem Industries) Siem Offshore pays Haliburton USD 200 million for its 50% share in Subsea 7 and de-lists the company
Subsea 7 (re-introduced) trades on OSE. Siem Industries’ control around 45% of outstanding sharesAwarded 1st major contract in South Africa, USD 115 million by Petro SA
Established JV with Technip to operate offshore subsea activities in Asia Pacific (excluding India and the Middle East). 1st JV contracts awarded same year in Australia and New Zealand Awarded 1st contract in Nigeria, USD 60 million by Star Deep Water Ltd Awarded 1st contract in Angola, USD 200 million by Esso Angola Awarded two 6 years long charter contract with Shell in the North Sea, valued at USD 1.1 billion
Continued to build backlog: Awarded major contracts in Brazil, USD 390 million trunkline contract and the North Sea, USD 280 million contract for the Troll area Took delivery of three new vessels, two major pipelay/CSVs and one ROV support vessel Operational improvement – steadily increasing EBITDA margin
Source: Subsea 7; Press search; Arctic Securities
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Appendix 2: Glossary of key subsea terms
Christmas/Xmas tree: An assembly of control valves, gauges and chokes that control oil and gas flow in a completed well. Christmas trees installed on the ocean floor are referred to as subsea, or “wet” trees. Christmas trees installed on land or platforms are referred to as “dry” trees. Deepwater: Generally defined as operations in water depths of 1,500 feet or more. Development well: A well drilled in a proven field to complete a pattern of production. Flow-control equipment: Mechanical devices for the purpose of directing, managing and controlling the flow of produced or injected fluids. Flowline: A pipe, laid on the seabed, which allows the transportation of oil/gas production or injection of fluids. Its length can vary from a few hundred meters to several kilometres. HP/HT (High Pressure/High Temperature): Refers to deepwater environments producing pressures as great as 15,000 psi and temperatures as high as 350 degrees Fahrenheit. Intervention systems: A system used for deployment and retrieval of equipment such as subsea control modules and pressure caps; also used to perform pull-in and connection of umbilicals and flowlines and to enable diagnostic and well-manipulation operations. Jumpers: Connections for various subsea equipment, including tie-ins between trees, manifolds or flowline-skids. Manifold: A subsea assembly that provides an interface between the production pipeline and flowline and the well. The manifold performs several functions, including collecting produced fluids from individual subsea wells, distributing the electrical and hydraulic systems and providing support for other subsea structures and equipment. PSI: Pounds per square inch. Measure commonly used to describe pressure. Risers: Physical link between the seabed and the topside of offshore installations. Used to transfer produced fluids from the seabed to surface facilities, and transfer injection or control fluids from the surface facilities to the seabed. Risers can be either rigid or flexible and are critical components of these types of installations. RLWI: Riserless Well Intervention. Well maintenance that is performed using DP vessels rather than anchored drilling rigs. The system is deployed through a moonpool from a DP vessel and installed on the subsea Christmas tree without the use of anchors or risers. Subsea separation and processing: Subsea processing consists of treating produced fluids, upstream or surface facilities at or below the seabed, including oil/gas/water separation, active sand management, multi-phase pumping, gas compression and flow assurance. Subsea system: Ranges from single or multiple subsea wells producing to a nearby platform, floating production system or TLP to multiple wells producing through a manifold and pipeline system to a distant production facility. Subsea tree: A Christmas/Xmas tree installed on the ocean floor. Also called a “wet” tree. Topside: Refers to the oil production facilities above the water, usually on a platform or production vessel (typically an FPSO), as opposed to the subsea production facilities.
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Also refers to the above-water location of certain subsea system components such as some control systems. Ultra deepwater: Usually refers to operations in water depths of 5,000 feet or greater. Umbilical: An assembly of hydraulic hoses which can also include electrical cables or optic fibres used to control subsea structures from a platform or a vessel. Wellhead: The surface termination of a wellbore that incorporates facilities for installing casing hangers during the well construction phase. The wellhead also incorporates a means of hanging the production tubing and installing the Christmas tree and surface flow control facilities in preparation for the production phase of the well. Source: FMC Technologies, Technip
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Profit & loss statement
Profit & loss USDm 2006 2007 2008e 2009e 2010eSales 2,124 2,663 2,988 3,306 3,610Operating expenses (1,766) (2,222) (2,487) (2,725) (2,961)EBITDA 358 441 500 580 649Depreciation (73) (94) (106) (113) (120)EBITA 285 347 394 467 529Amortisation & impairment 0 0 0 0 0EBIT 285 347 394 467 529Net interest 15 (39) (33) (31) (31)Other financial items 1 33 26 28 28Pre-tax profit 302 341 388 464 526Taxes (74) (212) (140) (162) (184)Net profit 237 135 251 306 342
EPS reported (USD) 1.2 0.6 1.3 1.6 1.8EPS adj (USD) 1.2 0.6 1.3 1.6 1.8EPS adj fully diluted (USD) 1.2 0.6 1.3 1.6 1.8
Sales growth (%) 39.0 25.4 12.2 10.7 9.2EBITDA growth (%) 85.8 23.1 13.4 16.0 11.8EBIT growth (%) 129.1 21.9 13.6 18.5 13.2Pre-tax profit growth (%) 124.0 13.0 13.9 19.5 13.3Net profit growth (%) 59.3 (43.2) 86.6 21.7 11.8
EPS reported growth (%) 57.0 (45.6) 102.4 21.7 11.8EPS adj growth (%) 57.0 (45.6) 102.4 21.7 11.8EPS adj fully diluted growth (%) 57.0 (45.6) 102.4 21.7 11.8
EBITDA margin (%) 16.9 16.6 16.7 17.6 18.0 Source: Arctic Securities Research
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Balance sheet & Cash flow
Balance sheet USDm 2006 2007 2008e 2009e 2010ePPE 673 814 1,008 1,070 1,125Other fixed assets 166 211 255 255 255Fixed assets 839 1,025 1,263 1,325 1,380Receivables 644 818 922 1,023 1,121Other current assets 17 1 0 0 0Cash & cash equivalents 718 583 611 851 1,133Current assets 1,378 1,402 1,533 1,875 2,254
Total assets 2,217 2,427 2,796 3,200 3,634
Shareholders' equity 816 819 1,045 1,313 1,616Provisions 104 121 131 140 149LT IB debt 372 387 390 390 390LT liabilities 476 508 521 530 539Payables 926 1,100 1,230 1,357 1,479Current liabilities 926 1,100 1,230 1,357 1,479Total liabilities 1,402 1,608 1,750 1,887 2,018
Total liabilitites and equity 2,217 2,427 2,796 3,200 3,634
Cash & cash equivalents 718 583 611 851 1,133Gross IB debt 372 387 390 390 390Net IB debt (346) (196) (221) (461) (743)Working capital (282) (282) (308) (334) (358)Capital employed 1,291 1,327 1,566 1,843 2,155
Net IB debt/Equity (%) (42) (24) (21) (35) (46)Equity/Assets (%) 37 34 37 41 44
Cash flow USDm 2006 2007 2008e 2009e 2010eNet profit 237 135 251 306 342Non-cash adjustments 73 94 106 113 120Change in working capital 370 33 37 35 34Operating cash flow (OCF) 680 261 394 454 495Capital expenditures (747) (235) (300) (175) (175)Free cash flow (FCF) (67) 26 94 279 320Share issues & buybacks 579 (131) (25) (38) (38)Change in debt 372 15 3 0 0Other non-cash adjustments (166) (45) (44) 0 0Change in cash 718 (135) 28 240 282 Source: Arctic Securities Research
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Key ratios & Valuation
Share data 2006 2007 2008e 2009e 2010eShares outstanding (m) (y-e) 192.7 188.4 188.1 188.1 188.1Shares fully diluted (m) (y-e) 201.1 213.3 191.0 191.0 191.0Shares fully diluted average (m) 198.3 207.2 191.0 191.0 191.0Share price NOK (y-e) 120.8 118.5 117.5 117.5 117.5Share price USD (y-e) 19.6 21.4 23.2 23.2 23.2Market capitalisation (USDm) 3,778 4,026 4,370 4,370 4,370Enterprise value adj (USDm) 3,432 3,830 4,149 3,909 3,627
EPS reported (USD) 1.2 0.6 1.3 1.6 1.8EPS adj(USD) 1.2 0.6 1.3 1.6 1.8EPS adj fully diluted (USD) 1.2 0.6 1.3 1.6 1.8DPS (USD) 0.0 0.0 0.0 0.0 0.0
Growth 2006 2007 2008e 2009e 2010eSales growth (%) 39.0 25.4 12.2 10.7 9.2EBITDA growth (%) 85.8 23.1 13.4 16.0 11.8EBIT growth (%) 129.1 21.9 13.6 18.5 13.2Pre-tax profit growth (%) 124.0 13.0 13.9 19.5 13.3Net profit growth (%) 59.3 (43.2) 86.6 21.7 11.8
EPS reported growth (%) 57.0 (45.6) 102.4 21.7 11.8EPS adj growth (%) 57.0 (45.6) 102.4 21.7 11.8EPS adj fully diluted growth (%) 57.0 (45.6) 102.4 21.7 11.8
Margins 2006 2007 2008e 2009e 2010eEBITDA margin (%) 16.9 16.6 16.7 17.6 18.0EBITA margin (%) 13.4 13.0 13.2 14.1 14.7EBIT margin (%) 13.4 13.0 13.2 14.1 14.7Pre tax margin (%) 14.2 12.8 13.0 14.0 14.6Net margin (%) 11.1 5.0 8.4 9.2 9.5
Valuation 2006 2007 2008e 2009e 2010eEV/Sales (x) 1.6 1.4 1.4 1.2 1.0EV/EBITDA (x) 9.6 8.7 8.3 6.7 5.6EV/EBIT (x) 12.1 11.0 10.5 8.4 6.9P/E (x) 16.4 32.9 17.7 14.5 13.0P/E adj (x) 16.4 32.9 17.7 14.5 13.0P/BVPS (x) 4.6 4.9 4.2 3.3 2.7
Profitability 2006 2007 2008e 2009e 2010eROE (%) 29.0 16.4 24.0 23.3 21.1ROCE (%) 22.1 26.2 25.2 25.4 24.6Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 Source: Arctic Securities Research
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Disclaimer
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