FPSO: Perspectives from the equity market
September 2010
Erik Tø[email protected]+47 21 01 32 26+47 48 40 32 26
2
Agenda/key topics highlighted in this presentation
Market development: Is the situation in the market picking up?
How do investors and analysts look at the FPSO-sector? What are their evaluation criteria?
Is the market willing to finance new developments? Is the financing situation on the road to recovery?
What are the main concerns for investors in financing FPSO-projects and how can you achieve a win-win deal with project financiers?
3
Underlying market development: Growth has been good and steady, and will likely continue to be so
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0
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13
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13
87
20
2
78
11 13
86
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85
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FPS (installed base)
84
11
6
83
9
+9%
09
225
144
41
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40
07
214
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40
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2
SPARs
TLPs
Production Semi’s
FPSOs
CAGR of 9% last 10 years
Underlying rationale for floating production solutions is strong – deeper, further from shore, more marginal fields etc. FPSOs are cost-efficient and versatile solutions (for the oil companies at least)
FPSOs continue to dominate as the most widely used floating production solution
CAGR, number of units 1999-2009
Source: IMA; Arctic Securities
We expect floating production to continue to see healthy / strong growth rates for the foreseeable future
We expect floating production to continue to see healthy / strong growth rates for the foreseeable future
4
Recent market development: A strong upswing in FPSO contract-awards…
Source: IMA; Arctic Securities
Order intake, new Floating Production Units (FPUs) ordered
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11 11
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0 0
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Jun-
Sep
97
Oct
97
- Fe
b 98
Mar
- J
un 9
8
Jul -
Oct
98
Nov
98
- Fe
b 99
Mar
- J
ul 9
9
Aug
- N
ov 9
9
Dec
99 -
Mar
00
Apr
- Se
p 00
Oct
00
- Ja
n 01
Feb
- Ju
n 01
Jul -
Oct
01
Nov
01
- M
ar 0
2
Apr
- Ju
l 02
Aug
02 -
Jan
03
Feb
- Ju
n 03
Jul -
Oct
03
Nov
03
- M
ar 0
4
Apr
- Ju
l 04
Aug
- N
ov 0
4
Dec
04 -
Mar
05
Apr
- Ju
l 05
Aug
- O
ct 0
5
Nov
05
- M
ar 0
6
Apr
- Ju
l 06
Aug
- N
ov 0
6
Dec
06 -
Mar
07
Apr
- Ju
l 07
Aug
- N
ov 0
7
Dec
07 -
Mar
08
Apr
- Ju
l 08
Aug
- De
c 08
Jan
- Ap
r 09
Apr
- Ju
l 09
Aug
09 -
Dec
09
Jan
10 -
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Jul -
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Nr
of F
PU o
rder
s
Even if excluding the eight pre-salt hulls for Petrobras, we are at 11 contracts YTD, representing a decent level. More to come with e.g. CLOV, OSX-2 and Frøy so far not announced
Even if excluding the eight pre-salt hulls for Petrobras, we are at 11 contracts YTD, representing a decent level. More to come with e.g. CLOV, OSX-2 and Frøy so far not announced
6 Projects awarded H2/09
1. Aseng to SBM 2. Papa Terra to BWO/Quip3. Chim Sao to EOC 4. TGT to Bumi Armada5. Aquila to Saipem6. Baleia Azul to SBM (redeployment)
19 Projects awarded so far in 2010:
1. Kitan to Bluewater(redeployment) 2. Guara to MODEC3. OSX-1 to OSX (old Nexus)4. Goliath EPC-contract to Hyundai 5. Athena LoI to BWO6. Huntington LoI to SEVAN (redeployment)7. Tupi Nordeste to SBM-consortium8. Sidon/Tiro to Teekay9. TSB to BWO 10. Aruana to Teekay(redeployment) 11. Pagerungan Utara to BLT (redeployment) 12.-19. Eight pre-salt FPSO-hulls (LoI to Engevix/GVA/ Cosco)
5
Floating Production Systems on order/under construction, Quarterly since Q3/96
31
37 3632
3533
30
2321
1721 22
27
37 37 38 3941
38 37 3734 34 35 34
4346 46
5760
6765
6056
49
41 4037
39
49
0
10
20
30
40
50
60
70
80
Q3/
96Q
1/97
Q2/
97Q
3/97
Q1/
98Q
3/98
Q4/
98Q
1/99
Q3/
99Q
4/99
Q2/
00Q
3/00
Q1/
01Q
3/01
Q4/
01Q
2/02
Q3/
02Q
1/03
Q2/
03Q
4/03
Q1/
04Q
3/04
Q4/
04Q
2/05
Q3/
05Q
4/05
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06Q
3/06
Q4/
06Q
1/07
Q3/
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4/07
Q1/
08Q
3/08
Q4/
08Q
1/09
Q3/
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4/09
Q1/
10Q
3/10
…Resulting in the order backlog (nr. of units under construction) at yards turning again
During Q1/10, order backlog increased again for the first time in eight quarters, following a steady drop
We expect order backlog to come up further: Demand is pent-up, and backlog should continue to build as FIDs (Final Investment Decisions) gain momentum
Average = 39
Note: Excludes storage-only units, MOPUs and LNG RVs (shuttle/regas vessels) Source: IMA; Arctic Securities
If excluding the 8 pre-salt hulls, order backlog would have been at 41 units, still confirming the turn (though more modestly)
6
Demand-side remains strong! In spite of many awards since Aug-09, number of projects in the Bid/final design phase remains steady Implying oil companies continue to move on projects, gradually progressing them to FID and contract-award
31323333
25
0
5
10
15
20
25
30
35Nr of units
CurrentSep-09Dec-08Oct-08 Nov-09
Source: IMA; Press; Arctic Securities
Number of projects in the Bid/Final Design phase describes projects that are close to FID and contract-award
In spite of 25 awards since Aug-09, this number remains fairly steady
This implies the number of projects progressing from “Planning” to “Bid/Final design” remains high; i.e. demand-side remains strong
We also believe it’s positive that this number remained fairly steady through the financial turmoil, demonstrating oil companies continued to mature projects
In short, we believe the demand-side is pent-up, and that conditions are now increasingly in place for more contract awards again
The oil price is steady (enabling planning) on back of healthy demand
Input-costs (steel, yard-capacity etc) have come down
Access to financing for smaller E&Ps and FPSO-operators has improved
Number of FPSO-projects in the bid/final design phase (see next two slides for details)
Of which FLNG units 1 1 1 1 2
7
Industry majors are increasingly positive – both amongst oil companies and major contractors
Source: Technip (Mar/Apr-10); Arctic Securities
We’re noticing more positive signals from most (all) of the companies, especially within subsea, field development and floating production
We’re noticing more positive signals from most (all) of the companies, especially within subsea, field development and floating production
8
Industry survey: Industry-players are more optimistic, reflecting higher tendering-levels and improved market-conditionsIndustry sees on average 12 contracts in 2010 and 15 contracts in 2011
Industry-players significantly more optimistic compared to last year’s survey
On average, the players expect a further increase in number of awards during 2011
“How many FPSO-lease contracts do you expect will be awarded across the industry next year?”
Note: Survey conducted in Q2/09 and Q2/10 respectively. Participants: MODEC, PROD, Maersk, FOP, SEVAN, BWO (10 only), SBM (09 only)Source: Companies; Arctic Securities
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75
25
12
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25
30
Low HighAverage
2009-results
2010-results
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7
23
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0
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30
HighAverageLow
2009-results
2010-results
“How many FPSO-lease contracts do you expect will be awarded across the industry by year-end?”
Competitive pressure reduced. Some players even comment being in single-source discussions for projects
Major input costs have dropped further since last year. Companies’ answers for 2010 vary significantly
How many bidders are there on average involved in projects you are tendering for?
How have input prices developed over the past 12 months? (%-change)
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HighAverageLow
2009-results
2010-results
-1
-3-3-3
-4
-7
-10
-9
-8
-7
-6
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-1
0
Yard costs Other costsMajor topside equipment costs
2009-results
2010-results
9
High-end of the lease segment consolidates with BWO-PROD combining. Competitive pressure should be further reduced, boding well for returns
Note: Does not include turnkey FPSOs, i.e. only includes FPSOs owned and operated by the FPSO-companies Source: Companies; IMA; Arctic Securities
Company Number of lease FPSOs in operation or under construction
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
SBM
MODEC
Prosafe Production
BW Offshore
Bluewater
Maersk
Petrojarl (Teekay)
Sevan FPSO
Saipem
Bumi Armada
Fred. Olsen Production
Rubicon
Sea Production
Tanker Pacific (TPOT)
Single unit owners
Contracted FPSOs in operation
Contracted FPSOs in operation (operations only)
Contracted units under construction/conversion
Construction on speculation
Idle
Combining to one entityLimited
financial bidding capacity
Mainly N.Sea
Financial capacity?
Likely to take one more
project only?
To conclude, we believe it’s fair to say the market is picking up and that bargaining position for the remaining players has improved and continues to do so!
To conclude, we believe it’s fair to say the market is picking up and that bargaining position for the remaining players has improved and continues to do so!
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 their evaluation criteria?
Is the market willing to finance new developments? Is the financing situation on the road to recovery?
What are the main concerns for investors in financing FPSO-projects and how can you achieve a win-win deal with project financiers?
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 to other segments, look at potential for earnings-upgrades/re-valuation. Some do modeling/DCF-analyses/more detailed work
History matters…
Opinions and momentum can turn rapidly – from loved by everyone to hated by everyone (usually infectious)
Source: Arctic Securities
12
The floating production segment has spooked investors – for obvious reasons
A string of disappointments…Shares have been a disaster – even in companies perceived to be “solid” and steady-performing businesses
BWO listed at NOK 25 May-06, currently at NOK 8.0PROD listed at NOK 36 Feb-08, currently at NOK 13.0 Add to this; Aker Floating Production, Sevan… - not a joyride for shareholders
Leading established players – e.g. SBM – have also disappointed with significant delays to EPC-contracts (rigs, Yme, Deep Panuke), and are trading at historically low P/B-levels
Speculative entrants (mainly originated out of Norway) didn’t help the situation Very hard to point to any success-stories. Massive value destruction Nexus, Petroprod, FPSOcean, MPF, Nortechs/Songa Floating Production
The financial community helped fuel the hype…“Floating Production is the new deepwater drilling”“If we assume two new contracts won per year at 15% IRR…”
…and failed to recognize fundamental aspects of the business No upside through e.g. rate-fluctuations – i.e. rate locked once capex is agreed upon/contract signed
Source: Arctic Securities
A lot went wrong operationally (poor contracts, too low contingencies, supply-chain tightness delays & overruns etc.), and a lot of investors got burned
A lot went wrong operationally (poor contracts, too low contingencies, supply-chain tightness delays & overruns etc.), and a lot of investors got burned
13
Norwegian FPSO-peers: By far the worst segment during the recent meltdown…
0
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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
…and clearly the laggard since the market started improving again
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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
Source: Factset; Arctic Securities
Hard to get investors’ enthusiasm up when the segment has underperformed all other oil services segments
Hard to get investors’ enthusiasm up when the segment has underperformed all other oil services segments
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
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110
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190
210
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290
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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 strongly lately on back of
APL-sale
FOP in line with drillers and supply
PROD, SBM and MODEC under-
performing
Source: Factset; Arctic Securities
A key question investors are asking themselves is: “Why should I invest in this, when there are so many other alternatives”
A key question investors are asking themselves is: “Why should I invest in this, when there are so many other alternatives”
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
Sector shake-out: A lot of players have disappeared. Speculative newcomers likely gone for quite some time…
1. AKFP
2. BWO
3. FLNG
4. FPSO (FPSOcean)
5. FOP
6. MPF – bankrupt
7. NEXUS
8. PetroProd
9. PROD
10.SEAP (Sea Production)
11.SEVAN
12.SFLO (Songa Floating Production, ex. Nortechs FPSO)
Norwegian FPSO-segment – March-09 Norwegian FPSO-segment – Today
1. AKFP
2. BWO
3. FLNG
4. FPSO (FPSOcean) - bankrupt
5. FOP
6. MPF – bankrupt
7. NEXUS – NEXUS I sold to OSX
8. PetroProd - bankrupt
9. PROD
10.SEAP (Sea Production) – OTC/Rubicon/Ashmore
11.SEVAN
12.SFLO (Songa Floating Production, ex. NortechsFPSO) – Bankrupt
Source: Vitae Energy; Arctic Securities
Of the remaining players, equity more or less wiped out in AKFP and the company lacks funding for additional projects. FLNG needs significant further funding. PROD will not bid actively before year-end 2010 and SEVAN likely
lacks equity to take on new significant capex commitments for some time
Of the remaining players, equity more or less wiped out in AKFP and the company lacks funding for additional projects. FLNG needs significant further funding. PROD will not bid actively before year-end 2010 and SEVAN likely
lacks equity to take on new significant capex commitments for some time
18
Analysts and investors have moved from “euphoric” to sober. Maybe a bit too sober…
Trusting companies’ input on capex, time, targeted IRR in contracts
Assuming all contracts will be fully utilized, including options, and potentially beyond that
High residual values / redeployment opportunities
Including a high system value / value of expected further growth (“2 new contracts per year”)
Believing in potential “super-returns” due to the strong and appealing deepwater story (“after DW drilling comes production”)
Low WACCs (abundant cheap financing)
From To
Strongly fearing capex overruns – running sensitivity analyses, incorporating cost overruns and delays in estimates
NPV-analysis of firm contracts alone –options viewed as potential upside only
Modest residual values
Assigning no value to growth / system value, not even for large players
Assuming “super-returns” will never materialize
Increasing WACCs
Note: Does not necessarily apply to all analysts, but expresses our view on the perceived shift in attitude Source: Arctic Securities
19
So, with a ”bad” track-record, but a positive market-outlook, what are the investors telling us?
”The FPSO-sector is still un-investable”
”I’m stuck with stocks in the worst segment in all of oil
services”
“The segment has been a disaster”
“We need to be able to believe in stronger IRRs to invest in this sector –
how is the industry going to be credible on this when they weren’t
capable of extracting stronger margins in the last super-cycle?”
“How is it possible that everything else in oil
services rallies and this segment is lagging so
significantly?”
On a more positive note: We are starting to notice increased interest again from investors. Partially as a result of the segment having lagged so significantly and partially as a result of the BWO-PROD situation –
potentially creating a larger and significantly more interesting entity for investors
On a more positive note: We are starting to notice increased interest again from investors. Partially as a result of the segment having lagged so significantly and partially as a result of the BWO-PROD situation –
potentially creating a larger and significantly more interesting entity for investors
Source: Arctic Securities
20
Established players have heard the message and started to increasingly address investors’ concerns It remains to be seen whether this will result in tangible, profitable projects
Our take: Credibility needs to be restored (also for industry majors). We are however more positive than we have been for quite some time and believe this is about to happen! Investor
interest is increasing
Our take: Credibility needs to be restored (also for industry majors). We are however more positive than we have been for quite some time and believe this is about to happen! Investor
interest is increasing
”Target good return FPSO projects”
”Will not agree to undue contractual risk”
Source: BW Offshore; Arctic Securities
21
Agenda/key topics highlighted in this presentation
Market development: Is the situation in the market picking up?
How do investors and analysts look at the FPSO-sector? What are their evaluation criteria?
Is the market willing to finance new developments? Is the financing situation on the road to recovery?
What are the main concerns for investors in financing FPSO-projects and how can you achieve a win-win deal with project financiers?
22
0
50
100
150
200
250
300
Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10
Oil Services/Equity markets have started improving again…
Philadelphia OSX since Sept-00, indexed
Source: Factset; Arctic Securities
Global financial turmoil & steep oil price drop
Markets bottom out and start recovering
Macondo
Improving equity markets indicated increased risk appetite again. However; At this stage of the recovery, it’s our perception that investors are looking more for rebound opportunities in established
names (less risky), rather than being willing to venture into financing new developments
Improving equity markets indicated increased risk appetite again. However; At this stage of the recovery, it’s our perception that investors are looking more for rebound opportunities in established
names (less risky), rather than being willing to venture into financing new developments
23
0
200
400
600
800
1000
1200
1400
sep. 10apr. 10okt. 09mai. 09nov. 08jun. 08des. 07jul. 07jan. 07jul. 06feb. 06aug. 05
HY
Spre
ads
(bas
is p
oint
s)
0
50
100
150
200
250
IG S
prea
ds (
basi
s po
ints
)
High-Yield (RHS) Investment Grade (LHS)
Debt markets are also improving
Low default rates and high liquidity
secured record low spreads
Credit crunch, increased
volatility and low liquidity
Strong
recovery
PIIGS
Source: Bloomberg; Arctic Securities Credit Research
24
US High-Yield issue volumes YTD already above full-year 2009-level and significant increase from the low level seen in 2008
Companies issued about USD 120 billion of junk bonds in the first half of the year, up from USD 63 billion over the same period in 2009, according to data compiled by Bloomberg.
US High-YieldVolume issued (in USDbn)
0
20
40
60
80
100
120
140
160
180
1H 20101H 20091H 20081H 20071H 20061H 2005YTD2010
20092008200720062005
USD
bn
Source: Bloomberg; Arctic Securities Credit Research
25
0
200
400
600
800
1000
1200
1400
sep. 10apr. 10okt. 09mai. 09nov. 08jun. 08des. 07jul. 07jan. 07jul. 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-estimate of future volatility (“fear index”), based on the weighted average of the implied volatilities for a wide range of strikes
Source: Bloomberg; Arctic Securities Credit Research
26
At USD 70/bbl, fundamentals still look strong. Oil companies increase E&P-spending again Should ease financing-burden somewhat
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E
E&P
cape
x pe
r ba
rrel
pro
duce
d (U
SD)
Average supermajors Average majors (ex STL) Average Independents STL Petrobras
-
25,000
50,000
75,000
100,000
125,000
150,000
175,000
200,000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E
E&P
spen
ding
(U
SDm
)
0
5
10
15
20
25
30
Aggr
egat
ed p
rodu
ctio
n (m
boep
d)
Supermajors Majors Independents Total production same co's
E&P spending 1998-2010e (top 23 companies)E&P spending 1998-2010e per
barrel produced, split by company type
Strong rebound in E&P-spending in 2010 (provided oil co’s use budgets)
First indications for 2011 point to +5-10% further increase from 2010-level
A sharp decline in oil price (down another 10-15 USD/bbl) likely required to “de-rail” the current upswing. Our oil analysts do not believe this is a likely scenario
A sharp decline in oil price (down another 10-15 USD/bbl) likely required to “de-rail” the current upswing. Our oil analysts do not believe this is a likely scenario
Source: Companies; Arctic Securities
27
Is the (equity) market willing to fund new developments?
Mid segment
More challenging. Few players can raise equity unless at (significant) discount
Needs to be backed by main owners + likely commitments from banks on the debt-side
Track-record must be in place, so should a plan for tangible return on capital to investors
High-yield market potentially becoming increasingly possible again
Newcomers / speculative
projects
Impossible?
At least extremely challenging. Speculative projects are likely gone for a long time
In addition to equity markets reluctance, banks are not willing to commit. Though not FPSO, Master Marine is a good example: Construction project on track (time and cost), 3Y firm contract in place with ConocoPhillips, still unable to raise remaining bank-funding
More advanced and structured financing required. Up-front payments/milestones from oil companies likely a way to go. More EPC-contracts. It makes more sense for the oil companies to come up with the
funding than for the FPSO-companies (lower funding cost)
More advanced and structured financing required. Up-front payments/milestones from oil companies likely a way to go. More EPC-contracts. It makes more sense for the oil companies to come up with the
funding than for the FPSO-companies (lower funding cost)
Source: Arctic Securities
Top tier players (SBM, MODEC, BWO,
PROD)
Established players with track-record and firm contracts/existing operations can still raise equity funding at acceptable terms. SBM e.g. successfully raised EUR 181m Nov-09 through a book building process (price set at/near closing price for the day). MODEC recently raised more equity, but directed at main shareholders
Increasing equity requirements pose challenges (for all players)
BWO able to raise debt-funding for PROD-deal at decent terms
28
Agenda/key topics highlighted in this presentation
Market development: Is the situation in the market picking up?
How do investors and analysts look at the FPSO-sector? What are their evaluation criteria?
Is the market willing to finance new developments? Is the financing situation on the road to recovery?
What are the main concerns for investors in financing FPSO-projects and how can you achieve a win-win deal with project financiers?
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)
Source: Arctic Securities
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