Sunday, May 04, 2008

Swiber Holdings Limited – AGM Highlights and Snippets

Swiber’s AGM had the uncanny timing of 1 p.m., which was sandwiched between the morning and the afternoon, right smack in the middle of lunch. I had made feedback to Swiber’s IR company (August Consulting) prior to the AGM informing them of the weird timing and that it was very difficult for shareholders who were working to make it for the meetings as afternoon leave was usually granted at 12:30 p.m. The problem was exacerbated by the fact that the company was holding its AGM at its premises in International Business Park, unlike for FY 2006 where their AGM was held at the more central location of Raffles Hotel near Beach Road.

Despite these “obstacles”, I managed to rush down to the AGM via a cab and was pleasantly surprised to find that the AGM was held at Swiber’s newly completed auditorium on the third floor. Their previous EGM was held in the company’s Boardroom on the fourth floor, so it was a good experience to attend the AGM in a spanking new auditorium which could seat up to 200+ people. Mr. Oon Thian Seng (Independent Director) told me that the auditorium was completed just this year and was used for training and briefings to staff.

At the AGM, the formal proceedings were brief and quick and the turnout was quite poor (due to the aforementioned reasons). I took the opportunity to speak to Mr. Oon Thian Seng, Mr. Francis Wong and finally Mr. Raymond Goh. I covered topics with them ranging from the credit crisis, to the potential for deepwater as well as various accounting issues (accounting issues were handled by Mr. Francis Wong as he is a trained chartered accountant and is very knowledgeable about the financial affairs of the company).

Chat with Mr. Oon Thian Seng:-

1) Prospects of the Company – Mr. Oon mentioned that Swiber was entering an “exciting phase of growth” and that he was sure the equatorial driller (to be delivered in FY 2010) would be very well-accepted and would provide a boost to the company’s earnings. He mentioned that Glen Olivera designed the entire driller and his industry experience shows that he was perfectly capable of designing something which would suit the benign deepwaters of South East Asia. He was surprised that other competitors had not done this before and designed a driller which was suitable for Asian waters, but my personal view is that other companies may not have Glen’s expertise and experience when it comes to designing a driller. More on this later during my chat with Mr. Goh.

Chat with Mr. Francis Wong:-

2) Long-term Receivables of US$8.8 Million – Mr. Wong explained that this amount was part of the seller’s credit placed for the sale and leaseback transactions. This was a standard clause for all sale and leaseback which means that a portion of the proceeds needs to be placed with the buyers. This amount earns interest and will be repayable in 8 to 10 years time. This, plus other receivable amounts in the Balance Sheet, are principally the reason for the negative operating cash flows in Swiber’s Cash Flow Statement. If not for this timing difference and this seller’s credit, there will be an operating cash inflow.

3) Hedging for Bonds – I enquired if the company does hedging and asked if Mr. Wong could explain the hedging policy of the company. Mr. Wong said that hedging would be done every time debt was taken up from the MTN programme, as the funds received would be in Singapore Dollars (they report their accounts in US dollars). The hedge used was a simple one to lock in the rate at a given point in time, coupled with interest rate swaps as stated in their Note 16. Any hedging gains or losses would be recognized in equity till such time that the transaction was completed, then the reserves would be reversed out to Profit and Loss account as realized derivative instrument gains or losses.

4) Oil Trends and Prices – Mr. Wong’s view of the current high oil price situation was that it was unsustainable as it is partly contributed by speculators driving up the price of oil. He also said we had to account for the weak USD playing a part in driving prices to recent record highs of nearly US$120 per barrel. By right, oil companies can function very profitably at US$70 per barrel, which he thinks will be the eventual price oil will settle to once the current bout of speculation dies down. For most oil companies, their cost is about US$40 per barrel for deepwater oil extraction; while for shallow water he says their cost is even lower (at less than US$1 per barrel !). This was because most oil companies had set up proper equipment and infrastructure near coastal areas (shallow waters), thus all they needed to do was to “turn on the tap” and oil would flow. It was effortless and cheap but the problem was that oil in such areas is running out; thus oil majors are moving to regions such as South East Asia and into deeper waters in search of more oil reserves.

5) Obtaining Financing During Credit Crunch – Mr. Wong did concede that obtaining good financing during the current sub-prime crisis-related credit crunch was proving tough. This was because banks, suffering from a lack of liquidity due to massive write-downs of debt-related securities, are less prone to lend money to just anyone and would be highly selective when it came to extending loans. In spite of this, he proudly mentions that Swiber had managed to draw down on their medium term note (MTN) program to raise S$100 million at a very attractive interest rate of around 4%. He said the rate was very good as SIBOR and LIBOR used to be about 5 or 6% just a few years back.

Chat with Mr. Raymond Goh:-

6) Prospects for Offshore Drilling Services Division – Mr. Goh was very optimistic about the prospects for Swiber’s Drilling Division, because of the Equatorial Driller. He said that this driller represents Swiber’s future growth and that he anticipates the drilling unit will contribute as much as the construction unit is doing now. Once the first driller is completed and rolled out by FY 2010, contracts should start to flow in. When oil majors see how successful the first driller is, Swiber will then consider building a second one to follow up, but this will come much later. Mr. Goh feels that the market is not placing enough value on the drilling division as it has the most potential for growth in the coming years. In fact, he said Swiber had saved money by not acquiring a drilling company; in fact just by hiring an experienced drilling team (including Mr. Glen Olivera who had worked for UNOCAL’s drilling team before and drilled more than 150 wells) and designing and building the Equatorial Driller, Swiber had effectively already obtained their Drilling Unit at a much lower cost.

7) Competitive Advantages of Equatorial Driller – The driller costs less to build as it is unlike the semi-submersible drillers which are more catered for the harsh North Sea conditions. As a result of lower costs in manufacturing the driller, Mr. Goh mentions that lower rates can be charged to customers; thus creating a win-win situation as Swiber still gets good margins (as costs are lower to build), yet they are also under-cutting the competition by offering very competitive rates to entice customers to use Swiber’s services. In a sense, I will see this as a competitive advantage which is unique as the Equatorial Driller’s design is difficult to mimic (it is an original design from Mr. Glen Olivera) and thus such cost savings can be maintained as competitors will find it difficult to duplicate.

8) Diverse Nationalities within Swiber’s Headcount – Mr. Goh mentions that Swiber has hired staff from about 20 different nationalities to work in the company; and all are hired based on merit and expertise and not based on familial connections or through internal networks. In the spirit of meritocracy, no person will be hired based on family relations and Mr. Goh imposes the rule that no Management staff can have any siblings within the company. These are the hallmarks of a professionally-run company employing high standards in terms of hiring quality staff to join its ranks and head its various divisions.

9) Ability of the company to continue growing – Mr. Goh cautioned that growth will eventually have to slow down and stabilize for the company, but he still sees an exciting 5-year period from now till FY 2013 where the company would be growing both its EPCIC operations as well as its new drilling division. Since the drilling unit was still new, it had yet to build up a track record and this was necessary to make the oil majors take notice. Thus far, the drilling division has only secured one contract valued at US$25 million from NuCoastal in Thailand. Mr. Goh asked for shareholders to be patient and to give him time to build the company to greater heights. In the meantime, I will fully support the company’s decision to fully retain ALL its earnings and NOT to pay out a dividend.

Through my interactions with the Directors, I can sense that they are also looking forward to an exciting growth phase for Swiber. It will be interesting and insightful to see how the company leverages on the joint ventures and alliances which it has made so far in order to extend its business further. Tie ups have been announced in Brunei with Rahaman, Vietnam with Petro-Vietnam; as well as Principia and most recently, CUEL of Thailand. The important thing is for the company to be able to capitalize on such relationships to secure good repeat business and larger contracts for the company; to enable it to scale new heights in terms of revenue and earnings growth. Only through consistent and stable recurring earnings stream can the value of the company be enhanced, and all shareholders will benefit as a result.

News Alert: This just in from Energy Current. One of Swiber's barges, Swiber Giant V, sank off the coast of Indonesia. Salvage operations are underway now and Swiber has chartered SMIT's pontoon Giant 2 to fulfill their contractual obligations. The incident is not expected to impact Swiber's earnings, though I suspect it may affect margins as they need to charter a vessel instead of using their own. During the course of work, accidents do occur and I accept this as part of the risk of owning a business. The full news article can be viewed here.

13 comments:

novice said...

thanks alot musicwhiz. The contribution of your view and session with the swiber directors have been extremely helpful and beneficial.

la papillion said...

Hi MW,

Wow, there's so much too read from this post :) Great work you did here in posting the AGM insights :)

I feel very excited about Swiber's growth and esp about the high quality of their management. I too, fully support their policy to retain their earnings. Who in the right mind wants to have dividend when the management had been doing such a good job to grow it all along? I look forward to their new division to come in place!

Thks mw, for the hardwork!

Brendan said...

Did you ask them why 2 of the directors have recently resigned? Do you think this is a concern?

Ao said...

hi mw,

just a suggestion to add the title of the post on the 'title' bar itself instead of incorporating it in the main text?

it would help us who rss feed your blog to check on updates easier.

cheers,

musicwhiz said...

Dear Novice,

You are most welcome. Thanks for visiting !

Cheers,
Musicwhiz

musicwhiz said...

Hi La Papillion,

Thanks for your comments. It was nice to chat with Management and hear about their growth plans, though I must caution that in theory it all sounds very rosy; but in practice there is a lot which could go wrong should things not work out as they plan. For one, costs could escalate unless they lock them in now, and delivery delays could possibly frustrate some of their contracts. However, I believe Management will take all efforts to mitigate these risks as they seem like very experienced people.

With the boom in oil and gas moving into deepwater, this holds out well for Swiber's prospects.

Regards,
Musicwhiz

musicwhiz said...

Hi Brendan,

I have checked Swiber's announcements and press releases and no where does it mention that two directors have resigned. I had just spoken to the directors and they are essentially the same BOD as in FY 2006. Kindly elaborate on what you mean, please.

Thanks.
Musicwhiz

musicwhiz said...

Hello AO,

Ok thanks point taken. I will try to do some in future.

Regards,
Musicwhiz

Simon said...

i think brenden confused swiber with swissco.....

la papillion said...

Hi,

I think so too. Swissco got into some trouble with compliance with listing rules. Hired KPMG as their advisor..so I read.

musicwhiz said...

Hi Simon and LP,

Yes I think it's probably a case of mistaken corporate identity as Swiber sounds like Swissco. :P

Cheers,
Musicwhiz

Anonymous said...

Thank you Musicwhiz

Your analysis was very detailed. But realized their shares were not performing good on last Thursday. Worried.

musicwhiz said...

Hi Anonymous,

Don't worry about short-term price fluctuations caused by Mr. Market's moods. Just focus on the business prospects and the company and you will be fine.

Regards,
Musicwhiz