Oil service companies firmly on growth path

Emirates Business 24-7, 30 December 2009

Despite the roller-coaster ride in the oil and gas business, the UAE-based service providers, equipment and material suppliers as well as rig builders are still reporting satisfactory financial performance.

These players typically feel the trickled effect of lower capital expenditure on oil and gas developments later than their other peers in the sector.

Decision makers told Emirates Busiess they are spreading their wings by adding more business portfolios, expanding geographically and pursuing their acquisition strategies.

This is despite payment defaults and delays hampering their growth.

Abu Dhabi Oilfield Services (Ados), a 37-year-old firm based in the UAE capital, has seen a 30 per cent increase of revenues this year and is continuing its infrastructure expansion programme, its chief said.

"We did not lay off people. In fact, we are recruiting... we are adding more people to the team," said Zuhair Shehada, Managing Director of Ados.

He said the company is expanding within the UAE by building a new facility in Jebel Ali and expanding its existing facilities in Abu Dhabi. "We have invested tens of millions in infrastructure as part of our programme. We have year after year plan for our infrastructure upgrade and we continue to do it."

Ados is also planning to reach other countries next year. "We have been approached by a lot of people outside our region," said Shehada. "We do service clients from outside the region from our base in Abu Dhabi or Jebel Ali but yes there is a conceptional thinking of going to branch out outside the UAE for a certain product range...our plan is in 2010."

The UAE-based and Oslo-listed Maritime Industrial Services (MIS), whose third quarter results showed 47 per cent higher revenues over the same period of last year, is looking at acquiring a new yard by next year.

Karim El Solh, Chairman of MIS, said the firm would either lease a land and build its own yard or opt for an acquisition.

"We can grow organically and build it ourselves or we can acquire a logistics company," he said. "We need a base in Abu Dhabi not just from business perspective but also from operational perspective. There are a few available yards to be acquired. Once we find a good opportunity, we will sit and negotiate if it makes sense.

"MIS is a large company and we have been acquisitive in the past and we are still at the same position. If the right one came up, we will look at the acquisition to crack up the Abu Dhabi market," he added.

Last year, it acquired 100 per cent ownership of Dubai-based 3C Metal International (3CMI), later re-named Rig Metals, which occupies a 30,000 square metre yard in Dubai Investment Park.

It complements MIS' existing 200,000 square metre yard in Sharjah; 90,000 sqm yard in Saudi; and a 15,000 sqm yard in Kuwait.

"Definitely we're looking at acquisitions similar to that and maybe regional ones as well," said El Solh.

The 30-year old firm has also created a separate business unit called Energy Projects International, which will focus on engineering, procurement and construction (EPC) and engineering, procurement and construction management (EPCM) projects outside the Northern Emirates.

The initial EPC/EPCM team is currently housed in the offices of Gulf Capital, its biggest shareholder. But it is planning to make bigger steps in the months to come. It is also hiring new staff as it deems to penetrate the Abu Dhabi market.

"It has officially started," said Kevin Hudson, MIS Managing Director. "We have a couple of engineers, the initial team, so we can pre-qualify and prepare tenders. The tendering cycle for EPC is normally six to 12 months so we're hoping to see something by the end of this year."

Steven Supply International is also continuing its expansion plans albeit on a moderate mood. The Dubai-based firm, which represents leading oilfield manufacturers, will expand in Erbil, Northern Iraq in the first quarter of next year with plans to expand presence in North Africa.

Bobby Stevens, CEO of Stevens Group, said the company is free of big near-term debts, allowing it to take advantage of any opportunity.

"Northern Iraq has stability," he said. "There's huge reserves ands there's no doubt that there would be more activities in the future. There are a lot of political things that have to be sorted out like the relationship with Baghdad but once that's in place that it will be one of the most active regions in the world in oil and gas."

Payment concerns
Payment delays and defaults are not unique to the real estate and construction sector. It is also an issue in the oil and gas industry, which accounts for more than half the GDP in the GCC.

"The oil producers - the guys at the top of the food chain - have put pressure on sub-contractors. I think they've achieved this by delaying payment so there has been a major slowdown in payment," said Stevens.

He said 2009 is the first in his decade-long business in the UAE that he had to face "significant" default.

"Payment terms here are slower compared to the rest of the world in a good day. And in some cases it's doubled." he said. "That's one of the main fallout that we've seen. Honestly, business declined but what we've really seen as an issue is the payment schedule."

Stevens said legal action is the common resort for most firms. "This is a very complicated and difficult process," he said.

MIS, too, had to resort to legal actions for the non-payment of its two new build rigs.

The rigs, hulls 106 and 108, have been subject of concern for quite sometime. In the first quarter of 2008, MIS had a reduction in profits due in part to non-revenue costs of these hulls, which remained unsold.

Then in July, it signed a contract worth $335 million (Dh1.22bn) for the construction of these rigs for Mosvold Middle East Jackup (Meju). Hulls 106 and 108 were scheduled to be delivered in December 2009 and March 2010, respectively.

Meju, established and registered in the Cayman Islands by Mosvold Shipping Holding, is a single purpose company owning jack up drilling rigs to be operated in the Middle East.

MIS holds 8.7 per cent of equity in Meju. The relationship between MIS and the Norwegian Mosvold shipping family dates back several years. In 2006, Mosvold Jack up signed a contract with MIS for the supply and construction of its first two rigs.

What seemed to be a smooth transaction turned sour during the height of the global financial crisis. MIS terminated its contracts with Meju on September 1 for failure to pay $117m against two rigs, which have already reached the construction stage called the "second milestone".

Meju earlier moved to terminate the contract on the grounds that the rigs under construction did not met the technical specification included in the contract.

MIS referred this matter to arbitration and in November an initial hearing was convened to determine MIS application for a partial final award in respect of the second milestone and an order for the sale of the rigs.

The arbitration panel has confirmed the order of the sale of the rigs, with the sale proceeds to be held in escrow pending further order of the arbitrators.

And most recently, MIS had to write-off its $10m investment in Meju.

"We received an order from the tribunal in November giving us permission to sell the rigs and we're in advance negotiation with the potential buyer now," said Hudson.

Despite reduced revenue due to the suspension of work on these rigs, the company continues to have an optimistic outlook thanks to its secured backlog of orders worth $418.8m, 87 per cent of which are new build works.

Confidence increasing
"We should be okay, we are a future looking company," Hudson said. "This year compared to last year is a lot better. We've been fortunate to have a backlog and we have executed that backlog profitably."

And with liquidity coming back to the system and investor confidence increasing, business outlook is set to further thread the recovery path.

"The market is picking up and we're investing in lots of divisions and acquisition in 2010 preparing for 2011," El Solh, who is also the CEO of Gulf Capital, said. "The trend is definitely up but more so in 2011. We are just recovering now from the slump so we are definitely on the way up, probably most of the upside is in 2011."

Diversification
The benefits of having a well-diversified business could not be more visible than today.

"We have not really been affected by the global recession," said Shehada. "First of all, we have a very diversified division within this company. If one division is down maybe the other division is up."

He said although the engineering business has seen slower demand, the technical service and the agency businesses have performed very well during this crisis.

In addition, he said, most projects in Abu Dhabi have continued as planned. "Nothing that we know of a released project that has been cancelled. All of the projects in Abu Dhabi, those in the agenda of Adnoc group of companies are continuing. None of them has been shelved or cancelled," said Shehada.

"With the amount of business, which has been released in Abu Dhabi, I believe we even have performed better than what we were expecting for the year," he said.

While new build is down, MIS refurbishment and fabrication business is up this year; the technical services segment has seen the biggest order backlog in its 30-year history; and Sunbelt H2S, one of its businesses, has seen a 25 per cent leap over last year.

Contract renegotiations underway
Capital expenditure on oil and gas developments is expected to fall 23 per cent this year, with the majority of contractors expected to bid low amid deflationary pressures and a growing urgency to arrest a decline in order backlogs.

Despite a September quarter increase of 21.3 per cent and two consecutive quarters of growth in new orders, contractors continue to struggle to replenish backlog levels, ODS-Petrodata's lead analyst Oliver Stephenson said.

He said new orders this year are expected to be about 70 per cent of last year's as international oil companies hold back on project sanctions after a drastic plunge in commodity prices in the second half of 2008.

Contract renegotiations, which come along with it, have affected the region's players. "Some of the major players in the process of negotiating with the day rates for drilling rigs and that affects us in a trickling manner because drilling contractors are our customers," said Bobby Stevens, CEO of Stevens Group.

Due to credit crunch, commodity price collapse and widespread economic malaise, prices of drilling rigs have collapsed to about $150 million (Dh550.5m) today from $180m last year.

"I don't think in the near future there will be more orders for the jack up rigs. With no orders, I think the price will be irrelevant," Kevin Hudson, MIS Managing Director, said.