Friday, December 28, 2007

Swiber - EGM Held on December 28, 2007

I attended the EGM today at Swiber's new office location at Cyberhub @ IBP. It was actually quite an adventure for me to locate the company as I had to take an MRT train to Jurong East, then hop on one of those IBP feeder buses (at S$0.20) in order to drop off at Bus Stop 5. Cyberhub @ IBP was one of the buildings beside M1 and Hi-P (both listed entities on SGX), and Swiber occupied about 2.5 floors (3rd floor partial, 4th and 5th floors). The office was spacious and brightly lit and the EGM was held in a conference room on the 4th floor. See picture below for a glimpse at Swiber's new lobby>>>

The turnout was actually better than the previous EGM held on July 31, 2007 at Raffles City Convention Centre, at about 8 shareholders as compared to only 3 the last time (myself included). Obviously, the location could not have been a factor as IBP is considered more "ulu" than Raffles City, so I guess it must be the date and the festive season which made people more willing to go down for the EGM. Nevertheless, I managed to clarify quite a few questions I had prepared for the Management. Mr. Raymond Goh was on vacation so I managed to speak to Mr. Francis Wong (Finance Director), Mr. Leonard Tay (Independent Director) and Mr. Yeo Jeu Nam (Lead Independent Director) about the Group's business plans and prospects. I have summarized it as follows:-

1) Improved Margins - Margins are expected to improve moving into FY 2008 as the Group takes delivery of more vessels. There are 10 vessels which are expected to be delievered in FY 2008, and of the 4 vessels which are the subject of today's EGM, 2 have been delivered already and are awaiting confirmation o the EGM results. The other 2 vessels under the S&L will be delivered in FY 2008 and FY 2009 (see attached circular). Gross margins as at Sep 2007 stood at about 32%, as compared to only 20+% when the use of third-party vessels was practised. As Swiber grows its vessel fleet, costs can be better controlled by having their own vessels which means project execution will also be less risky.

2) Charter Rates (rationale for Sale-and-leaseback) - One shareholder did query the Management on why Swiber did not prefer to use third-party vessels for their EPCIC work, but instead to rely on their own vessel fleet. Mr. Wong mentioned that spot charter rates are very high now and it would not make economical sense for the company as it would lower their GP margins. On the other hand, operating lease payments for sale and leaseback vessels is only 20 to 40% of the spot rate and therefore yields a much better cost structure for the Group.

3) Risk of Vessel Delivery Delays - One of the risks is that vessel deliveries get delayed, thus impacting on the start dates of the project or contract and undermining confidence in the Company. This could potentially result in loss of revenue and goodwill as well. Mr. Wong mentioned that Swiber has personnel who work closely with the shipyards and engine manufacturers to ensure that delays are minimal and are anticipated way before they occur, so that some contingency plan may be conceived. This gives them better operational control over their vessel delivery schedules and minimizes the impact of nasty surprises should there be any delays or faults with the vessel. In my opinion, this was a mitigating factor and it is commendable that the Company takes pains to monitor its new vessels under contruction in addition to its current ones.

4) Mechanics of Sale and Leaseback Transaction - The exceptional gain arising from this round of sale and leaseback transaction is US$33 million; but this will be progressively recognized as each vessel is delivered. Thus, the entire US$33 million will be smoothed out over FY 2008 and FY 2009. The cash will be received in full (100%) once the vessel(s) are delivered, and a 20% downpayment is to be received from those currently under construction. I would expect to see at least part of this reflected in the FY 2007 cash flow statement.

5) Prospects for Deepwater Drilling - Mr. Wong mentioned that currently, the market for offshore oil and gas consists of 90% shallow water, 10% deep-water. This is expected to change to 80% shallow water, 20% deepwater in 3 to 5 years time. Thus, Swiber is preparing itself for deepwater drilling as a separate business segment in order to complement their EPCIC activities. Their new vessel orders such as the equatorial driller are specially designed to handle South-East Asian's benign waters, and this will give them a competitive advantage as they also operate on a lower cost base as compared to Norwegian companies which also have the requisite assets and expertise.

6) Kreuz Shipbuilding and Engineering - Originally known as North Offshore Pte Ltd, this company was wholly acquired by Swiber in August 2007 and renamed. With field development activities growing in the region, the Company felt the need to have their own base to carry out in-house repairs, store equipment, perform maintenance work and also carry out some fabrication. These activities, if outsourced to third-party shipyards, will increase Swiber's costs. Thus, the acquisition of a shipyard cum fabrication yard enables better cost synergies to be achieved for the Group.

7) Joint Ventures in Brunei and Vietnam - As announced in their press releases in Sep 2007, Swiber has entered into JV with companies in Brunei and Vietnam. For Brunei, this allows them to bid for local projects which they otherwise are not allowed to bid for as a foreign company, thus opening up their opportunities for more contract wins. In Vietnam, the partnering is with state-owned companies which have a foothold in the O&G industry there, thus it will open up more chances for Swiber to work with their local partners on contracts (more of a collaborative process).

8) Territorial Expansion - When quizzed about which other regions Swiber will be targeting, I got the reply that Thailand, Middle East and India were potential hot spots. Swiber have already clinched their maiden drilling contract in the Gulf of Thailand some time back, and Mr. Wong mentioned that 40% of the world's oil and gas reserves are found in South East Asia. When asked about China though, he said that most of the time they preferred to do it themselves and did not like outside companies to take on projects. Swiber is currently bidding for US$800 million worth of projects for FY 2008 and FY 2009.

9) Order of US$53.13 million Derrick Crane - The crane would be one of the largest in the world and is capable of lifting loads of up to 4,180 tons, a rarity among the cranes these days operating in EPCIC projects. Mr. Wong explained that cranes which can lift heavier weights help to cut costs as they reduce the time taken to dissemble the object into parts, lift them and then re-assemble them back again. For conventional cranes, this has to be done and it can be tedious and time-consuming. Thus, it is my understanding that Swiber will have a definite edge in bidding for higher value projects once this asset comes on board.

10) Demand and Supply for Newly Ordered Vessels - Mr. Wong clarified that even though the Group orders vessels with no firm contract or definite customer demand on hand, these orders are benchmarked to what oil majors require for field exploration and Swiber keeps in close contact with these oil majors to see what their requirements are. Therefore, the orders follow the requirements of oil majors closely and this will mitigate the risk of the vessels lying idle in the shipyard or not being put to use. Note: Swiber's business model is inherently different from Ezra as Ezra operates on a long-term charter basis for their vessels (thus ensuring steady revenue streams) while Swiber's vessels are utilized for specific contracts by the company themselves. Thus, people should be wary of comparing these two companies as they operate differently, possess different assets and are targeting different aspects of the oil and gas supply chain.

All in all, the feel I got was not so much of undue optimism, but more of guarded and cautious optimism. The Management is confident of their 3-prong approach to building the business and so far the fruits of labour have been very good, seeing their financials so far. Whether this can carry on and whether they can clinch another deal of similar or higher value than their Brunei Shell deal remains to be seen.


la papillion said...

Hi MW,

Thks for your timely update for the Swiber AGM :) You never tell me the food! ;P

Derek said...

Hi MW,

Thanks for your analysis. Though I'm not vested in Swiber, it's good to know more about the company through the eyes of their shareholder.


musicwhiz said...

Hello la papillion,

The food consisted of croissants with tuna, chicken and egg mayonnaise filling. There were also tarts with smoked salmon, egg,, chicken and tuna. I think they were all from delifrance. Of course, the usual tea and coffee were also provided.

Sorry, I did not deem it necessary to talk about the food in my blog proper as I am a guy who gets right down to business (i.e. stating the important and salient points which I discussed with Management).

Regards, Musicwhiz

musicwhiz said...

Dear Derek,

Glad that my write-up is useful to you. You have a very Happy New Year yourself ! :)

Regards, Musicwhiz

Anonymous said...

Hi MW, just a quick question. Why do you say that Swiber and Erza target diff parts of the O&G value chain? Both seem to be targetting the exploration/extraction portion?

musicwhiz said...

Hi Anonymous,

Ezra does more of the offshore support vessel business and also povides marine services such as fabrication works for platforms. As such, their vessels help to provide support to the crew which are to shuttle between platforms, rigs and such O&G structures. Visit their website to learn more about their business activities.

As for Swiber, they are involved in EPCIC for the O&G industry, which is more geared towards procurement, installation, construction and commissioning. They are the ones who lay the foundation for the topsides and jack-up rigs and also help to lay the cables for under-sea oil recovery. Please check out their website as well which has a very good diagrammatical flow of their business.