Saturday, December 22, 2007

Swiber - Extension of Brunei Shell Contract

It's been a while since I had a post, but that's due to the fact that nothing much has been happening with regards to the companies I own, till now ! Also, I have been busy at work clearing my pile of stuff before the Christmas and New Year's Day holidays. Anyhow, on December 19, 2007, Swiber announced that Brunei Shell Petroleum Company ("Brunei Shell") had awarded them a contract extension for the transportation and installation of offshore facilities off the coast of Brunei which forms part of the major project developments by Brunei Shell in that region. The work is expected to be completed by FY 2009, implying that the revenues from this contract extension will only be recognized in FY 2009.

Readers would recall that on February 13, 2007, Swiber had announced their largest contract to date of US$146.6 million with Brunei Shell. Of the total contract value, US$70.5 million was to be recognized in FY 2007 while the other US$76.1 million would be recognized in Fy 2008. In the latest announcement, it was reported that the total new contract value (in addition to the US$146.6 million) would be approximately US$200 million, which means that this contract extension is worth at least US$53.4 million which will be recognized in FY 2009.

This extension is very good news for Swiber in that it demonstrates that Brunei Shell has faith in the company and are willing to continue to use them 2 years into the future. Also, Swiber has shown that it can deliver larger projects on schedule, which is probably why the contract extension was given. This speaks volumes about the Company's ability to handle larger projects for oil majors as more of their new vessel fleet comes on stream. Mr. Goh also mentioned that the oil and gas sector is fiercely competitive, but that Swiber will offer value to customers by offering a range of services which are catered to the specific needs of each customers (customization), and this will afford them a suitable competitive advantage. It remains to be seen, of course, if Swiber can manage to outflank the competition and clinch larger projects in time to come. The company has already bidded for projects worth a total of US$800 million for FY 2008 and FY 2009, and their joint ventures in Brunei and Vietnam should act as catalysts which could see them clinching projects in these countries very soon.

One concern is that the new vessels which are coming on stream (including the drillers) may see a lack of demand or rates that were not as high as anticipated. It would be good if Management can support their optimistic prognosis with more concrete and substantial evidence; otherwise the high capex associated with ordering vessels would surely be a drain to cash flows, unless the company can derive suitably high revenues from future drilling and EPCIC operations. The FY 2007 results and presentation should cast some light on the company's direction and future plans, and I will be keenly tuning in to this over the next few months.

In terms of contracts, the company seems able to clinch at least 2 to 3 contracts on a regular basis every quarter. Note that the last "batch" of announcements of contract awards were from the period of May to July 2007, and involved three contracts/LOI worth US$21.3M, US$31M and US$12M. The more recent batch of contracts were announced from mid-November (Nov 13) to date and involve the amounts of US$25M, US$31M and US$53.4M. One quick glance should tell the reader that the value of the contracts is generally higher than the previous batch, while the time period for reporting contract wins has also shortened considerably. Assuming the company is able to secure 2 to 3 contracts every quarter, one can only hope that the value of these contracts continues to increase, and hopefully it will culminate into another large contract either equalling or exceeding the US$146.6 million one from Brunei Shell.

I see good potential for growth for the company, assuming they play their cards well, leverage on their strengths and make clear their objectives and goals. I should be attending the EGM on December 28 and will offer readers some updates if I manage to speak to the Management again.

4 comments:

la papillion said...

Hi MW,

Eagerly awaiting your interview with the management :)

PanzerGrenadier said...

Hi Musicwhiz

That's a good idea. I have included your blog link into my blog.

Wishing you all the best in your own blog on value investing. :D

Panzergrenadier

musicwhiz said...

Hi la papillion,

Will post an update once I get to speak to Management, though I am not sure if I will get the chance. :)

Regards, Musicwhiz

musicwhiz said...

Hi Panzergrenadier,

I will include your link as well the next time I update my blog. Hope to share more insights with you on achieving financial freedom !

Regards, Musicwhiz