The Group is a provider of floating production systems to the offshore oil and gas E&P industry. It offers a broad scope of services across the full spectrum of the product life-cycle, from engineering to procurement, construction, installation, operation and product life extension (including relocation). The Group is a leader in its main activity, the design, supply, installation and operation of FPSO and FSO vessels, in particular mid-sized FPSO vessels with a production capacity of 80 – 150k boe/d (see "Industry and Market Overview – FPSO market: Competitive Landscape"). Furthermore, the Group is a market leader in the design, supply, installation and operation of large turret mooring systems, the most complex component of an FPSO.
The Group operates in three business segments:
· Turnkey Systems: the supply of FPSOs and other types of floating production systems, complex large turret mooring systems and associated services, such as engineering services, on a turnkey basis to customers. This segment also includes the construction and conversion of vessels forming part of the Group's lease fleet, for life extension and relocation projects, which is all undertaken at cost basis.
The Group's Turnkey Systems operations accounted for 67% of the Group's total revenue for 2012 (2011: 63%);
· Lease and Operate: the lease and operation of the Group's fleet of floating production vessels on long-term contracts to customers. The Group's Lease and Operate operations accounted for 25% of the Group's total revenue for 2012 (2011: 27%); and
· Turnkey Services: the provision of installation, overhaul and repair services, including the supply of spare parts, and the supply of Catenary Anchor Leg Mooring buoys (CALM buoys) and other mooring systems. The Group's Turnkey Services operations accounted for 8% of the Group's total revenue for 2012 (2011: 10%). As of January 2013, the results of the Turnkey Services segment are integrated in the Turnkey Systems reporting segment.
The Group's administrative office is located in Schiedam, the Netherlands. The Group operates five execution centres, which are located in Schiedam (the Netherlands), Monaco (Monaco), Houston (US) and Kuala Lumpur (Malaysia). Four of these execution centres focus on project management and the remaining execution centre focuses on the management of the Group's fleet. In addition, corporate support functions are located in Monaco, Marly (Switzerland) and Schiedam, and there are four representative offices, nine operational shore bases and two construction and integration yards. The Group had 7,493 employees worldwide at 31 December 2012.
Since the offshore oil and gas E&P industry is a global industry, the Group operates on a global basis. Based on the geographies of where the floating production systems operate, the main regions in which the Group is currently active are Brazil and West Africa (Angola, Nigeria and Equatorial Guinea). In 2012, the Group's revenue from Brazil accounted for 49% of the Group's total revenue (2011: 40.5%) and from West Africa for 22.8% of the Group's total revenue (2011: 35.7%).
The Group's total revenue for 2012 was US$ 3,695 million (2011: US$ 3,157 million) and net loss for 2012 was US$ 74.9 million (2011: a net loss of US$ 440.6 million). The Group's Order Portfolio (see "Key elements of the Group's business model – Order Portfolio") at 31 December 2012 amounted to US$ 14.54 billion (31 December 2011: US$ 16.91 billion).
10.2 History
The Group's history dates back to 1862. In that year, entrepreneur Mr A.F. Smulders founded his own factory, specialising in steam engines and boilers, before diversifying into an iron foundry. In 1905, the Smulders
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Machine Factory founded the Gusto shipyard in Schiedam. In 1943, the Gusto shipyard entered into a joint venture with five other shipyards to create a new organisation known as Industrieële Handels Combinatie Holland (Industrial Trading Combination Holland, IHC Holland). The six yards agreed to join forces to sell, design and build dredgers for export. In 1965, five of the six partners agreed to a full scale merger, continuing to trade under the name IHC Holland in order to capitalise on their existing reputation and the shares in the share capital of N.V. Industrieële Handels Combinatie Holland were listed on the stock exchange in Amsterdam.
In the 1950s, Gusto already worked on offshore oil and gas related activities and constructed the first Single Point Mooring (SPM) facility. The market for SPM systems developed rapidly from the 1960s. In 1969, Single Buoy Moorings Inc was created as a separate subsidiary for the marketing and further development of SPM systems.
In the late 1970s, the shipbuilding crisis in Europe led to the closure of several shipyards in the Netherlands including the IHC Gusto shipyard. However, in order to retain the engineering expertise and experience built up in the shipyard, Gusto Engineering was created as designer of the offshore related products of the shipyard.
Subsequent years saw many changes in the ownership of the different entities, a split of the Group in two separately listed companies under the names IHC Inter N.V. and Caland Holding N.V. and in 1984 the merger of these two companies into IHC Caland N.V.
In the 1980s and 1990s, the product line of the Group expanded towards more and more complex mooring systems for FSOs and FPSOs. Development of the Group's own engineering capabilities to include the oil processing facilities on the deck of a permanently moored tanker enabled the Group to offer the full scope supply of FPSOs either on a sale or on a lease basis. The Group was the first contractor to invest in an FPSO under a lease and operate contract with an oil major.
In 2001, the Group acquired Atlantia Offshore, which specialised in the design and construction of tension leg platforms. This acquisition enabled the Group to expand the range of its products and provided all the building blocks for deep water oil and gas field developments.
In 2005, the Group sold the remaining shipyards in response to the market downturn in the specialised shipbuilding market after 2000. IHC Caland N.V. was subsequently renamed as SBM Offshore N.V. on 1 May 2005.
Since then the Group has focused on offshore oil and gas related activities, in particular FPSOs, and has grown its business through organic growth.
10.3 Corporate Strategy
The Group's current strategy plan, adopted as of 31 December 2012, covers the years 2013 up to and including 2015 (the Strategy Plan). The Strategy Plan draws on an extensive analysis of markets, customers and technological developments as well as in-depth internal analysis across the Group's main functions. The Management Board and the Supervisory Board review the Strategy Plan annually in light of significant market developments and any other internal or external events that may affect the Group and require a revision of the Strategy Plan.
The Group's goal and driving ambition is to be the trusted partner of choice in the development of complete offshore floating solutions for the world's energy companies. It is on this basis that the Group intends to maximise shareholder value.
The Strategy Plan consists of the following elements:
Continued focus on core products with attractive margins
The Group will continue to focus on supplying complex medium-to-large floating production solutions for the full product life-cycle; from engineering and procurement, through construction, installation and operation to product life extension (including relocation). The Group targets the high-end of the converted FPSOs sector with facilities requiring large processing capacities (typically above 80,000 bopd) and/or projects with especially demanding challenges (harsh environment, heavy oil etc.). The Group will continue to strengthen its position as the global leader in floating production, mooring systems and production operations. The full focus of the Group is on the FPSO business, related products and associated mooring systems. The Group has re-focused its organisation (see "Focus on the bottom line" below) to meet the growing demand for larger and more complex floating production facilities that it believes offer the potential to yield attractive margins. The Group seeks to identify industry-defining technologies and devote the necessary financial and human resources, through selected product and technology development to provide a technological edge over its competitors.
Strive for a balanced portfolio
The Group engages both in the lease and operation and the turnkey sale of its products. Leasing and operation provides long-term visibility of cash flows and earnings; however, it is capital intensive and requires tight management of complex financial, operational and contractual risks. Turnkey sales contracts generate revenues and profits as the project progresses (i.e. during the construction phase), minimising capital requirements from the Group. Balancing both types of projects allows the Group to continually improve its track record, while managing its balance sheet exposure.
The Group believes that an important advantage of its business model is the full life-cycle aspect of the business. By leasing and operating its assets, the Group can feed back its operational knowledge to its project teams which allows for continuous improvement and innovation. This loop results in further business opportunities such as relocations, vessel refurbishments and other brown-field projects, but it also contributes to an in-depth understanding of the effects of age on components; this is intended to result in better life-cycle costing and asset integrity management, based on concrete experience.
The Management Board believes that the fact that the Group offers both lease and operate and turnkey sale possibilities to its clients provides it with an important commercial benefit in the market place. For large floating production systems, it is essentially the client's choice to opt for lease and operate or sale, which at times is decided relatively late in the contracting process. However, the financial capacity of the Group combined with its assessment of the overall risk profile of each project determines whether the Group will pursue a prospect and influences the Group's appetite to expose its balance sheet.
The Group aims to grow its lease and operation business primarily by expanding organically its lease fleet of FPSOs and it will consider acquisitions as opportunities arise meeting the Group's cost and benefit criteria. The Group aims to maintain its leading position in Brazil and Angola and aims to secure new, suitable projects in geographical areas such as the Far East, Australia, North Sea, Mexico and West Africa (in addition to Angola) to diversify its geographic spread, but keeping in mind its high-end positioning.
Focus on the bottom line
The Group is dedicated to providing its stakeholders with an organisational structure that enables and incentivises on-time delivery of projects, within budget.
FPSOs developed by the Group and its competitors are specialised items, as each FPSO must be tailored to the specific requirements of an oil and gas reservoir. The main trends observed during previous years are the increasing complexity and size of FPSOs; the doubling and sometimes even tripling of the average FPSO contract life and the use of FPSOs as full life-of-field development systems; and as a result of the increase in complexity, size, and contract life of FPSOs it is anticipated that FPSOs will require a growing scale of investment; the move to production of fields in increasingly deeper waters is expected to continue; FPSOs will
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continue to be constructed and operated under strict local content requirements in Brazil but also in Africa and other parts of the developing world; the IEA and other expert sources expect oil to remain the leading fuel in 2035 with a 27% share (down from 33% as at March 2013) and in the overall energy mix, alongside renewables and biofuels, gas is expected to be the only fossil fuel source to increase its share and due to the global debt crisis, it is increasingly difficult to secure long-term debt financing from banks.
To address the increasing complexity of FPSOs, the Group has significantly increased staff numbers from 2,500 at the end of 2004 to more than 7,000 in 2012. The Group substantially transformed its organisational structure to maximise its capacity to execute large and complex FPSO projects for clients and continues to further improve its organisational structure. The transformation resulted in a consistent organisational structure across the Group's five execution centres with the delegation of a broad range of responsibilities for delivery and performance, to the execution level and amendments to the Group's performance and evaluation system. It furthermore resulted in the streamlining of internal (cross-border) processes, systems and objectives for similar types of projects.
The new organisation is intended to allow the Group to focus on its core business and provides the strengthened Management Board with the adequate tools to monitor profitability via transparent accountability throughout the organisation. It also encourages best practice sharing/implementation and capitalises on the advantages of a single brand strategy.
Better risk/reward balance
It has been recognised in the FPSO industry that the returns over recent years have not followed the increased size and complexity of project tenders in comparison with the returns for E&P companies and the integrated specialist equipment suppliers. The Group seeks to address this imbalance by providing for differentiated, value-adding life-cycle solutions and proper contract management through which to justify higher margins and achieve better returns. The Group is also increasingly selective in its bidding process only tendering for FPSO projects that meet its stringent risk-return profile and by engaging in a more active dialogue with clients on sharing risks.
The Group continues to review the level of risk that is appropriate to be taken in pursuit of strategic objectives and hence the risk sharing between the client and the Group, for example in respect of HSSE risks. Especially after the three-month oil spill in the Gulf of Mexico in April 2010 caused by a blowout of the Macondo well and subsequent explosions and fire on the semisubmersible Deepwater Horizon oil rig which is considered the largest accidental marine oil spill in the history of the petroleum industry, excellent HSSE performance remains a priority in the Group's strategy.
Partnerships
The increasing size and complexity of FPSOs has led the Group to form new partnerships to help finance the continuing growth of its lease fleet, and to develop the local content component of FPSO projects. The Group also aims to diversify its capital sources through partnerships. Key commercial partners include Sonangol, MISC, QGOG and GEPetrol; key financial partners include Mitsubishi Corporation, NYK and Itochu; key technical partners include DSME and Synergy. Key technology partners include Linde, Ivanhoe Energy and CompactGTL. Long-term alliances and joint ventures are becoming particularly important as the scale and capital requirements of future projects increases.
The Group aims to continue to enter into partnerships in order to improve its chances of securing new business and to add value to its performance in the long run.
Strengthen the balance sheet
Divestment of non-core activities
In line with the Group's focused strategy on FPSOs, the Group has conducted a comprehensive review of its asset portfolio to identify non-core assets. In August 2012, the Group expressed its intention to realise approximately US$ 400 million from disposal of non-core assets. The first steps in this divestment plan were taken by the Group in November 2012 with the sale of GustoMSC to Parcom Capital. The Group also sold its installation vessel the Dynamic Installer in November 2012 and intends to enter into a sale and lease back transaction to dispose of its Monaco real estate assets in 2013. As part of the Group's strategy to focus on FPSOs, the Group continues to review its asset portfolio, including for the sale of any non-core assets.
Decrease dependency on bank financing
In light of the global financial crisis, it has become increasingly difficult to secure long-term debt through the project financing market; therefore, the Group is diversifying its sources of funding and aims to continue to do so in the coming years. A number of banks have already withdrawn from the structured asset financing sector.
The Group has started to implement various financing diversification options, both corporate and project based, in addition to partnering with new financial partners for larger projects. In 2012, the Group secured a US$ 1.08 billion project loan for FPSO Cidade de Ilhabela and issued US$ 500 million of project bonds through a US private placement.
In the coming years the Group intends to boost its equity position through the abovementioned disposal programme for non-core assets and through the expected profit contributions to equity, in order to obtain in the medium term an investment grade credit rating, which aims to also enable the Group to gain access to the public bond markets.
10.4 Key strengths
The Group believes it has the following strengths:
FPSOs as core product
The Group is the largest FPSO player in terms of total number of leased units and total oil and gas production capacity with only a limited number of relatively large competitors (see "Industry and Market Overview – FPSO market: Competitive Landscape").
The global trend in oil and, to some degree, gas production is the increasing development offshore and in deeper water. The average water depth has practically doubled over the past decade and as a result has increased the demand for FPSOs. FPSOs are the preferred production system in such deeper water due to their storage capacity as they typically have a shorter delivery schedule than other floating productions systems and can be relocated to other fields.
The Management Board believes that the Group is well positioned to benefit from this industry trend for the following reasons. First of all the Group has the capability to design, construct and commission FPSOs destined to work in even the most challenging ocean regions. Secondly, because the Group has the financing capabilities to arrange the significant amounts that are required to finance large lease and operate FPSO projects, which are financed primarily through project finance facilities. In 2012, the Group secured a US$
1.08 billion project loan for FPSO Cidade de Ilhabela. The Group furthermore diversified (and will endeavour to diversify further) its sources of long term debt by widening its core banking group, for example by a long term cooperation agreement with Mitsubishi Corporation to develop FPSO projects in partnership, and by accessing debt markets directly (as it did with a US private placement project bond of US$500 million in 2012 to refund investments made in FPSO Cidade de Anchieta). Thirdly, because the Group has a strong track record in operating FPSOs successfully across the globe and primarily in the fast growing areas of Brazil,
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where the Group leases and operates seven FPSOs with two currently under construction, and Angola, where the Group leases and operates six FPSOs with one currently under construction.
Engineering skills and cutting edge technology
The Group's competitive advantages have traditionally been the quality of its engineering skills and its leadership in key technologies. The increasing size and complexity of FPSOs underpins demand for the Group's technical expertise. The Group is a leader in complex mooring systems, including those for harsh environments and ultra-deep water, with only a few direct competitors. The Group currently has three large complex turrets under construction for Prelude FLNG (which upon completion, is expected to be the largest offshore floating facility to date), Quad 204 and Ichthys. All three of these turrets contain elements that require advanced technology solutions for high mooring loads; total weight of 11,000 tons with a height of 95 meters
The Group's competitive advantages have traditionally been the quality of its engineering skills and its leadership in key technologies. The increasing size and complexity of FPSOs underpins demand for the Group's technical expertise. The Group is a leader in complex mooring systems, including those for harsh environments and ultra-deep water, with only a few direct competitors. The Group currently has three large complex turrets under construction for Prelude FLNG (which upon completion, is expected to be the largest offshore floating facility to date), Quad 204 and Ichthys. All three of these turrets contain elements that require advanced technology solutions for high mooring loads; total weight of 11,000 tons with a height of 95 meters