Wednesday, November 21, 2007

Swiber - 3Q 2007 Financial Review and Analysis (Part 2)

Part 2 of my analysis is continued here, and it will focus on the cash flow statement as well as discuss the strategies, prospects and plans for the Group moving forward

Cash Flow Statement Review

Due to the scaling up of operations and the completion of several contracts, Swiber has generate a healthy operating cash inflow of US$14.5 million for the 3Q 2007. This is up almost 300% from last year’s 3Q 2006 amount of US$5.3 million. It can be seen that the increase in trade receivables of US$20.7 million (due to expanded operations) was more than offset by the cash generated from an increase in payables of US$25.1 million, using the indirect method of cash flow statement. Other payables had also increased by US$10.4 million which helped to provide support as well. For Swiber, having a healthy operating cash inflow is integral as it operates in a capital intensive environment and is also increasing its gearing through the issuance of notes and taking up of bank loans. Thus, in time to come, interest expenses will be higher and will eat into their cash flows. As more projects are anticipated to flow in, operating cash flows should remain healthy for the foreseeable future.

Most of the cash outflows belonged to investing activities, as the Company scaled up its vessel fleet aggressively during 3Q 2007. Proceeds from the sale of vessels came up to US$47.1 million, but this was offset by purchases of more assets and additions to non-current assets amounting to US$73 million. A further US$5.2 million was spent in acquiring the interest in a subsidiary (I would suspect this is their 100%-stake in North Shipyard, now renamed as Kreuz Engineering and Shipbuilding Pte Ltd). All these transactions led to a net cash outflow of US$30.4 million.

The Group had sought to raise cash through financing activities during 3Q 2007, and it shows in this portion of the cash flow statement. US$71.1 million was raised through a bond offering as part of their S$300 million multi-currency medium-term note facility with CitiCorp Investment Bank (S) Ltd. Another US$78.6 million was raised as proceeds from the issue of 55.35 million new shares at S$2.1748 per share, as part of a placement to institutional investors back in June/July 2007. A further US$6.7 million was raised through additional bank loans obtained, while US$13.9 million was used to repay other bank loans. Moving forward, Swiber has indicated that they will resort to more debt funding for the purchase of their new drilling vessels and support vessels (derrick crane, subsea support vessels and Equatorial Driller).

Prospects and Future Plans

For Swiber, prospects look positive as they have recently recruited veterans such as Mr. Glen Olivera to helm their deepwater drilling unit, and also conducted a very successful notes issue. The Group’s move into subsea and deepwater signifies their commitment to grow the business beyond what it is today, and shows the Management’s drive to stay abreast of changing trends and to adapt and react accordingly. Swiber’s core strength is in EPCIC activities for the offshore oil and gas industry, and they are leveraging on this to extend their capabilities to the deepwater segment as well.

Swiber’s strategy for the future remains a three-prong approach: build up their vessel fleet capabilities, extend their presence into new, untapped markets; and hire experienced and capable Management to lead the business and take it to new heights. Thus far, they have been very aggressive on the vessel acquisition front, with many announcements and press releases detailing the extent of their plans for purchasing; and committing a lot of funds in the process. The key risks here are the demand and supply cycle of the EPCIC and deepwater drilling market. It is one thing to make forecasts and predictions about how things will pan out in the future, but another matter when it comes to the actual scenario and whether good value can be capitalized upon to grow revenues and profits. There would be uncertainty at this point over the level of competition present in the industry and also the margins to be enjoyed in new segments such as deepwater drilling. You can summarize by saying that Management are taking a calculated risk by expanding their fleet, and much of their future success still depends on uncertain future events.

As for entering new markets, thus far Swiber has demonstrated that they are able to forge strategic alliances to extend their footprint within South-East Asia, with JVs in India and Brunei as well as a co-operative agreement inked in Vietnam. As mentioned in my previous posts, whether these alliances will translate into actual dollars and cents will depend on whether Swiber can leverage on their network of contacts to secure more contracts and LOI. Much of their anticipated success comes from building their “brand name” and the CEP Mr. Raymond Goh personally flying over to engage in negotiations. The progress thus far is encouraging and it is hoped that the Company can continue to forge ties with other countries where Swiber has yet to establish a presence, in order to build up the Group’s reputation in South-East Asia.

The hiring of experienced Management has been a key factor in Swiber’s growth; good Management has the expertise and experience to ensure projects are executed on time and with no cost overruns, and it is critical to put someone experienced in charge so as to create goodwill as the Group is expanding. Delays and hiccups are not only financially costly, but also reflect badly on the capabilities of the service provider and may hamper future business. Swiber understands this aspect very well and knows that timely project execution is not merely about financial numbers, but also about reputation and recognized skill. I see this year (FY 2007) as Swiber’s year of building their reputation and credibility, in order to bid for more projects of higher value. Thus far, they have placed bids for US$800 million worth of projects to be carried out in FY 2008 and FY 2009.

In summary, things look bright for the Group but there are also significant risks moving forward as mentioned above. I will be closely monitoring developments within the industry as well as on the Company level, and will report such news here from time to time.

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