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FPSO: Market perspective and challenges in obtaining funding
June 2010
Erik Tønne
+47 21 01 32 26
+47 48 40 32 26
2
Agenda/key topics in this presentation
Brief history of the FPSO-companies from the Norwegian equity-market
perspective – it hasn’t been easy…
Recent market development and outlook
How is the equity-market currently looking at FPSO-companies / what needs to
be done?
Is the market willing to finance new developments? / which options exist?
3
The floating production segment has spooked investors – for obvious reasons
A string of disappointments…
Contracts did not achieve “promised” returns. Projects hampered by delays and cost overruns
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
AKFP listed at NOK 75 Jun-06, currently at NOK 3.4…
Speculative entrants 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
4
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
Drillers NOR Subsea NOR Supply NOR FPSO NOR Seismic NOR
Source: Factset; Arctic Securities
5
…clearly the laggard in the latest upswing…and even dropping in line with the
market lately (in spite of no “obvious” reason)
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
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
6
Creating value for shareholders…?
Source: Vitae Energy; Arctic Securities
Shareholders care about this… it’s more or less the only thing they care about!
7
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. 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 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
8
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
9
Underlying market development: Growth has been good and steady, and will
likely continue to be so
11 1114
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FPS (installed
base)
84
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+9%
09
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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
We expect floating production to continue to demonstrate healthy growth, with FPSOs also continuing to be
the preferred solution. We expect 10+ new FPSO-contracts in 2010, increasing to 15+ in 2011. Other market
sources, e.g. ODS Petrodata and Technip, expect even stronger growth. Longer-term, the market should see
15-20 contracts p.a.
CAGR, number of
units 1999-2009
Source: IMA; Arctic Securities
10
Recent market development: A strong upswing in contract-awards late-
09/early-10
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
4
5
8
11
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10
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12
14
16
18
Ju
n-S
ep
97
Oct
97
- F
eb
98
Mar
- Ju
n 9
8
Ju
l -
Oct
98
Nov 9
8 -
Fe
b 9
9
Mar
- Ju
l 9
9
Au
g -
Nov 9
9
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c 9
9 -
Mar
00
Ap
r -
Se
p 0
0
Oct
00
- J
an
01
Fe
b -
Ju
n 0
1
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l -
Oct
01
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1 -
Mar
02
Ap
r -
Ju
l 0
2
Au
g 0
2 -
Jan
03
Fe
b -
Ju
n 0
3
Ju
l -
Oct
03
Nov 0
3 -
Mar
04
Ap
r -
Ju
l 0
4
Au
g -
Nov 0
4
De
c 0
4 -
Mar
05
Ap
r -
Ju
l 0
5
Au
g -
Oct
05
Nov 0
5 -
Mar
06
Ap
r -
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l 0
6
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g -
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6
De
c 0
6 -
Mar
07
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r -
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l 0
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g -
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Mar
08
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r -
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l 0
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Jan
- A
pr
09
Ap
r -
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l 0
9
Au
g 0
9
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ar
10
Nov 0
9
- Ju
n 1
0
Nr
of
FP
U o
rde
rs
Arctic Securities expects 10+ contracts in 2010, increase to 15+ contracts in 2011. Other forecasts somewhat higher
(ODS Petrodata ~15 in 2010, 15-20 in 2011). The industry expects 12 contracts in 2010, 15 in 2011
6 Projects awarded
1. Aseng to SBM
2. Papa Terra to BWO/Quip
3. Chim Sao to EOC
4. TGT to Bumi Armada
5. Aquila to Saipem
6. Baleia Azul to SBM
(redeployment)
7 Projects awarded so far in
2010:
1. Kitan to Bluewater
2. Guara to MODEC
3. OSX-1 to OSX (old Nexus)
4. Goliath EPC-contract to
Hyundai
5. Athena LoI to BWO
6. Huntington LoI to SEVAN
7. Tupi Nordeste to SBM-
consortium
Following a year of no contracts, we’ve seen 13 awards since Aug-09
11
Floating Production Systems on order/under construction, Quarterly since Q3/96
31
37 36
3235
3330
2321
17
21 22
27
37 37 38 3941
38 37 3734 34 35 34
4346 46
5760
6765
60
56
49
41 4037
39
0
10
20
30
40
50
60
70
80
Q3/9
6
Q1/9
7
Q2/9
7
Q3/9
7
Q1/9
8
Q3/9
8
Q4/9
8
Q1/9
9
Q3/9
9
Q4/9
9
Q2/0
0
Q3/0
0
Q1/0
1
Q3/0
1
Q4/0
1
Q2/0
2
Q3/0
2
Q1/0
3
Q2/0
3
Q4/0
3
Q1/0
4
Q3/0
4
Q4/0
4
Q2/0
5
Q3/0
5
Q4/0
5
Q1/0
6
Q3/0
6
Q4/0
6
Q1/0
7
Q3/0
7
Q4/0
7
Q1/0
8
Q3/0
8
Q4/0
8
Q1/0
9
Q3/0
9
Q4/0
9
Q1/1
0
Order backlog has stabilized (number of units under construction at yards)
During Q1/10, order backlog increased again for the first time in eight quarters, following a steady
drop
The backlog is currently at the average level over the period – we expect this to come up further on
back of more contracts: Demand is pent-up, and we will see a strong increase as FIDs gain momentum
The 39 units on order consist of: 28 FPSOs, 4 Semis, 2 FSRUs, 4 FLNGs and 1 TLP
Average = 39
Note: Excludes storage-only units, MOPUs and LNG RVs (shuttle/regas vessels)
Source: IMA; Arctic Securities
12
Demand-side remains strong! In spite of 13 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
34
323333
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 phase
describes projects that are close to FID and contract-
award
In spite of 13 awards since Aug-09, this number is up
to 34 projects from 32 in our Nov-09 update and 33
in our Sep-09 report
This implies the number of projects progressing from
“Planning” to “Bid/Final design” is higher than actual
awards, meaning the demand-side is strengthening
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 3
13
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
14
Arctic annual FPSO-industry survey (I): Industry-players significantly more
optimistic, reflecting high 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
Companies are however still cautious on their own behalf,
signaling restrictive bidding from several key players
Expectations for 2011 on “own” behalf
still in line with those for 2010 one year ago
How many new FPSO-contracts does your
company expect to secure by year-end?
How many new FPSO-contracts does your
company aim for during next year?
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 will
be awarded across the industry by year-end?”
2
1
0
2
2
0
2,0
4,0
2,5
3,0
3,5
1,5
1,0
0,5
AverageLow High
0,0
2009-results
2010-results
3
2
1
3
2
0
2,0
4,0
2,5
3,0
3,5
1,5
1,0
0,5
AverageLow High
0,0
2009-results
2010-results
15
Arctic annual FPSO-industry survey (II): Competition has been reduced and
major input-costs have dropped further; Bargaining position has improved
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)
Competition reduced – speculative players gone and remaining companies significantly more restricted in bidding (some
restricted by access to financing)
Some players even comment being involved in processes where they have no competition
Costs have dropped further, especially yard-costs. Companies’ answers vary greatly, from almost no drop to up towards
20-30% for certain components
Overall, we believe it’s fair to conclude that the FPSO-companies’ bargaining-position has improved significantly over
the last year we should see some of the companies take on value-creating projects, provided execution is decent
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
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 topside
equipment costs
2009-results
2010-results
16
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”
“The companies are
still expensive – all
cash flow will be used
to repay debt”“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?”
The “feedback” has more or less been the same over the last 1 ½ - 2 years… It will take time to restore
credibility. But; we are starting to notice somewhat more interest, and more investors are at least willing
to start discussing the segment again
Source: Arctic Securities
17
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 – investors still doubt if
they can trust the companies
Our take: Established companies are addressing the issues,
but there is still likely some way to go in terms of restoring credibility
”Target good return
FPSO projects”
”Will not agree to
undue contractual risk”
Source: BW Offshore; Arctic Securities
18
What about the debt-market? Current events…
Source: Arctic Securities
19
0
200
400
600
800
1000
1200
1400
mai. 10jan. 10sep. 09mai. 09jan. 09sep. 08apr. 08des. 07aug. 07apr. 07des. 06aug. 06apr. 06nov. 05
HY Spreads
(basis points)
0.0
50.0
100.0
150.0
200.0
250.0
IG Spreads
(basis points)
High-Yield (RHS) Investment Grade (LHS)
Credit spreads – A new round of widening
Low default rates and high liquidity
secured record low spreads
Credit crunch, increased
volatility and low liquidity
Strong
recovery
PIIGS
Source: Arctic Securities
20
Investors worried about the financial sector – banks’ funding cost currently
above investment-grade European industrials…
iTraxx Senior Finance vs. iTraxx Europe
0
50
100
150
200
250
M ay-10Sep-09Jan-09Apr-08Aug-07Dec-06Apr-06Jul-05Nov-04
Senior Finance Europe
Spread Diffenece
iTraxx Senior Finance vs. iTraxx Europe
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
10
20
30
40
50
60
70
80
90
100
M ay-10Sep-09Jan-09Apr-08Aug-07Dec-06Apr-06Jul-05Nov-04
Spread Difference
Source: Arctic Securities
This does not represent a
sustainable business
scenario…
21
0.0
50.0
100.0
150.0
200.0
250.0
25.05.201008.12.200923.06.200906.01.200922.07.200805.02.200821.08.200706.03.200719.09.200604.04.2006
0
10
20
30
40
50
60
70
80
90
Investment Grade (RHS) VIX (LHS)
Spike in volatility is a sign of market uncertainty
Source: Arctic Securities
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
22
Equities have seen a strong recovery, with increasing appetite for oil services. Dropping
oil price, Horizon, sovereign debt concerns dragged the market down again
50
100
150
200
250
300
350
400
Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09
Ph
iladelp
hia
oil
serv
ices
index
Philadelphia OSX since Jun-01
Source: Factset; Arctic Securities
23
…But; At USD 70/bbl, fundamentals still look strong
-
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
apex p
er
barr
el
pro
duced (
USD
)
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
pendin
g (
USD
m)
0
5
10
15
20
25
30
Aggre
gate
d p
roducti
on (
mboepd)
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
We expect +5-10% growth in E&P-spending in 2010, stronger growth again thereafter. Previous
spending-reductions have been short-lived: ”It is naive to believe that 5 years of strong spending in a
high-inflation environment can compensate for 20 years of underinvestment” (Andrew Gould,
Chairman and CEO, Schlumberger)
A further 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
24
What impact is this having on the FPSO-market?
Less competition as many players are restrained from bidding realistically – positive for FPSO-
operators and should be used to push up returns
Eased supply chain – also positive for operators
Delayed project awards – likely to continue. Smaller oil companies also struggle with financing
More work on financing – more complex to structure. More banks involved at an earlier stage. Lot-
sizes amongst banks have dropped. Alternative sources of funding involved to a greater extent
Costlier financing – Equity component increased, banks demand higher margins
More EPC contracts – highly likely. Projects are still there, and we believe there is a pent-up demand
amongst the oil companies. Will be released at stable oil prices
Consolidation? – Larger entities needed to fund projects and continue to grow
Fewer conversion yards? – Likely. Easier access to yard slots at top yards, and the industry has likely
learned some lessons during the last up-cycle
IRRs need to come up - for investors to be interested, but also to accommodate increased funding
cost
Source: Arctic Securities
25
Leverage matters…
400
600
1500
0
200
400
600
800
1000
1200
1400
1600
USD
m
Typical project
cost 2Y ago
Typical project
today
Large project
today (e.g. sub-
salt)
+50%
FPSO-projects have gotten larger, more
complex and costlier…
80
180
450
0
50
100
150
200
250
300
350
400
450
500
USD
m
Typical Equity
component 2Y ago
@20% Eq-stake
Typical Equity
component today
@30% Eq-stake
Large project
Equity component
today @30% Eq-
stake
+125%
…implying a significant increase in Equity
requirement to take on new projects
Higher required Equity-investment in each project constrains (realistic)
bidding-capability for a large share of the companies out there
Source: Arctic Securities
26
Is the (equity) market willing to fund new developments?
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 10-Nov through a
book building process (price set at EUR 13 – near closing price for the day). MODEC recently
raised more equity, but directed at main shareholders
Increasing equity requirements pose challenges (for all players)
Why should PROD and BWO raise equity at 0.6x-0.8x book value?
Top tier
players (SBM,
MODEC, BWO,
PROD)
Mid segment
More challenging. Few players can raise funding 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
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)
Source: Arctic Securities
27
Disclaimer
The information and views presented in this presentation are prepared by Arctic Securities ASA (“Arctic”) an investment banking firm domiciled in Norway, under the supervision of The Financial
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The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is
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