Scaling new heights

Kevin Hudson recently arrived to head the group as their chief executive officer, and acknowledges he’s arrived at a tumultuous time.

“I arrived at Maritime Industrial Services (MIS) in October and hit the ground running. It’s a very different market scenario from when I decided to join, just months beforehand, but I’ve always worked in this industry and I’ve witnessed contractions before,” says Hudson.

“The market’s cyclical in nature, but the crunch times I’ve worked through include those depressed market periods in the 70s and 80s, but to put the current situation in perspective, I don’t think they were quite as bad as the current scenario. You could probably go back to the 1930s for a parallel situation,” he says ominously.

“The problem hasn’t come from one source; it’s a combination of the economic crisis, and the collapse of the crude oil price. I think the right level for a barrel of crude oil is around US$75, because that’s a sustainable level for the industry. $140-plus is equally as ridiculous as $30 in my opinion.”

Hudson says that right now the market trying to find its balance, evidenced by the fact that it is now roundly accepted that the $140 environment was brought about not by solid supply and demand issues, but by market speculation. “Now we’ve got a depressed market which is driving the price to an artificial low. It’s not catastrophic because it  will come back, but a severe market drop does come with risks,” he explains.

The fear is that a depressed price drives whatever investment that is taking place towards the production side, because the motivator becomes getting product out of the ground to hit revenue targets. “Exploration investment typically drops off, so no new reserves are found. All of a sudden the market wakes up to a supply shortage and the price skyrockets again.”

That said, Hudson acknowledges that regionally that scenario is not as acute. “We’re likely to see companies in the region retrenching investment into cheaper production. Experience shows that the multinationals and the national oil companies are quite strategic, so short term blips in the market don’t throw their long term objectives off. I think everybody is applying caution to their business at the moment, quite rightly.”

The growing need for domestic energy by the Middle East’s largest producers will no doubt provide an impetus to upstream market which may insulate companies here from the worst effects of the global downturn. “There is a growing need to produce energy, particularly gas in much of the GCC, and I don’t think the export price of crude will dent those plans or those national growth ambitions.”

Globally, however there will be companies and projects which will fall as casualties to the currewnt price environment. Hudson joined MIS from a Candian east coast fabricator, and the effects were already being felt in that market before he’d left.

“I was CEO of a rig building yard in Canada. Although the deepwater work there is carried out by semi-submersibles, there is still a sizable jack-up market. In fact most of the exploration that’s bee done recently in the eastern waters off Canada has been done by Jack-ups.”

In some frontier environments the profitable price is around the $85 mark, and this is where exploration will really suffer if the depressed market conditions are sustained. “In the current price environment the attraction drops off quite quickly in Canada because it is a combination of harsh environment, expensive, and it is regulatory heavy, so oil companies can find it difficult working there. Because of this the Canadian offshore market felt the impact of the drop in price fairly early.”

Activity report

The MIS yard in Sharjah remains a hive of activity and has managed to buck local and global trends by continuing to deliver a series of headline grabbing achievements.

Last October Hull 104 was completed, a significant landmark for the company and region, as it became the first jackup fabricated in the Middle East. The rig is a Friede & Goldman Super Mod 2 design jack-up rig with 30,000 foot rated drilling depth and an operating water depth capability of 300 feet (92 metres).

Since then, the building programme has picked up quite substantially. The yard now has a back-log of 7 offshore jack-up drilling rigs on order at MIS yard, with the newest order from MENAdrill – Hull 109 and 110 scheduled for delivery Q3 and Q4 2010. The last order has taken MIS’ back-log to the US$ 1 billion mark.

Hull 107, contracted to KSAM2 Petrodrill Offshore, a joint venture company led by Singapore-based KS Energy Services, Saudi-based Amwal Al Khaleej and MIS, is now scheduled to be delivered months ahead of its original contract delivery date of February 2010.

Benefits of the learning curve were evident at the launch of Hull 107 with a greater degree of completion in comparison to the launches of the first two rigs, Hull 104 and 105.

Hull 107 was loaded-out at a heavier weight of 5200 tonnes compared to 4200 tonnes at the time of launching the previous two rigs thus contributing to greater efficiency in terms of work completed while the hull was still on land.

Additionally, Hull 107 now has its four modules for the living quarters already installed compared to Hulls 104 and 105 which were installed post launch. 150 tonnes of steel outfitting has already been completed vis-a-vis 50 tonnes for Hull 104, and 80% of the mechanical installation has already been completed compared to 40% on the previous rigs.

“We’re very pleased to see such visible benefits of our steep learning curve which is already delivering results for Hull 107,” says Hudson.

“We plan to maintain this strong momentum to ensure that the rig is delivered well ahead of its contract delivery date and to further benefit the other rigs currently on order.”

These lessons have been an organic part of the building process, but the advantages don’t stop there. Hudson says that because the company has managed to enter 2009 with the launch of Hull 104 under its belt, it can perform very competitively for future unit orders.

“If you balance cost against number of units, particularly highly engineered products such as a jackup rig, the cost for the first unit may be high, but that drops up to 30% for the second unit because initial investments have been made, and that covers everything from machine tools to getting the people with the necessary skills onboard. If you are first into the market that’s quite an advantage.”

Essentially, the people, procedures, and design are all in place for the second and any subsequent units. “That’s all investment that’s needed and there’s simply no short-cut to where we are now,” he beams.

Broad Spectrum

The news spilling out of the MIS yard has been dominated by the jack up rig fabrication contracts and launches, but the company has a much longer heritage providing services and support to the region’s offshore industry.

“Lot’s of the work we carry out is outside the new-build sphere. Rig refurbishment, EPC projects, technical support and sour gas safety services are all part of our offering, and in June 2008 MIS acquired 3CMI, an engineering services and steel fabricator specialised in work for the offshore and oilfield service industry.”

At a time when many oil and gas related companies will be tightening their belts to protect bottom lines, these core elements of the business may be the powerhouse of the ambitious growth Hudson has set his sights on.

“To be honest we’re still looking at quite an aggressive growth model. We will probably see more business in our traditional markets, and possibly a drop in new build rigs. If you look at the overall market and people aren’t investing in newbuilds, then the priority becomes keeping the establishment and the business is good working order.”

As facilities become older they grow more expensive to maintain. Hudson says that offshore maintenance work is a prime example of a business sector which will increase in the downturn. “The next 12 months are going to be very challenging – nobody is going to walk through this as if it is not happening. One of the things I really like about MIS is that the portfolio covers the whole spectrum. It’s not as if one business segment, for example exploration, dies, then we die with it.”

Over the years MIS has built a base of longstanding traditional customers. Hudson estimates that around 60% of the company’s work is through these key clients.

For several years workers under the MIS umbrella have been dispatched under contract to carry out essential offshore maintenance for Dubai Petroleum, work which incorporates the skills of the full spectrum of skills from engineers and through to welders.
 
“We’ve got six core revenue streams which provides us with a solid base. All of these units feed off of each other, so I think we’re operationally quite well braced to work through a downturn.”

Future focus

The offshore market is certainly at an interesting juncture. Talk of a catastrophic drop in upstream spend has been soothed by confirmation from some National Oil Companies that targets will be met, and major projects will go ahead, but nobody is expecting 2009 to be pain free, explains Hudson.

“I don’t think anyone can be insulated from what’s going on globally, but I think we are fortunate to be in a hydrocarbon rich area. We’re fortunate with our geography, but nobody will fail to notice these are tougher times.”

In past E&P crunches, the worldwide average utilisation rates for jackups has dropped to around 50% of the total fleet, but the Middle East typically outperforms such extremes. “We’re at around 94% for the region with a fleet that is actually quite old.

There are some newer rigs, but the majority is ageing,” muses Hudson.

Even 94% shows some capacity drop off, but obviously the regional jackup E&P market hasn’t collapsed. Globally too there are still deals being signed, though speculative building is likely to drop significantly.

“PEMEX has something like 18-22 tenders running at the moment, so there are still people buying, but companies and buyers will use the current downturn to get a better price. And that’s not just because steel and other commodity prices are down, but because they can squeeze lower prices when the market is distressed.”

In spite of the perceived weaknesses in the newbuild market, Hudson is forthcoming with his ambitious targets for the roadmap to 2013.

“In five years we know where we want to be. We’d like to see $1 billion in annual revenues, a $100 million profit margin, and a 100 NOK (Norweigian Kroner) share price,” states the CEO.

“These are strategic goals and we have the confidence we can do that. MIS is already very good tactically, and is becoming very good strategically. Strategic management is all about setting long terms goals in place and laying the plans to achieve them,” he says.

Hudson rejects claims that these are unattainable, and is humble about the prevailing conditions.

“We’re not blind or oblivious to the state of the market, and we don’t live in a cushioned world. We’re not special people and we’ll suffer the same problems as everybody else. But we have confidence in our facilities, our people and we think we can achieve these goals by 2013.”

With the yard at full capacity, the nod towards more business suggests the current facilities will soon be outgrown.

“To achieve those targets we won’t be able to do it all out of this facility. There are limitations naturally with our current home, and we’re looking at opportunities.

That said, we’re extremely happy with the business environment in the UAE, we’re not looking at a shift away from that. Already we’ve obtained 30 000m2 in Hamriya which is being developed right now.

As contractors and oil companies look to squeeze fabricators on margins, Hudson says the company must get the best result from the assets it already has in its arsenal. Maximising the output and yardspace utilisation of the current site will also play a big part in meeting those lofty goals.

“I think we can be up to 20% more efficient with the yard space at out primary facility, obviously HSE issues remain paramount, but with some intelligent planning we can achieve more from here too.”

End note

Rig work and new orders are intrinsically linked to the ability to finance such projects. Sourcing that finance is difficult in the current market, but NOC commitments may throw the industry a lifeline.

“Financing a speculative newbuild rig at the moment is going to be difficult, and will continue to be so for some time.”

All rigs under construction are scheduled for delivery throughout 2009 and 2010. Hudson’s enthusiasm is refreshing, and with the advantage of ongoing work and a packed order book it’s easy to see why.

“I’ve had a lot of surprises since I’ve arrived, with the market declining, but so far there’s nothing that dents my optimism, or shifts my goals.”