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FPSO: Market perspective and challenges in obtaining funding

June 2010

Erik Tønne

[email protected]

+47 21 01 32 26

+47 48 40 32 26

mailto:[email protected]

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


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


9

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

likely continue to be so

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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


Order intake, new Floating Production Units (FPUs) ordered

7

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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

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6

Q1/9

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Q2/9

7

Q3/9

7

Q1/9

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Q3/9

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Q4/9

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Q1/9

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Q1/0

8

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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)


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

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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)


8

5

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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


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…


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


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


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


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


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


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


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


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)


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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Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting

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