Downturn and investmentJune 19, 2017
TOGY talks to Christopher McDonald, CEO of UAE contractor Lamprell, about the company’s operations in 2016, demand for services and competition with Asian service providers. Lamprell specialises in the construction of oil rigs and has five facilities across the UAE and Saudi Arabia.
• On the offshore drilling market: “We’re seeing early signs in the offshore drilling market of consolidation. Shelf Drilling bought a few more rigs recently and raised money to go buy some newer second-hand rigs. I think that’s an early sign of the market starting to restructure.”
• On renewables: “What we’re seeing is that these new developments are going ahead without subsidy. And to me, that’s the exciting bit, because that requirement for a government contribution has held back the growth in this sector.”
Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find the full interview with Christopher McDonald below.
What have been the latest developments over the past year?
We were very active in 2016 and were working on a number of projects. We had seven concurrent new-build jackup rigs all in various stages of completion. We have delivered a total of 45 modules here in Jebel Ali for the UZ750 project. And we had a number of smaller projects, such as maintenance jobs and E&C projects. We had 24.5 million direct work hours worked in our yards and, I am pleased to say, an excellent safety record.
There was subdued bidding activity however. During the course of 2016, we took cost out of the business. We reduced headcount by about 20%, as well as admin, to roughly 40% overall.
We delivered four of the seven jackup rigs in 2016 and the remaining three in the first four months of 2017. I believe we’re in very good shape. Towards the end of 2016, we were awarded two significant projects, both in the North Sea. One is a refurbishment and material upgrade of a jackup accommodation unit for the Johan Sverdrup project in the Norwegian sector. The other was the renewables project for ScottishPower’s East Anglia project. These will keep us busy over 2017 and are scheduled for delivery in mid-2018. We entered 2017 knowing that it was going to be a very challenging year.
During 2016, we also generated cash to assist us over 2017. Thus, we ended the year with USD 276 million of net cash. In the next 12 to 18 months, it will continue to be quite challenging. We need to see higher oil prices in the market for confidence to come back and for our clients to start making new investment decisions. It will probably be 12 to 18 months from now before that happens and it starts flowing back to services providers like Lamprell.
What are you going to do during those 12 to 18 months?
We’re doing a number of things to position the company for the medium and long term. You overspend at the top and you underspend at the bottom, so that perpetuates the cycle. I think the market will recover, and when it does we want to be well positioned.
Probably the most significant thing that we’re doing this year is our proposed joint venture with Saudi Aramco in Saudi for a new maritime yard on a scale that’s probably five times of all of Lamprell. Our partners are Saudi Aramco, Hyundai Heavy Industries of Korea, and Bahri, which is basically the Saudi state shipping company.
Do you think demand will pick up for jackup rigs?
Eventually, but I think it will take some time. Our view of the new-build jackup market is that it’s going to be very challenging in the next five years. One of the reasons why we’re excited to be involved with the Saudi venture is that we believe Aramco is one of the very few customers who are going to order new build jackup rigs, and they have the financial strength to do so. We don’t currently have direct exposure to Saudi, and they’re spending USD 30 billion-40 billion a year in their oil and gas capex, so it is strategic to them. They’ve continued to spend through the cycle. They have been very consistent, up or down, they have a capex program and it may tweak here or there, but essentially, you can rely on them to spend. As of now there are about 45 jackup rigs operating in Saudi and around 27 operating offshore of the UAE.
What sets Lamprell apart from your Asian competitors?
There are a number of things. We’re very selective with our client base. Many of our competitors in the jackup market have taken on payment terms which included a small advance payment (in some cases as low as 1% down) with the remaining payment at the end on delivery. We have been disciplined and not done that. In hindsight, we may have lost business a few years ago when people were ordering rigs, but the net of that is that we’ve delivered all our rigs and all of our clients have paid us.
Is the trend in customer demand going towards refurbishment and utilising outdated rigs and platforms rather than new builds?
I think that’s right. Obviously, they’re going to try to prolong the productivity of older assets, and we’ve refurbished quite a few projects in our history. But even that business is pretty challenged at the moment. Our clients are saying that unless their rigs have a real job to go to, they’re not spending money.
I think last year was probably our low point in the overall refurbishment business, so it’s extremely challenging, not just on the new builds but also on the refurbishment. We are seeing early signs of more activity among our clients. We currently have 14 rigs stacked in our yards; 12 of them are warm stacked and two of them are cold stacked.
What is going to happen with them?
Over time the clients will try to get the stacked rigs deployed, and in this case would most likely ask us to do some work on these rigs before they sail off. We’re seeing early signs in the offshore drilling market of consolidation. Shelf Drilling bought a few more rigs recently and raised money to go buy some newer second-hand rigs.
I think that’s an early sign of the market starting to restructure, and the opportunity for us in the medium and long term is that the vast majority of the world’s fleet is over 30 years old. You can extend the life of a jackup rig, but the cost of extending that beyond its designed life starts to get increasingly expensive. Right now, because of the depressed market and the economics, oil companies can continue to take that option. But as the market starts to recover, I would imagine that a lot more rigs would be scrapped. But it’s still the very early days yet, and there’s significant overhang.
The other thing that hasn’t really been addressed yet is the longer that rigs are stacked and are not being used, the more likely they’re going to get scrapped.
What is your short-term strategy?
We’re planning to invest in the Saudi maritime yard but we’re also continuing to invest in our facilities. We have new rolling machines and we’re spending tens of millions of dollars on a new state-of-the-art pipe fabrication shop, which, when it becomes operational towards the end of this year, will be probably the most advanced in the region.
We are moving up the value chain and are continuing to invest in our competitiveness through very wise capital investment. We’re continuing to look at our cost structure to become more competitive. Whether you’re in an up-market or a down-market, you have to be competitive and you have to keep moving forward.
How important are accounts like NDC for you?
Absolutely important. We’re not a consumer business, so we don’t have big name recognition with thousands of customers. We can count our major customers on both hands; we have been blessed with a limited but loyal customer base. We have to make them happy and satisfied, and I think we’ve done a very good job of doing that. Even with some of the more challenging projects, we’ve been able to do that, and that’s what really matters. That’s why they come back and give us an opportunity to compete for new work.
What other business lines are you focusing on?
The other thing that we’re doing is positioning ourselves for renewables. Again, we believe that our geographic position and our low cost base make us very competitive in Europe. And renewables is a different segment with a totally different set of customers.
But in terms of work, that is exactly what we do for our oil and gas customers. We are currently building 60 foundations for ScottishPower Renewables. Whether you put a drilling package on a jacket or a wind turbine, the process is very similar, and so for us, it’s not a big step-out in terms of our core competency.
We’ve opened up this new market and we’re in the very early stages of talking to some partners and some additional customers about their projects. It’s something that Lamprell is focused on doing.
The other thing that we’re doing is trying to move more into offshore EPC projects. On the heels of the relationship we’ve developed with Saudi Aramco, we are trying to prequalify for their long-term agreement as a contractor. This is the work that they do year in and year out to maintain their production for offshore oil and gas fields. This includes jackets, wellhead platforms, decks, risers, manifolds and lots of fabrication. LTA contractors have to install all these products as well, and we’re talking to potential partners to determine how best to execute that work. Hopefully we’ll hear something by the end of the year if not earlier. That would open up significant opportunities for us, year in and year out, which again, we don’t have any exposure to. We’re also looking at some EPC projects up in the North Sea with various partners in the regions up there.
Do you expect demand for renewable energy to increase in the near future?
We are taking a hard look at it. Wind power generation has been around for a long time, more than a decade, if not longer. But those initial projects used to be subsidised mostly by the government. What we’re seeing now is the scale of the projects. The turbines have gone from 2 to 4 to 5 to 7 MW each; they’re getting bigger and more efficient. And the infrastructure in the industry has now started to develop around it, where they can service it better at lower cost.
What we’re seeing is that these new developments are going ahead without subsidy. And to me, that’s the exciting bit, because that requirement for a government contribution has held back the growth in this sector.
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