At the end of March, Aberdeen drilling/drilling services group KCA Deutag completed a refinancing that opens the door to ramping up international growth.
Pamplona Capital Management, which had previously owned the company outright, diluted its shareholding by inviting GoldenTree Asset Management, EIG Global Energy Partners, and BlackRock Financial Management to the table.
The shareholders have, in essence, injected $550million of new equity into KCA Deutag’s holding company, Turbo Alpha, of which $300million is being used to reduce senior debt and $250million for developing the business further.
Holger Temmen, KCA Deutag’s chief executive, told Energy that the company was in good shape and looking forward to significant growth.
“We have been developing the business well since the early 2000s, when the merger between KCA and Deutag took place, though progress was hampered in 2009 as a result of oil prices dropping in the second half of 2008.
“The market is now recovering; it’s exciting. In fact, we’ve refinanced at a very good time.”
But why refinance in the first place?
“Financing for KCA Deutag had previously been set up and structured in March 2008, following taking the company private. Our business plan looked ahead three to five years, based on the market outlook that we saw then.
“But the market changed and the earnings growth did not develop as hoped. While the oil price collapse in the second half of 2008 was very rapid and had limited impacts, in 2009 we saw our customers cutting their budgets.”
Temmen said the 2009 dip had washed over into 2010 – and then there was Macondo, which delivered its own shockwaves worldwide and led to rig rates slipping.
However, he said KCA Deutag had ridden through the uncertainties with a solid performance and had delivered healthy earnings. But what was missing was the growth anticipated in early 2008, when the group was de-listed in London.
Today the picture is more positive.
“We see significant opportunities in Russia, the Middle and Far East and also Europe, all of which require appropriate funding to enable us to realise these,” said Temmen.
Temmen stressed that KCA Deutag had not slipped when compared with its peers. The whole drilling market had been set back, but the time had come to get growing again as oil & gas companies stepped up investments.
When KCA Deutag was de-listed, its management team and advisers saw what looked like a healthy growth trajectory, barring left of field balls like a stock market crash.
When the current refinancing discussions began, again the picture looked good, barring those left of field balls.
And yet again, one arrived – unrest in a number of MENA (Middle East/North Africa) nations.
However, with the exception of Libya, which is very important to KCA Deutag, Temmen seemed unworried by the MENA situation.
“We’ve been working in Libya throughout the Gadaffi period – since 1957 when we established our business there. Of course, we have been impacted by recent events there and have had to suspend operations. But events on other parts of the MENA region have yet to be felt, and are unlikely to impact our operations further.
“Libya is our biggest operation in terms of rig numbers. We have been embedded there as a German company since 1957. The situation there must be resolved. If things continue as they are, it will be very difficult to return because we need the whole logistics chain to work efficiently for us to deliver our services there.
“But once the political instability is sorted out, I expect that well workover activities will start immediately as oil production in Libya has already been hit by a lack of this.”
However, in terms of profit generation for KCA Deutag, Libya generates some 5% of profits, so the group is well protected in that regard.
“We have a very well-balanced portfolio and that’s a part of our strategy. There’s not a country or customer that accounts for more than 15% of turnover. That is key in our risk management process for the business.”
KCA Deutag is quintessentially European in nature and, at least in the past, this has played in its favour. But is that still the case?
Yes, the European card is very important as far as Temmen is concerned. He believes the group’s behaviour, culture and values have worked in its favour, especially in the likes of Russia and the Caspian, and the MENA too for that matter.
But it’s not just soft factors that work for the group; its approach to engineering also succeeds due to an innate understanding of the operating conditions that can be encountered in Russia, indeed across the Europe-Asia diaspora.
“We have a rig design that’s very much geared to our Russian customers and able to work on well super-clusters. The rigs have to be able to move as quickly as possible under Arctic conditions, where temperatures can be as low as minus 45-60C. It’s a German design from our sister company Bentec; one that is part-built in Russia but based on western equipment. It’s extremely successful.”
While on the subject of rig manufacture, Bentec is ambitiously expanding its offering to the market, including designing and building top-drive units (10 sold already), draw-works and power control rooms. The $250million chest is seen as being particularly important in terms of underpinning the growth of this business, and therefore also the firm’s own operating land rig fleet.
On Iraq, Temmen described it as arguably the best opportunity of all, adding KCA Deutag already had a decent customer base, despite a tough start-up environment.
“Security continues to be an issue and needs to be taken very seriously. We have the first rig working in the south of Iraq, another in the north in Kurdistan, plus we’re in the process of bringing another two rigs into the south. Over the next five years I think it would be a reasonable target for us to achieve anything between 10 and 15 operating rigs in Iraq.
“In terms of our relationship with our blue-chip customers operating there, being European is important. But, in Iraq, it’s a more global market than you would find in Russia. So being European is significantly less important there than in Russia.”
Iraq is a long way from the North Sea geographically, and in terms of the nature of the business. The North Sea is KCA Deutag’s backyard, from where so much of its offshore installation expertise has developed and exported.
But it’s 10 years since the group generated almost all earnings from the UK. Today, based on EBITDA (earnings before interest, tax, depreciation and amortisation), it accounts for less than 10%.
“The strategy has been to take the considerable know-how and values that we had in the UK and export those as appropriate into markets such as Angola, Azerbaijan and Sakhalin,” said Temmen.
“The UK business has a less than 10% stake, but it remains important and our hope is that the latest North Sea tax change will have relatively little impact.
“The North Sea is a cash generator; the UK market is mature and driven by cost optimisation and high pressure on costs, so margins are very low. It means too that any tax change (such as the Osborne hike) could have a disproportionately negative impact on the industry, as the oil companies can simply invest elsewhere.
“But Norway is different. Even in 2008-09, when there were stock market crashes and volatile oil prices, it was business as usual.”
However, it is Azerbaijan, where the company presently operates six drilling units on a long-term contract, which is the flagship of its platform-based operations.
“This has been incredibly successful for us and is based on a very good relationship with clients coupled with very robust performance delivery,” said Temmen.
“By comparison, Angola is a small market with, currently, only one platform. We see little development potential there.
“At Sakhalin, we operate two units. We expect this to grow to three as the Molikpaq (production unit) will come online next year.
“In terms of earnings and work volumes, Azerbaijan is top and has further potential, but our North Sea operations remain pretty substantial.”
Temmen is keen to break into the Brazilian offshore market as it is world class and growing rapidly, plus opportunities are emerging in Asia-Pacific, most notably Australia.
On Brazil he said: “The start point is our engineering division RDS, which has very early involvement in projects, including FEED studies to develop the best possible concepts for certain markets. That is the approach being used in Brazil, where RDS has won its first contract.
“We’re now opening a small office in Brazil to make us more visible; the next step following engineering is potentially to provide training facilities – our DART simulator.
“We anticipate that in Brazil, given the pace of growth, there will be a need for such a service and that in turn is an enabler to contact with potential customers for our wider services.
“RDS’s particular interest is drilling derrick systems, and we’re as capable of semi-submersible rig design as we are drilling packages for a fixed platform. It’s a significant market that we would like to be a part of.”
And the ultimate win? Long-term, North Sea-style platform-based drilling contracts that dovetail with the pathfinding activities of RDS and training services.
“We are first and foremost a drilling contractor and RDS is an excellent early first contract point, hopefully leading to full engineering and construction of drilling packages, and ultimately securing long-term drilling contracts,” added Temmen.
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