oil field services valuation
DESCRIPTION
Oil Field Services Valuation, how to value? key value driver assumptions, comparative valuation metrics, approach to valuation and appraisalkey metricsopportunitiesnet asset valueComparativeMetricsComparative metrics include P/E, EV/EBITDA, P/CF, ROICPredominant valuation metric for the sectorComparing opportunities against publicly traded companies will confirm valueKey is predicting utilization rates and pricing in the short and medium term toforecast future earnings – “Contract Backlog” vs. “Spot Market”Day rates are published by many international drillers in “Fleet Reports”Precedent transaction metrics will be used as potential upside to valuationDistinction made between Asset vs. corporate transactionsCan be used as a tertiary metric, not a key driver for valuation of the sectorDifficult to estimate long-term utilization rates and pricingDays in serviceQuality and operational track record of off-taker e.g. IOCPricing power for ServicesUtilization can vary for different types of assets & by locationpubicly traded comparablesTRANSCRIPT
INVESTOR EDUCATION
OIL FIELD SERVICES VALUATION LAGOS 2ND OF JULY 2013
The emerging markets investment firm
1
TABLE OF CONTENTS
I. Oilfield Services & Equipment
II. The Nigerian Oilfield Services Opportunity
III. Approach to Oilfield Services Valuation & Appraisal
IV.Key Value Driver Assumptions
V. Comparative Valuation Metrics – Examining Publicly Traded Comps
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OILFIELD SERVICES & EQUIPMENT
Helicopters
Marine Services & Vessels
Seismic Acquisition
Project Management
EPC contracting
Fabrication
Drillers
Onshore rigs
Swamp rigs
Jackups
Semisubmersibles
Drillships
Well testing & completion
Nigeria
Angola
Gabon
Togo
Benin
Ghana
Cote d’Ivoire
Liberia
Sierra
Leone
Guinea
Gambia
Cameroon
Equatorial Guinea
Senegal
Guinea Bissau
Republic Of
Congo Democratic
Republic of
Congo
Snapshot of Offshore Rigs Locations- July 2013 OffShore West Africa
A total of 90rigs in offshore fleet
- 30% within Nigerian waters
- 24% within Angola
64 offshore rigs contracted for West Africa, with 59 actively
drilling (July 2013)
Selected additional drilling announcements and field
developments for remainder of 2013 include:
- Tap oil have begun drilling Starfish-1 oil exploration
well in Ghana
- Afren discover 78 mmboe of gross P50 resources in
Ogo-1 well
- Subsea Egina field developments by Saipem, FMC
Nigeria
30 rigs stationed in Nigeria
Operators include
ExxonMobil, Total, Oando,
Chevron
Angola
22 rigs stationed in Angola
Primarily supporting Total’s
exploration program
8 rigs in Cameroon
10 rigs in Gabon
3 rigs in Eq.Guinea
9 rigs currently in Congo
Equatorial Region
Ghana
5 rigs stationed in Ghana
OffShore East Africa
Majority of E&P activity has been centred in West Africa,
however recent finds offshore Mozambique and Tanzania
are fuelling further activity
Mozambique is the highest producing country in the region
with 3 operating rigs including the one operated by Anadarko
Kenya and Tanzania also have an operating rig each
CURRENT OFFSHORE ACTIVITY DEMONSTRATES
CONTINUED FOCUS ON NIGERIA AND ANGOLA
Source: Rigzone 3
The “indigenous opportunity” comes against the backdrop of the current Nigerian O&G industry themes
Nigerian government desire to see job creation and capacity building amongst indigenous service companies
Desire to increase overall GDP contribution from oil services industry & see in country “value add”
The local content bill passed in Nov 2010 focuses on services sector
Nigerian govt seeking increased indigenous capacity building in the oil
field services segment of the O&G value chain
Certain % of all jobs must be carried out by indigenous operators with a
view to building local job creation – jobs over $100m must have
minimum % of Nigerian Labor
Indigenisation and Legislation Critical Success factors for Service Companies
Preferential Selection & Pricing on Contracts
Access to equipment & technology – business is
equipment heavy, access may be through own capacity,
partnerships and alliances
Service offering & track record – focused on delivering
end to end services within different areas of
specialization
Understanding of terrain – ability to do business in
Nigeria and deal with communities in job execution
including job creation
Standards and certifications – appropriate certifications
demanded by HSSE and IOC community for various
jobs, required permits from regulators
Access to capital – appropriately capitalized to enable
execution of backlog and growth. Indigenous companies
can access the NCDF
Management team – deeply entrenched within upstream
community for business development and backlog
creation
The Local Content Act stipulates preferential selection for indigenous
service companies in the procurement of certain services to the
upstream oil and gas industry
Allows for preferential pricing of up to 10% during selection between
local and foreign service companies for same job
Local Content Monitoring Board
Nigerian Content Development and Monitoring Board (“NCDMB”) set
up towards implementation of Nigerian Oil and Gas Content
Development Act and implementation of Nigerian Content
Development Fund (“NCDF”)
From April, 2010, NCDF requires upstream co’s to contribute 1% of
all contract award sums towards a Nigerian Content Development
Fund
NCDF fund is to be managed by local banks and accessed by
indigenous service co's in actualisation of their contract awards
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The services sector is very fragmented with very few
integrated local champions. Most service companies are
private, thereby limiting access to capital and the industry is
likely to face capacity shortage as there is increased
upstream activity
KEY THEMES IN NIGERIAN OIL & GAS – OIL FIELD
SERVICES
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5
OVERVIEW OF THE LOCAL CONTENT ACT
Overview
Key Highlights
Nigerian Oil & Gas Industry Content Development Act 2010
Commonly referred to the Nigerian Content Act or
Local Content Act, it mandates oil companies to
reflect considerable level of Nigerian content in
all their operations
First consideration to Nigerian goods and
services, and the engagement of Nigerians in
project work programmes
The provides the specific Nigerian content level
for each listed services, including man hours and
expenditure.
Foreign companies are required to submit a
Nigerian Content Plan before carrying out any
project in Nigeria
Preferential consideration for projects with the
highest level of Nigerian content during bid
evaluation
Selected Local Content (LC) Level Requirements in OFS
Description LC%
FEED and Detailed Engineering 50%-80%
Fabrication and Construction 50%-100%
Materials and Procurement 45%-100%
Well and Drilling Services 45%-100%
Exploration, Subsurface, Petroleum Engineering 55%-100%
Marine Services 30%-100%
Project Management / Consulting Services 45%-90%
Local Content in Practice
Total Upstream Nigeria recently awarded a $3 billion
contract for the subsea development of the Egina oil field to
Siapem - Most of the fabrication work would the carried
out in Port Harcourt
The $3.1billion contract awarded to Samsung to build the
Egina FPSO also includes 12,000 – 15,000 tons of in-
country fabrication
$400 million East-West evacuation gas pipeline awarded to
two indigenous firms
NGN12 billion drilling contract awarded by Shell to Oando
Energy Services limited in 2012
$85 million fleet upgrade support provided by Shell to
Caverton Helicopters.
$5 billion Contractor Support Fund Scheme recently
launched by Shell in partnership with five Nigerian banks
$2.4 bn
$1.4 bn
Nigerian Companies Others
$3.8 bn
Breakdown of Contracts Awarded by Shell in 2012
Source: Shell
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KEY APPROACHES TO VALUATION
Net Asset
Value
Can be used as a tertiary metric, not a key driver for valuation of the sector
Difficult to estimate long-term utilization rates and pricing
Valuation Methodology Predominantly Based on Comparative Trading Metrics
Comparative
Metrics
Comparative metrics include P/E, EV/EBITDA, P/CF, ROIC
Predominant valuation metric for the sector
Comparing opportunities against publicly traded companies will confirm value
Key is predicting utilization rates and pricing in the short and medium term to
forecast future earnings – “Contract Backlog” vs. “Spot Market”
Day rates are published by many international drillers in “Fleet Reports”
Comparative
Metrics
Precedent transaction metrics will be used as potential upside to valuation
Distinction made between Asset vs. corporate transactions
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ASSUMPTIONS & FACTORS IMPACTING EARNINGS &
VALUATION
Commodity
Prices
The key driver of demand for Oilfield services
Equities trade with commodity prices although long-term contracts may be in place
Valuation Methodology Predominantly Based on Comparative Trading Metrics
Capacity
Utilization
Days in service
Quality and operational track record of off-taker e.g. IOC
Pricing power for Services
Utilization can vary for different types of assets & by location
Day Rates
Depend on type of equipment & utilization rates
Depends on demand / supply dynamics
Swamp rigs in Nigeria currently average US$100k/day
Onshore rigs in Nigeria currently average US$40k/day
Growth &
Return on
Capital
Margins & Costs of Operation
Ability to deploy additional equipment on field
Pipeline of additional assets to be deployed
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FACTORS IMPACTING EARNINGS & VALUATION
The key driver of demand for Oilfield services
Driven by asset acquisition and published capex
work programmes
Equities trade with commodity prices although long-
term contracts may be in place
Source: Broker Research
Illustrative View of Future Capex Spending
Illustrative Demand vs. Supply
Average Day Rates – Deepwater & Midwater
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EXAMPLE CONTRACT STATUS
The key driver of demand for oilfield services “Contract Backlog”
Source: Songa Offshore Corporate Documents
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THE EARNINGS FORECASTING MODEL
Based on corporate disclosure
Based on Analysts’ discussions with management & industry view
May also include a view on “spot market” rates (where applicable e.g. marine support vessels)
Source: Broker Research
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PUBLICLY TRADED COMPARABLES
Source: Bloomberg as at 20th March 2013; OES Financial Forecast
Mcap EV Share Price EBITDA Margin (%)
$mn $mn Local CY12A CY13E CY14E CY15E CY12A CY13E CY14E CY15E CY12A CY13E CY14E CY15E
JACUKUP RIGS
Hercules Offshore 1,122 1,819 7.07 8.6x 5.4x 3.8x 4.3x 30% 35% 42% 41% n/m 25.1x 8.7x 9.8x
ENSCO International Inc. 13,569 17,845 58.31 8.5x 7.1x 6.1x 5.4x 49% 49% 51% 52% 11.1x 8.9x 7.5x 6.5x
Transocean Ltd 17,455 24,975 48.44 9.0x 6.9x 5.6x 5.3x 30% 38% 41% 42% n/m 11.0x 7.9x 7.4x
Seadrill Limited 18,983 30,614 244.60 12.7x 11.3x 9.0x 7.7x 54% 55% 58% 58% 15.8x 14.3x 10.8x 8.8x
Songa Offshore 175 1,106 5.21 5.6x 5.1x 5.0x 3.0x 34% 39% 38% 41% 7.6x 3.2x 5.3x 2.9x
Average 8.9 x 7.2 x 5.9 x 5.1 x 39% 43% 46% 47% 11.5 x 12.5 x 8.0 x 7.1 x
Median 8.6 x 6.9 x 5.6 x 5.3 x 34% 39% 42% 42% 11.1 x 11.0 x 7.9 x 7.4 x
LAND DRILLING RIGS
Nabors 4,608 8,308 15.64 4.2x 4.8x 4.3x 3.8x 28% 27% 28% 30% 9.1x 16.0x 11.2x 8.7x
Pioneer Energy Services 410 959 6.61 3.9x 4.2x 4.0x 3.7x 27% 24% 25% 25% 16.8x n/m n/a 16.5x
Patterson UTI 2,856 3,409 19.44 3.4x 3.8x 3.6x 3.4x 36% 33% 33% 34% 10.9x 14.0x 11.8x 11.1x
Average 3.8 x 4.3 x 3.9 x 3.6 x 31% 28% 29% 30% 12.3 x 15.0 x 11.5 x 12.1 x
Median 3.9 x 4.2 x 4.0 x 3.7 x 28% 27% 28% 30% 10.9 x 15.0 x 11.5 x 11.1 x
27-Jun-13
EV/EBITDA P/E
Mcap EV Share Price EBITDA Margin (%)
$mn $mn Local CY12A CY13E CY14E CY15E CY12A CY13E CY14E CY15E CY12A CY13E CY14E CY15E
DIVING COMPANIES
Subsea 7 6,167 6,394 106.00 6.1x 6.0x 4.3x 3.7x 17% 16% 21% 22% 11.3x 15.4x 9.1x 7.6x
Sevan Marine 197 138 22.60 5.2x 14.0x 8.4x 12.8x 25% 13% 21% 14% 6.9x 16.1x 13.9x 25.4x
Helix Energy Solutions 2,459 2,557 23.21 48.5x 8.9x 6.9x 6.1x 6% 32% 34% 37% 12.5x 22.4x 13.5x 11.6x
McDermott International 1,986 2,049 8.40 4.6x 7.3x 4.7x 4.0x 12% 9% 12% 13% 9.3x 20.3x 9.7x 7.5x
Average 16.1 x 9.1 x 6.1 x 6.7 x 15% 17% 22% 21% 10.0 x 18.6 x 11.6 x 13.0 x
Median 5.6 x 8.1 x 5.8 x 5.1 x 14% 15% 21% 18% 10.3 x 18.2 x 11.6 x 9.6 x
MARINE SERVICES COS
Gulfmark Offshore 1,206 1,588 45.30 14.4x 10.4x 7.4x 7.2x 28% 34% 40% 41% 35.5x 19.4x 11.1x 10.2x
Hornbeck Offshore Services 1,919 2,519 53.62 12.1x 9.0x 6.0x 4.9x 41% 45% 50% 51% 50.5x 22.0x 12.3x 9.6x
Tidew ater 2,826 3,786 57.10 10.9x 10.1x 7.8x 6.7x 28% 29% 33% 34% 21.2x 18.4x 12.3x 9.7x
Average 12.5 x 9.8 x 7.1 x 6.3 x 32% 36% 41% 42% 35.8 x 20.0 x 11.9 x 9.8 x
Median 12.1 x 10.1 x 7.4 x 6.7 x 28% 34% 40% 41% 35.5 x 19.4 x 12.3 x 9.7 x
27-Jun-13
EV/EBITDA P/E
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PUBLICLY TRADED COMPARABLES (cont’d)
Source: Bloomberg as at 20th March 2013; OES Financial Forecast
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