I attended the AGM cum EGM of Swiber Holdings Limited held on April 30, 2009 at 9 a.m. Due to the fact that there was quite a heavy torrential shower in the morning and also the presence of an accident near the AGM venue (which was the Company’s headquarters), several directors as well as shareholders arrived late. Due also to the fact that there was a lack of signs pointing to the location of the AGM and also a lack of hourly parking lots (the carpark at Swiber’s HQ was all season-parking), this also caused quite a bit of disgruntlement and there were some accusations that the AGM was not organized well. Management acknowledged the issues and said that they would learn from the experience and that all feedback would be noted and that FY 2009’s AGM would be a better experience.
The entire AGM and EGM lasted about 3 hours in total, with Management candidly answering questions from several shareholders who took to the microphone. I also managed to clarify some doubts I had with regards to certain issues which had been nagging me since the late deliveries of Swiber Concorde and Swiber Supporter, as well as some recent corporate activites. I shall now proceed to give a point by point review of the queries which were raised, issues discussed and explanations given.
1) Late Deliveries of Swiber Supporter and Swiber Concorde – Management has explained that these delays were unfortunate and unforeseen as the yards were unable to cope with so much work and did not have the capacity to finish the vessels on time. This resulted in delays and deferred revenues while costs escalated due to commissioning and de-commissioning as well as third-party vessel charters. When quizzed if this would be a one-off scenario, Management mentioned that this was unlikely to happen in the near future as yards are now begging for business as the slowdown has meant that many customers are cancelling contracts. I also asked if there would be any penalties involved as the oil majors who had contracted Swiber would have suffered delays in the commencement of the contract. Management assured that they work very closely with the oil majors and have obtained their understanding that such delays were an inevitable part of business and oil majors accept this as part of the cost of doing business. Moreover, there are a lack of incumbent players in South-East Asia who can perform such EPCIC work, which also means Swiber has better bargaining power. To date, these vessels have been delivered and are being prepared for their respective jobs (see FY 2008 Annual Report Page 28).
2) Oil Prices – One shareholder did bring up the issue of a breakeven price level for oil which would make Swiber’s business viable. The reply was that should oil fall to an improbable US$20 per barrel, this would certainly curtail E&P activities and would trickle down to affect Swiber’s core business. However, Management mentioned that they think this to be unlikely as most analysts are of the consensus that oil prices would hit about US$70 to US$80 per barrel by end-2009. Even then, Management reiterated that Swiber was doing good business back in the late 1990’s (before listing) when oil prices were much lower, and had been profitable then as well.
3) Contract Wins and Sustainability of Order Book – I did bring up the fact that Swiber’s order book seems to be drying up as no recent contract wins were announced on SGXNet. Mr. Raymond Goh did mention that US$70 million worth of contracts had been won for Jan-Feb 2009 but these were all made up of smaller individual contracts and each by itself was not material enough to warrant a press release. Management also said that their current order book would last them for the next 2 years till end-2010 and that they were currently bidding for projects in 2010 as their new fleet arrives. Their order book was currently filled by Brunei Shell’s extension contract as well as CUEL’s 5-year US$50 million per annum contract. In addition, there are possible “spill-over” contracts from joint-venture partners which Swiber has established in Brunei and Saudi Arabia.
4) Offshore Drilling Services (ODS) Division Plans – I was enquiring on the future of ODS now that it was announced that the Equatorial Driller would be postponed till economic conditions improved. It would have been a heavy burden for Swiber to finance this vessel and there were also no shipyards at the time to take up this project which involved the design of a radically new type of drilling vessel (different from the normal semi-submersible). Management also made the wise choice of deferring the construction of this vessel as the recession would mean cheaper construction costs in the near future should they take up this task again. My question to them was about their plans for this division in the interim as Swiber had hired a full drilling team headed by Mr. Glen Olivera. They said that ODS was now providing drilling expertise services and moving forward, there were plans to restart the Equatorial Driller project once conditions improved. I suspect gross margins and prospects for drilling expertise services would not be as good as being able to own and charter out a cost-efficient drilling vessel, but that would be the best move which Swiber can make in the meantime while waiting out the recession.
5) Sale of 51% of Swiber Victorious to ICON Capital – I was asking about the rationale behind the sale of 51% of this vessel to ICON Capital for US$19.125 million. Management said that this helped to lighten their capital commitments, but it does not mean that only 49% of the contract value would be recognized for Swiber. The reason for ICON buying 51% of the vessel was to look for a fixed, steady return which Swiber would provide; but technically the vessel was still contracted under Swiber to carry out its contracts and so 100% of the earnings will still accrue to Swiber. In other words, Swiber was farming out some of the cost of the vessel while enjoying the full benefit of the contracts which the vessel was engaged in; thus it was a win-win solution for both ICON (which received a fixed return on its investment in the vessel) and Swiber (which could lower its ownership costs yet partake in the full benefits of each contract). It was also reported in Upstream Online that CUEL had agreed to buy Swiber Chai for an undisclosed sum, after which Swiber would probably lease it back from them for use in its contracts. Swiber’s partnership with CUEL meant that there was mutual sharing of assets and the synergy would continue to work for both parties as each benefited from vessels as well as co-operation on contracts.
6) Divestment of Swiber’s 30% stake in OBT – It was announced that Swiber had divested its entire 30% stake in OBT at cost, netting them a total of S$3.9 million. I questioned the rationale for this sale and Management replied that OBT was actually used for coal transhipments using coal and crane barges. Now that coal prices were coming down, this made owning OBT less attractive (I assume the margins would become much thinner) and Indonesia was also becoming more stringent on such barges. In view of these negative developments, Management made the decision to divest OBT and they viewed it as fortunate that they could divest it at cost instead of at a discount (i.e. loss).
7) Offshore Wind Power Potential – Swiber is exploring this business opportunity as it presents a very lucrative proposition for the Company should they be able to break into this growing market. Many countries are rooting for clean energy and wind power was a growing source of capex for companies which are keen to ride on this trend. Swiber would mainly be the contractor to provide barges and cranes to transport wind turbines, which could be very large and heavy indeed. Although it is too preliminary to talk of securing any contracts, Swiber is in discussion with several companies on the possibility of providing their vessels for such wind power projects. There was no mention of the gross margins, size of contracts or duration.
8) Joint Ventures with Strategic Partners – Swiber’s tie-ups with partners in Thailand (CUEL), Vietnam (Vietsopetro), Brunei (Rahaman) and Saudi Arabia (Rawabi) are ways for them to break into a new market. The aim is also to share assets (to lighten the debt burden as vessels are costly assets) as well as to partake in mutual contracts. It was mentioned that Rawabi was a very good partner as they had connections with Saudi Aramco and thus could garner good contracts which would probably flow through to Swiber. As to whether there will be any future JV, Management said this was a possibility but could not give further details.
While the above may not signify a rosy future for Swiber, at least it provides some comfort that the Company is not in danger of collapse due to over-leveraging, as their capital commitments of US$318 million have already been covered by existing cash, sale and leasebacks and bank loans. Management’s assertion of contracts stretching till late 2010 also gives some comfort on revenue visibility, while the non-deliveries of the 2 vessels can be construed as a one-off event; implying that margins will improve in the near future (they have been trending down for 3 consecutive financial years since FY 2006 and this is a worrying sign).
Still, I am waiting for 1Q 2009 results to see if there is any spillover effects from the late vessel deliveries, or if any more unforeseen issues haunt the company. As at this writing, the future is still murky and uncertain and even though oil and gas companies are still spending on capex as oil reserves are expected to run out in 50 years time, there is no confirmation that Swiber is able to snare contracts of sizeable value to boost its order book any time soon. I am hoping that Management remain prudent and conservative with regards to cash flow management, in order to see the Company through this difficult period.