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During the first half of 2014, Lamprell has continued to recover strongly, building on the company’s 2013 performance. This operational outperformance has resulted in financial results for the period being ahead of expectations. The successful completion of both a US$ 120 million rights issue and a US$ 350 million refinancing package (along with a US$ 250 million bonding facility) has enabled the company to implement our refreshed growth strategy and we are already starting to see positive initial results, both operationally and financially. We are also pleased to see the support shown by our clients, who have placed their confidence in Lamprell with a number of major contract awards. Collectively, these developments have established a solid foundation for the Group to grow sustainably in the coming years.
Lamprell has a proven track record for reliable project execution in its core markets and this has been enhanced further with four major deliveries during the first six months of 2014. In February, Lamprell completed the “Qarnin” jackup rig, a LeTourneau Super 116E (Enhanced), to our largest client, National Drilling Company (“NDC”). This was followed by delivery of its sister rig of identical design, the “Marrawah” jackup rig, in May 2014. This latest rig represents the 16th new build jackup drilling rig that Lamprell has successfully constructed since 2006 and is the fourth in a series of six rigs that Lamprell has been commissioned to build for NDC.
In April 2014, the Group delivered the 13,000 plus tonne production, utilities and quarters (“PUQ”) deck to Nexen as part of the Golden Eagle Area Development in the North Sea.
Our safety record on the combined Nexen project (namely the wellhead platform handed over in June 2013 and the PUQ deck) has been world class reaching the milestone of ten million man-hours without a lost time incident. In completing this project, Lamprell also achieved a world record for the heaviest load moved by self-propelled modular trailers.
The fourth major delivery during H1 2014 was for the self-propelled jackup vessel “Hydra” to another key client, Seajacks. The “Hydra” is the fourth vessel that Lamprell has built for Seajacks and these vessels have been specifically designed to work in the harsh environment of the North Sea. They are flexible and multipurpose, capable of operating in both the offshore wind and the oil and gas sectors.
We have experienced a busy period in the rig refurbishment market, buoyed predominantly by the recent completion of the conversion of the jackup drilling rig, “MOS Frontier”, into an accommodation support vessel. This was handed over to our client, Millennium Offshore Services, in July. This has been the largest rig conversion and refurbishment project in Lamprell’s history and we have seen significant operational achievements on this highly complex and technically challenging project including an excellent safety record of 3.8 million man hours without a day away from work case. With the departure of the “MOS Frontier”, we anticipate lower levels of activity in rig conversions and refurbishments in H2 2014 based on current projections.
During the H1 period, the Group experienced a high number of major projects either in late stages of construction and/or being completed. As already noted, the Group’s operations also outperformed in the project execution and delivery of four of these projects, meaning not only that they were delivered on time but also ahead of budget. Consequently, the project contingencies have not been used and so these projects have been delivered ahead of budgeted margins. This has also been supported by some early savings from productivity enhancements and costs efficiencies (‘Project Evolution’) being implemented across the Group and by our efforts to reduce overheads, as well as improved performance in both our land rigs and other minor fabrication businesses.
The Group intends to deliver a similar, strong operational performance during the second half of the year.
Our next major delivery period commences in November with the planned handover of the second Caspian Sea rig, which is now in the commissioning phase. This project had been identified as a key project with significant potential risk around completion, due to the losses suffered on and lessons learned from delivery of the first Caspian Sea rig in 2013. While we have been making good progress on the project, we continue to take a conservative view on completion because of previous experience on the first Caspian Sea rig and weather extremes in the region. We are understandably working hard towards the scheduled delivery date and, if delivered successfully as planned, this could have a material positive impact on the financial results of the Company for 2014.
During the five-month period after completion of the second Caspian Sea rig, Lamprell is scheduled to hand over four further new build jackup drilling rigs. This will be a critical time for Lamprell with delivery of so many major projects in such a short space of time; however all these projects are progressing well.
We have also been busy during H1 2014 with completion of several important corporate achievements. Early in the year and in line with the Group’s strategy to focus on its core markets, we entered into an agreement to sell the non-core “Inspec” service business for US$ 66.2 million. This resulted in the early repayment of a substantial part of the high cost portion of our existing debt facility.
In June, the Company successfully completed a rights issue which raised gross proceeds of approximately US$ 120 million. The rights issue was well supported by shareholders and puts the Group on a stronger footing to deliver its growth strategy.
Project Evolution is a key component of our strategy as it will produce significant productivity improvements across major projects and also entails a significant capital investment programme to automate some of our facilities. Under Project Evolution, the Group has rolled out new welding equipment and associated training, as well as updating its welding techniques, across the facilities. This has reduced the welding manhours on one of the ongoing jackup rig projects by 2% and it is expected to result in further reductions on other projects once the techniques have been fully embedded. We have also recently entered a contract with a value of more than US$ 5 million for upgrading the panel line in our Hamriyah facility. This facility enhancement will be installed by mid-2015.
As a result of the rights issue, the outstanding portion of existing debt Facility B was repaid and this immediately reduced the Group’s bonding costs which will be further reduced going forward under the improved terms of the new debt facility announced on 12 August 2014. This new debt facility replaces the entire existing debt facility and comprises a funded US$ 350 million debt facility as well as a committed US$ 250 million bonding arrangement to be used for new project awards. The rights issue, in conjunction with the new debt arrangements, has strengthened the Group’s balance sheet by providing it with a more cost effective and sustainable capital structure which enhances the Group’s working capital flexibility and enables the Company to broaden its addressable markets.
Market overview, order book and bid pipeline
Over the last twelve months, the highest priority for the management team has been to convert a substantial proportion of its strong bid pipeline into backlog and I am pleased with our achievement in winning new projects with a total value of more than US$ 900 million since the beginning of the year. We announced previously that we have seen strong demand for our products and services in our core markets and we have maintained a buoyant pipeline, notwithstanding the broader negative sentiment across the sector. We are attracting a variety of clients, both new and existing, and will continue to focus on converting more awards, led by two new, senior business development appointments.
The Group has secured two, multiple-rig orders in H1 2014. Firstly in April, Ensco awarded a US$ 390 million contract for two Super 116E high specification jackup rigs with two options. Later, in May, we were awarded a contract by Shelf Drilling, with an estimated value of more than US$ 370 million for two more Super 116E jackup rigs. More recently, the Company announced that it had received a new contract award from Petrofac for the fabrication and delivery of 29 piperack modules to be deployed to a project in Abu Dhabi.
A fundamental element of our updated strategy is to leverage our key strengths, namely our high build quality, strong safety record, commitment to reliability, our reputation for working collaboratively with our clients for success, our skilled workforce and our strategically-located facilities. Broader market conditions around our core markets remain competitive but these new contract awards demonstrate our clients’ confidence in our project execution, the value we offer and our renewed financial strength.
As at 30 June 2014, the Group’s order book was valued at US$ 1.2 billion (31 December 2013: US$ 0.9 billion), of which a substantial proportion relates to the construction of the four new build jackup rigs for Ensco and Shelf Drilling. With the increased focus on business development, the bid pipeline has grown to approximately US$ 4.9 billion (31 December 2013: US$ 4.7 billion).
As announced previously, the Board believes that the jackup rig market will continue to provide the Group’s primary revenue stream in the medium term and we have already been successful in starting to diversify our client base with the contract award from Shelf Drilling. However in the longer term, our goal is to broaden our addressable markets into related fields, based around our proven expertise in project execution, and to attract new major clients with our improved offering and renewed financial strength. With this in mind, our pipeline includes a more balanced representation from our core markets, in particular from new build onshore and offshore construction projects and new build jackup rigs.
The Board expects that 2015 revenue will remain heavily weighted towards new build jackup rigs in line with these recent contract awards. We continue discussions with prospective clients about upcoming projects.
Refurbishment projects typically have a short bid to award profile and therefore limited order book or pipeline values. This has typically been one of the Group’s traditional areas of strength but, notwithstanding the successes with the recent MOS project, we are seeing increasing competition for all such projects and clients are increasingly driven by cost as the primary factor. While we expect rig refurbishment and conversion projects to remain a core market for the Group, we will only take on such projects which include a balanced and reasonable level of risk and reward.
The Company has performed very well in the year to date and we aim to repeat the high levels of operational performance during H2 2014 through our focus on project execution and embedding the Project Evolution initiatives into the business. However, with the delivery of the five major projects already this year and the new projects at a very early stage of construction, the business will experience lower revenue levels in H2 2014. This is being driven by the timing of build cycles for the major projects, in particular where cycles for the new build jackup rigs coincide, and the lower revenues from the onshore and offshore construction market.
Nevertheless the Board expects that the outturn for the full year will be ahead of expectations (with a heavy weighting towards the first half of the year). This is predominantly as a result of the projected continuing operational outperformance and margin improvements on our new build projects and savings in procurement activities. As announced previously, revenue for 2015 is expected to be broadly flat on the current year, with significantly fewer major project completions scheduled during 2015. Alongside our continuing focus on conversion of the strong bid pipeline, our drive to target further reductions in overhead is a high priority for the management team.
