Cover story: The right combination

The deal involves a 3-to-1 reverse split of McDermott’s common stock, but in the lead-up to the agreement, headlines had focused on a sudden and unexpected $2bn takeover manoeuvre for Dickson’s firm from UK based rival Subsea 7 which would have required McDermott, if they had accepted the bid, to pull out of their own ongoing CB&I transaction.

“Subsea 7 came and shocked us all with this offer that came in from leftfield. Obviously the offer just wasn’t compatible to the value of the combination it would create, so that’s why then we responded with rejecting it.

“I think the concern everybody had was normally you would anticipate that a counter offer would come, and time-wise we were running out of time and, much to say, Subsea 7 were running out of time. If you read our business combination agreement, you’ll see that legally we could not have discussions with Subsea 7’s management, even though Subsea 7 kept on saying in the press they wanted us to engage in discussions – and they knew, legally, we couldn’t engage in discussions.”

Dickson continues that there would have been no point to the discussions in any case, describing Subsea 7’s offer as “low” and a “discount to our 52 week high”. Dickson suggests a further offer had been expected, and indeed that might have been the only way any interest could have been sustained, but he mentions the strong support from McDermott’s own shareholders when approving the arrangement with CB&I, as attention from Subsea 7 “fizzled out”.

When asked about the rationale surrounding the British firm’s eleventh hour bid to take over McDermott, Dickson states the move was most likely based on a consolidation play. In fact, many industry experts estimated that if Subsea 7’s bid had been successful, its acquisition of McDermott would have created a new market leader in the subsea oil and gas EPC sector, outstripping other global operators like TechnipFMC and Saipem.

Dickson is self-effacing when theorising as to why McDermott was singled out for Subsea 7’s attentions referring to the fact his firm had enjoyed “a good run over the past couple of years” and it had achieved wins in marketplaces that have proved lucrative for some of its rivals, such as in Mauritania, where the EPCI operator has earned a subsea deal alongside consortium partner Baker Hughes, a GE Company, from oil supermajor BP.

When Dickson took over at McDermott in October 2013, the company was not in such good shape. It had a raft of loss-making projects, which have mostly been turned around as part of an extended financial restructuring strategy, and the management team has also been overhauled.

Similarly, CB&I is a firm that has been hamstrung by several poor-performing projects and, prior to the completion of the McDermott deal, had debt levels in excess of its full company value – with some estimates suggesting more than $2bn worth of liabilities. The firm had to announce a $548mn charge at the end of Q2 2017, related to four engineering projects.

In an interview with another news outlet earlier this year, Dickson drew parallels between the McDermott he took over and the current state of CB&I’s books and emphatically stated that “everything is fixable.” He would utilise the McDermott “playbook” to turn CB&I around.

Dickson’s intricate reasoning for McDermott’s merger with CB&I highlights a lot of comparisons between the two firms and he has been exploring the potential deal for a while.

“My push for the CB&I thing wasn’t an overnight pipedream, it was something we had been working on since 2016. Strategically, I wanted to diversify the offer McDermott had to the marketplace and obviously CB&I bring that diversification.”

Dickson says he tapped into his own experience from his time at Technip to inform him in the lead-up to the CB&I deal. He had seen how diversification and technology enabled the business to grow and strengthen across both upstream and downstream sectors. He led the French based firm through its acquisition of Stone & Webster, the technology division of the Shaw Group, in 2012 for more than $200mn and he recognised how this purchase had helped expand Technip’s downstream activities in the US and pushed it into additional territories.

“When the CB&I opportunity came along, it just ticked so many boxes for us that it was something that we really wanted to move forward with and fortunately we persuaded their management and board that this was a better solution for CB&I rather than just selling their technology business, so this made a lot of sense and a lot of points.”

One key factor behind the tie-up was the chance for McDermott to position itself in the growing liquefied natural gas (LNG) business, a segment that Dickson says he knows well despite his own firm’s current lack of footprint in the segment. He believes that combining McDermott’s offering in modularisation, which it had demonstrated in providing modules at the Yamal LNG facility in Russia for instance, alongside CB&I’s knowledge and capability in the sector could create a market-leading proposition.

McDermott’s combination with CB&I might have filled column inches recently but the oilfield services industry has historically been rife with mergers and acquisitions (M&A) activity. Early last year, Technip merged with US based FMC Technologies. In the EPC sector the Wood Group recently completed the purchase of the UK’s Amec Foster Wheeler.

Leading industry figures seem divided as to the merits of such moves with Subsea 7’s chairman Kristian Siem, perhaps unsurprisingly, advocating more consolidation as a means to protect against choppy economic waters, while others, such as Luis Araujo, CEO of Aker Solutions, openly expressed his concern at the ultimately vain attempt by Subsea 7 to acquire McDermott, pointing to a reduction in competition if such deals succeeded.

Dickson is keen to emphasise that his company’s deal with CB&I has little to do with consolidation and everything to do with diversifying its offering to the market. Of course, with the climate seemingly right for M&As, there is surely the possibility that Subsea 7 will be back? Dickson is far from convinced.

Subsea 7 may have been looking for consolidation, but the CB&I deal has changed the landscape, “Now with McDermott, the look is completely different because two thirds of our revenue is going to come from onshore EPC type projects which is a distance away from what Subsea 7 does today.”

Dickson feels the value of the newly merged business could also prove challenging as McDermott and CB&I have a combined worth comparable to Subsea 7. The British based firm would now have to contemplate diversifying its business significantly if it pursued a purchase of McDermott, whereas its previous rationale was based on subsea and offshore synergies.

It is clear David Dickson’s focus is firmly on what the future means for the newly enlarged entity he is about to lead. McDermott has had a strong presence in the Middle East for many decades including a long-standing relationship with oil giant Saudi Aramco.

McDermott’s CEO reveals that the world’s leading oil exporter is his firm’s biggest global customer and suggests that the Houston based multinational is most likely regarded as Aramco’s favoured offshore contractor. But Dickson references other strong regional interests including with the Abu Dhabi National Oil Company (ADNOC) and he mentions that McDermott can provide a good alternative option to the National Petroleum Construction Company, which has a close tie-up with ADNOC.

McDermott has also shown interest in the gas fields of the Mediterranean located off Egypt and Cyprus but, as yet, has not managed to secure deals in those areas, with Rome based supermajor Eni choosing to give fellow Italian outfit, and a firm in which it holds a minority holding, Saipem, key contracts.

But Dickson has concrete grounds for optimism and he says the EPC sector has enjoyed a definite “uptick” recently and he points to the McDermott “revenue pipeline” (a combination of the firm’s backlog, on-going bids and future targeted bids) rising 25% over the past two quarters. The firm’s front end engineering design business has grown noticeably, according the CEO, and this too represents a sign that the EPC sector is starting to spring back into life.

Dickson also gives the example of regional giants Aramco and ADNOC, saying both have been very vocal about “major incremental projects” in the near future, with the former keen to develop its sizeable Berri and Marjan oilfields, located off the kingdom’s east coast.

But McDermott’s senior executive is also looking several years into the future – and this is where LNG becomes a key focus and opportunity.

“It’s clear that somewhere between 2023 and 2025, there’s going to be a significant undersupply of LNG in the global marketplace and that’s written everywhere. Shell are writing about it, BP are writing about it, everybody, and bearing in mind an LNG project is anywhere between five and seven years to develop, those projects that need gas in 2023 or 2025, really need to move to FID (final investment decision) in the next one to two years. So, again, that’s why I’m really excited about the combination with CB&I.”

Dickson refers to 2023 and, by then, leading industry organisations such as the International Energy Agency believe the United States will have become the world’s leading oil producer as it pushes aggressively forwards with its drive for energy self-sufficiency. Both Saudi Arabia and Russia will have been overtaken as US tight oil production helps provide a defining sea change in the industry.

How would the emergence of the US as the world’s hydrocarbon leader affect McDermott – a firm that has focused so much of its attention, over decades, on the Middle East? Energy consultancy Rystad Energy calculates that as much as 90% of the Houston based firm’s business emanates from the Middle East and Asia.

“If you look at the new company moving forwards, our largest area now becomes the US because of CB&I’s presence across petrochemicals and LNG in the US and I’ll expect that to continue on, so that will be a shift change for us.”

It’s clear that while the MENA region will remain a priority for the firm, and its development of a new maritime production facility at Ras Al Khair in Saudi Arabia, which could be operational by 2021, is a key commitment, Dickson emphasises that CB&I’s impact on the new entity creates more global “balance”.

Much of the debate around global production has centred on the conflicting policies of accelerated US output versus the cutbacks initiated by Saudi Arabia and Russia and the potential impact on market share. But David Dickson is looking past all this and sees positive synergies that clearly bode well for McDermott’s future plans as it moves forward as a more diverse operation, with a bigger international footprint.

“At the end of the day, as you look longer-term, and you can only talk about up to 2040, but there will still be a huge increase in demand for fossil fuels, whether that’s oil or gas. So, I don’t think market share becomes an issue, I think it’s more about global demand versus global supply and even with the increase coming out of the US, you’ll still need growth in areas elsewhere around the world just to meet the future demand.”