Sunday, October 14, 2007

Swiber – Acquisition of 4 New Vessels for US$108 Million (An Analysis)

Swiber had, on October 11, 2007, announced the acquisition of 4 new vessels from Thaumas Marine Ltd through its wholly-owned subsidiary Kreuz Engineering Limited. Two of the vessels are subsea support vessels while the other two are deepwater 10,000 bhp AHTS. The total cost of the vessels comes up to US$108 million and the vessels are expected to be delivered between 4Q FY 2009 and 1Q FY 2010. The cost, however, does not include any equipment which Swiber may retrofit or install on to the vessels once they are delivered, which means the potential cost of getting the vessels ready for EPCIC projects will exceed the stated US$108 million.

The important thing to note about this latest corporate move by Swiber is that this acquisition cements their entry into a whole new market segment; one which is served by deeper waters and subsea activities. These support vessels can further complement and support Swiber’s EPCIC activities in order to perform hardware installation and inspection, repair as well as maintenance. Various enhancements and sophisticated technical aspects on the new subsea vessels such as SAT system, Class 2 DPS and a working monopool (heck, I don’t know what this all is, but it sounds impressive !) all are supposed to add value to the vessels and enable them to command a premium when used for EPCIC activities. This should enable the Group to bid for higher-value EPCIC projects and also to improve gross margins as they can reduce reliance on third-party chartering of subsea vessels. The deepwater vessels, on the other hand, will be available for oil and gas companies for use in their deep sea operations; but the company does not elaborate on what kind of operations this will entail. More clarification is needed on what the deep water AHTS are for, in terms of whether they are used to complement their EPCIC activities or used merely for charter income.

Mr. Raymond Goh succinctly captured Swiber’s prospects for the future by commenting that the expanded fleet (along with the associated new capabilities and enhancements) would give the Group a strong competitive edge as a leading, niche provider to the oil and gas industry. Recall that there is no direct competitor within the South-East Asian region doing EPCIC works and even though it is known that there is one player in India, they are not scaling up their vessel fleet significantly enough to pose a serious threat. Regarding his further comment about “revenue synergies and growth potential”, I would hazard a guess that he is referring to stronger revenues from bidding for higher-value EPCIC projects. It was previously communicated that Swiber is currently mulling over EPCIC projects in excess of US$500 million, but this was dismissed by myself in an earlier post as Swiber had neither the fleet nor technical capabilities to handle such a massive project. Now, it appears that they are gearing themselves up for this eventuality and it may be in FY 2009 that we see such a large project coming on board.

To give a quick recap, below is Swiber’s expanded vessel fleet consisting of their second (and sustained) fleet expansion intiative:-

One main concern which I have is how the Group plans to finance these purchases and whether they have raised enough cash. To give a quick rundown of the costs required in order to expand their vessel fleet, please see the following bullet points:-

a) August 30, 2007 – Acquisition of 4 vessels (1 submersible barge and 3 accommodation barges) for US$70.6 million;

b) September 6, 2007 – Purchase of Derrick Crane for US$53.13 million;

c) October 11, 2007 – Acquisition of 2 subsea vessels and 2 10,000 bhp AHTS for US$108.0 million.

The total consideration of these vessels amounts to US$231.73 million. Referring to my posting on September 5, 2007 on Swiber, I had computed that the first sale-and-leaseback, private placement of 55.35 million additional shares and the inaugural bond issue under their S$300 million MTN program would generate about US$238.1 million. The second round of sale-and-leaseback will bring in cash of US$95.0 million, thus the total cash inflow now from these 4 financing activities is around US$333.1 million, which is about US$101.37 million in excess of their current requirements. Under the MTN program, Swiber has already drawn down S$108.5 million, leaving another S$191.5 million (about US$130.7 million at 1 US$ = S$1.465) yet to be utilized. Thus, Swiber’s potential cash inflow could be a total of US$463.8 million. This would give them a an additional US$232.07 million more cash to place orders for further vessels, which implies that they are only 50% into their ordering of new vessels to scale up their fleet.

It must be noted that the above projections do not account for the fact that increasing gearing may also have further adverse effects such as higher interest expenses. Another point to note is that the US dollar is depreciating and this would affect the amount of US$ they can raise via the MTN program. Underpinning all this aggressive expansion is, of course, the hope that Swiber can clinch more and higher-value contracts in either Brunei, Vietnam or Indonesia (where they recently incorporated a new company PT Swiber Offshore). More sophisticated vessels and an expanded fleet also hint at better gross and net margins for the company which should crystallize in mid to late 2008 through FY 2010.

The company is expected to release its financials for 3Q 2007 in mid-November 2007. Catalysts for further growth would include new contract wins in countries which Swiber does not have a foothold and the order of new vessels to strengthen their fleet; as well as the hiring of more experienced senior management to helm the different business units of the Group.

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