Download - Presentation 2 - Erik-Tonne.pdf

8/18/2019 Presentation 2 - Erik-Tonne.pdf

1/30

FPSO: Perspectives from the equity market

September 2010

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

+47 48 40 32 26


2/30


3/30

3

Underlying market development: Growth has been good and steady, and will

likely continue to be so

11 1114

1315

1818

20

22 22 22

1213

14

1516 18

10

76644311100

322

2

11111000000

63

2

2

10

000

00000000000

0

20

40

60

80

100

120

140

160

180

200

220

240

260

280

02

137

83

35

01

127

76

34

00

117

70

33

3

99

112

67

32

98

93

53

30

8

97

80

46

26

7 1

96

65

36

22

6

95

57

31

21

5

94

50

28

184

93

43

24

16 3

92

37

22

12

0

91

34

21

11

0

90

31

19

10

0

89

25

13

88

21

13

87

20

2

78

11 13

86

19

12

85

13

FPS (installedbase)

84

11

6

83

9

+9%

09

225

144

41

08

222

144

40

07

214

137

40

06

190

116

40

05

8

176

108

37

04

166

100

36

03

149

89

36

9

6

82

7

6

81

6

5

80

5

4

79

2

SPARs

TLPs

Production Semi’s

FPSOs

CAGR of 9% last 10 years

Underlying rationale for floating production solutions is strong – deeper, further from shore, more marginal

fields etc. FPSOs are cost-efficient and versatile solutions (for the oil companies at least)

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

CAGR, number ofunits 1999-2009

Source: IMA; Arctic Securities

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

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


4/30

4

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

Source: IMA; Arctic Securities

Order intake, new Floating Production Units (FPUs) ordered

7

4

3 3 3

4

2

6 6

8

11 11

8

4

11

3 3

45

8

11

5

10

7

9

16

11

9

2

9

10

4

0 0

6

7

12

0

2

4

6

8

10

12

14

16

18

J u n - S

e p 9 7

O c t 9 7 - F

e b 9 8

M a r - J u n 9 8

J u l - O

c t 9 8

N o v 9 8 - F

e b 9 9

M a r - J

u l 9 9

A u g - N

o v 9 9

D e c 9 9 - M

a r 0 0

A p r - S

e p 0 0

O c t 0 0 - J

a n 0 1

F e b - J

u n 0 1

J u l - O

c t 0 1

N o v 0 1 - M

a r 0 2

A p r - J

u l 0 2

A u g 0 2 - J

a n 0 3

F e b - J

u n 0 3

J u l - O

c t 0 3

N o v 0 3 - M

a r 0 4

A p r - J

u l 0 4

A u g - N

o v 0 4

D e c 0 4 - M

a r 0 5

A p r - J

u l 0 5

A u g - O

c t 0 5

N o v 0 5 - M

a r 0 6

A p r - J

u l 0 6

A u g - N

o v 0 6

D e c 0 6 - M

a r 0 7

A p r - J

u l 0 7

A u g - N

o v 0 7

D e c 0 7 - M

a r 0 8

A p r - J

u l 0 8

A u g - D

e c 0 8

J a n - A

p r 0 9

A p r - J

u l 0 9

A u g 0 9

- D

e c 0 9

J a n 1 0

- J u n 1 0

J u l - A

u g 1 0

N r o f F P U

o r d e r s

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

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

6 Projects awarded H2/09

1. Aseng to SBM2. Papa Terra to BWO/Quip3. Chim Sao to EOC4. TGT to Bumi Armada5. Aquila to Saipem6. Baleia Azul to SBM(redeployment)

19 Projects awarded so farin 2010:

1. Kitan to Bluewater(redeployment)2. Guara to MODEC3. OSX-1 to OSX (old Nexus)4. Goliath EPC-contract toHyundai5. Athena LoI to BWO6. Huntington LoI to SEVAN

(redeployment)7. Tupi Nordeste to SBM-consortium8. Sidon/Tiro to Teekay9. TSB to BWO10. Aruana to Teekay(redeployment)11. Pagerungan Utara toBLT (redeployment)12.-19. Eight pre-salt FPSO-hulls (LoI to Engevix/GVA/Cosco)


5/30

5

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

31

37 36

3235

3330

2321

17

21 22

27

37 37 3839

4138 3737

34 34 35 34

4346 46

5760

6765

60

56

49

41 4037

39

49

0

10

20

30

40

50

60

70

80

Q 3 / 9 6

Q 1 / 9 7

Q 2 / 9 7

Q 3 / 9 7

Q 1 / 9 8

Q 3 / 9 8

Q 4 / 9 8

Q 1 / 9 9

Q 3 / 9 9

Q 4 / 9 9

Q 2 / 0 0

Q 3 / 0 0

Q 1 / 0 1

Q 3 / 0 1

Q 4 / 0 1

Q 2 / 0 2

Q 3 / 0 2

Q 1 / 0 3

Q 2 / 0 3

Q 4 / 0 3

Q 1 / 0 4

Q 3 / 0 4

Q 4 / 0 4

Q 2 / 0 5

Q 3 / 0 5

Q 4 / 0 5

Q 1 / 0 6

Q 3 / 0 6

Q 4 / 0 6

Q 1 / 0 7

Q 3 / 0 7

Q 4 / 0 7

Q 1 / 0 8

Q 3 / 0 8

Q 4 / 0 8

Q 1 / 0 9

Q 3 / 0 9

Q 4 / 0 9

Q 1 / 1 0

Q 3 / 1 0

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

turning again

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

drop

We expect order backlog to come up further: Demand is pent-up, and backlog should continue to

build as FIDs (Final Investment Decisions) gain momentum

Average = 39

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

If excluding the 8 pre-salthulls, order backlog wouldhave been at 41 units, stillconfirming the turn (thoughmore modestly)


6/30

6

Demand-side remains strong! In spite of many awards since Aug-09, number of projects

in the Bid/final design phase remains steady

Implying oil companies continue to move on projects, gradually progressing them to FID and contract-award

31323333

25

0

5

10

15

20

25

30

35

Nr of units

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

Source: IMA; Press; Arctic Securities

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

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

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

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

projects

In short, we believe the demand-side is pent-up, andthat conditions are now increasingly in place formore contract awards again

The oil price is steady (enabling planning) on

back of healthy demand

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

down

Access to financing for smaller E&Ps and FPSO-

operators has improved

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

Of whichFLNG units

1 1 1 1 2


7/30

7

Industry majors are increasingly positive – both amongst oil companies and

major contractors

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

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

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


8/30

8

Industry survey: Industry-players are more optimistic, reflecting higher

tendering-levels and improved market-conditionsIndustry sees on average 12 contracts in 2010 and 15 contracts in 2011

Industry-players significantly moreoptimistic compared to last year’s survey

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

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

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

10

7

5

25

12

5

0

5

10

15

20

25

30

Low HighAverage

2009-results

2010-results

16

11

7

23

15

10

0

5

10

15

20

25

30

HighAverageLow

2009-results

2010-results

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

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

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

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

How have input prices developed over the past12 months? (%-change)

8

5

3

6

4

1

0

5

10

15

20

25

30

HighAverageLow

2009-results

2010-results

-1

-3-3-3

-4

-7

-10

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

Yard costs Other costsMajor topsideequipment costs

2009-results

2010-results


9/30

9

High-end of the lease segment consolidates with BWO-PROD combining.

Competitive pressure should be further reduced, boding well for returns

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

Company Num er o ease FPSOs in operation or un er construction

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

SBM

MODEC

Prosafe Production

BW Offshore

Bluewater

Maersk

Petrojarl (Teekay)

Sevan FPSO

Saipem

Bumi Armada

Fred. Olsen Production

Rubicon

Sea Production

Tanker Pacific (TPOT)

Single unit owners

Contracted FPSOs in operation

Contracted FPSOs in operation (operations only)

Contracted units under construction/conversion

Construction on speculation

Idle

Combining toone entityLimited

financial

bidding capacity

Mainly N.Sea

Financialcapacity?

Likely to takeone more

project only?

To conclude, we believe it’s fair to say the market is picking up and that bargaining position for

the remaining players has improved and continues to do so!

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


10/30

10

Agenda/key topics highlighted in this presentation

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

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

Is the market willing to finance new developments? Is the financing

situation on the road to recovery?

What are the main concerns for investors in financing FPSO-projects and

how can you achieve a win-win deal with project financiers?


11/30

11

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

Hard to place all in one group. Many are generalists. Investment strategies and

exposures vary - across industries, geographies and asset classes

Some are oil services “specialists” – even these sometimes have detailed knowledge of

the floating production business

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

Valuation approaches are usually “simple”: Valuation metrics (multiples), relative toother segments, look at potential for earnings-upgrades/re-valuation. Some do

modeling/DCF-analyses/more detailed work

History matters…

Opinions and momentum can turn rapidly – from loved by everyone to hated by

everyone (usually infectious)

Source: Arctic Securities


12/30

12

The floating production segment has spooked investors – for obvious reasons

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

businesses

BWO listed at NOK 25 May-06, currently at NOK 8.0

PROD listed at NOK 36 Feb-08, currently at NOK 13.0

Add to this; Aker Floating Production, Sevan… - not a joyride for shareholders

Leading established players – e.g. SBM – have also disappointed with significant delays to EPC-

contracts (rigs, Yme, Deep Panuke), and are trading at historically low P/B-levels

Speculative entrants (mainly originated out of Norway) didn’t help the situation

Very hard to point to any success-stories. Massive value destruction

Nexus, Petroprod, FPSOcean, MPF, Nortechs/Songa Floating Production

The financial community helped fuel the hype…

“Floating Production is the new deepwater drilling”

“If we assume two new contracts won per year at 15% IRR…”

…and failed to recognize fundamental aspects of the business

No upside through e.g. rate-fluctuations – i.e. rate locked once capex is agreed upon/contract signed


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

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


13/30

13

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

0

20

40

60

80

100

120

140

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

Drillers NOR Subsea NOR Supply NOR FPSO NOR Seismic NOR

Source: Factset; Arctic Securities


14/30

14

…and clearly the laggard since the market started improving again

70

120

170

220

270

320

370

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Drillers NOR Subsea NOR Supply NOR FPSO NOR Seismic NOR


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

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


15/30

15

Adjusting for worst performers (AKFP & SEVAN), some of the FPSO-peers have performed

more in line with other oil services segments since the market started coming up again

50

70

90

110

130

150

170

190

210

230

250

270

290

310

330

350

370

Mar-

09

Apr-

09

May-

09

Jun-

09

Jul-

09

Aug-

09

Sep-

09

Oct-

09

Nov-

09

Dec-

09

Jan-

10

Feb-

10

Mar-

10

Apr-

10

May-

10

Jun-

10

Jul-

10

Aug-

10

Sep-

10

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

BWO up stronglylately on back of

APL-sale

FOP in line withdrillers and supply

PROD, SBM and

MODEC under-performing


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

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


16/30

16

Creating value for shareholders…?

Source: Vitae Energy; Arctic Securities

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


17/30

17

Sector shake-out: A lot of players have disappeared. Speculative newcomers

likely gone for quite some time…

1. AKFP

2. BWO

3. FLNG

4. FPSO (FPSOcean)

5. FOP

6. MPF – bankrupt

7. NEXUS

8. PetroProd9. PROD

10.SEAP (Sea Production)

11.SEVAN

12.SFLO (Songa Floating Production,

ex. Nortechs FPSO)

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

1. AKFP

2. BWO

3. FLNG

4. FPSO (FPSOcean) - bankrupt

5. FOP

6. MPF – bankrupt

7. NEXUS – NEXUS I sold to OSX

8. PetroProd - bankrupt9. PROD

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

11.SEVAN

12.SFLO (Songa Floating Production, ex. Nortechs

FPSO) – Bankrupt

Source: Vitae Energy; Arctic Securities

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

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

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

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


18/30

18

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

sober…

Trusting companies’ input on capex, time,

targeted IRR in contracts

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

that

High residual values / redeployment

opportunities

Including a high system value / value of

expected further growth (“2 new contracts

per year”)

Believing in potential “super-returns” due

to the strong and appealing deepwater story(“after DW drilling comes production”)

Low WACCs (abundant cheap financing)

From To

Strongly fearing capex overruns – running

sensitivity analyses, incorporating cost

overruns and delays in estimates

NPV-analysis of firm contracts alone –

options viewed as potential upside only

Modest residual values

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

Assuming “super-returns” will never

materialize

Increasing WACCs

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


19/30

19

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

investors telling us?

”The FPSO-sector isstill un-investable”

”I’m stuck withstocks in the worstsegment in all of oil

services”

“The segment hasbeen a disaster”

“We need to be able to believe in

stronger IRRs to invest in this sector –how is the industry going to be

credible on this when they weren’tcapable of extracting stronger margins

in the last super-cycle?”

“How is it possible thateverything else in oil

services rallies and thissegment is lagging so

significantly?”

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

potentially creating a larger and significantly more interesting entity for investors

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

potentially creating a larger and significantly more interesting entity for investors



20/30

20

Established players have heard the message and started to increasingly

address investors’ concernsIt remains to be seen whether this will result in tangible, profitable projects

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

interest is increasing

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

interest is increasing

”Target good returnFPSO projects”

”Will not agree to

undue contractual risk”

Source: BW Offshore; Arctic Securities


21/30

21



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

evaluation criteria?






22/30


23/30

23

0

200

400

600

800

1000

1200

1400

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

H Y

S p r e a d s ( b a

s i s p o i n t s )

0

50

100

150

200

250

I G S

p r e a d s ( b a s i s p o i n t s )

High-Yield (RHS) Investment Grade (LHS)

Debt markets are also improving

Low default rates and high liquidity

secured record low spreads

Credit crunch, increased

volatility and low liquidity

Strong

recovery

PIIGS

Source: Bloomberg; Arctic Securities Credit Research


24/30

24

US High-Yield issue volumes YTD already above full-year 2009-level and

significant increase from the low level seen in 2008

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

US High-Yield

Volume issued (in USDbn)

0

20

40

60

80

100

120

140

160

180

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

2010

20092008200720062005

U S D b n



25/30

25

0

200

400

600

800

1000

1200

1400

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

0

10

20

30

40

50

60

70

80

90

High-Yield (RHS) VIX (LHS)

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

VIX reflects a market-estimateof future volatility (“fearindex”), based on the weightedaverage of the impliedvolatilities for a wide range ofstrikes



26/30

26

At USD 70/bbl, fundamentals still look strong. Oil companies increase E&P-

spending again Should ease financing-burden somewhat

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

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

E & P

c a p e x

p e r b a r r e l p r o d u c e d

( U S D )

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

-

25,000

50,000

75,000

100,000

125,000

150,000

175,000

200,000

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

E & P s p e n d i n g ( U

S D m )

0

5

10

15

20

25

30

A g g r e g a t e d p r o d u c t i o

n ( m b o e p d )

Supermajors Majors Independents Total production same co's

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

barrel produced, split by company type

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

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

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

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

Source: Companies; Arctic Securities


27/30

27

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

Mid segment

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

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

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

High-yield market potentially becoming increasingly possible again

Newcomers /speculative

projects

Impossible?

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

In addition to equity markets reluctance, banks are not willing to commit. Though not FPSO,

Master Marine is a good example: Construction project on track (time and cost), 3Y firm

contract in place with ConocoPhillips, still unable to raise remaining bank-funding

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

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

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

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


Top tierplayers (SBM,MODEC, BWO,

PROD)

Established players with track-record and firm contracts/existing operations can still raiseequity funding at acceptable terms. SBM e.g. successfully raised EUR 181m Nov-09 through a

book building process (price set at/near closing price for the day). MODEC recently raised

more equity, but directed at main shareholders

Increasing equity requirements pose challenges (for all players)

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


28/30

28



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

evaluation criteria?






29/30

29

What are the main concerns for (equity) investors and how can you achieve a

win-win situation with financiers?

Main concern: Receive decent return on invested capital

Both categories of investors: Secure decent yield on invested capital

Debt side: Avoid downside risk

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

shareholder return policy

Companies need to:

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

Vs. debt-investors: Convincing risk mitigation (contract coverage/backlog, strong

contract-counterparties, guarantees, debt/value etc.)

Vs. equity-investors: Focus on shareholder (cash) return policy. Investors want to avoid

“value traps”. Look to Fredriksen. Why is implicit value per DW rig in SDRL USD 1bn+, vs.

USD ~470m in RIG, USD ~580m in PDE etc.?

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



30/30

Download - Presentation 2 - Erik-Tonne.pdf

Top Related