One of the outcomes of Offshore Europe 2009 is an acceptance that life in the oil patch is not so miserable after all; the glass is at least half full – even in the North Sea.
Among companies bullish about their world is Petrofac, despite the twin dramas of global recession and crazy oil prices.
Explaining exactly why, group CEO Ayman Asfari told Energy: “Most parts of the world where we are focused have not been impacted that much by the current slowdown in capital spending.
“For us, the glass is at least half full. We’re busier than ever; we have a very healthy backlog … it is north of $8billion. So we’re very comfortable with our earning visibility for the next few years.
“We see that clients in places like the Middle East and North Africa, even our clients in the North Sea, are continuing to expand or maintaining momentum with expenditure plans. We feel that we’re in fine shape.”
This is budget-setting season for many oil companies and, with Opec signalling contentment with oil around $70 per barrel, does this help set the stage for a strong recovery in upstream offshore investment over the next couple of years? Asfari thinks so.
“We’re very comfortable with this price; this is a price that will continue to promote investment. We should see a lot more activity.
“But what the industry needs more than anything is some level of stability. Just to understand that we’re going to have a price at such levels for a reasonable period will promote investment again. It’s good for consumers, too … it’s a fair price.”
However, while oil prices have been restored to health, that is not the case with natural gas, especially in the US.
“It’s the market that’s been shattered,” said Asfari.
“Luckily, Petrofac is not exposed to that market. US gas prices are below $2. That’s amazing. There’s also weakness with UK gas prices.”
He pointed out that, like every shock, the latest price swings are a reminder that the industry needs to remain fit and exercise strong financial discipline.
“This is why, as a business, even in last year’s high when everybody was talking about leverage, we maintained cash on our balance sheet at north of $1billion, plus we have credit lines that have not been utilised. We believe we must maintain a very disciplined approach to these things and keep a lot of firepower in reserve.”
Asfari said Petrofac had never chased business simply to build a contracts book or because oil prices were rocketing. He said pricing as sumptions were always conservative and that, for example, the company’s own development in the North Sea – Don – was well able to turn a profit at current barrel prices.
He said, too, that Petrofac had still been able to build its backlog throughout this latest price shock, with some very large chunks of business landed last winter despite oil being in freefall at the time.
“It comes back to the point about geographic focus. We don’t have exposure to the weak US gas market. However, we have always had a large focus on the Middle East, North Africa and Central Asia, where clients, particularly the NOCs (national oil companies), made the decision to invest through the cycle.
“What is more, they think they can access supply-chain capacity much better today and, as a result, can realise their developments at a more optimal price; also, they have no pressures in terms of leveraging balance sheets and having to cut dividends with shareholders … the kinds of challenges that the major IOCs are facing today … and they all have a shared view that, ultimately, demand will come back and everyone will focus on the supply again. And that supply (of oil) is not getting any easier to find and develop … rather, it is getting tougher.”
Asfari pointed to speculation in the FT recently suggesting that Saudi Aramco is investing $100billion in this current cycle, and that this vast company may not see a return for years ahead. It is producing 8million barrels per day now, yet has capacity for 12.5million bpd.
“Very few companies in the world will build capacity if it is not utilised straight away,” said Asfari.
“But every IOC, if building capacity, will immediately require cash flow.
“It’s only large NOCs like Aramco that can afford to build 4.5million barrels capacity and then say they’re going to keep the taps shut until oil demand comes back.
“Private-sector companies will not do this. Basically, it means freezing capital long-term. From their point of view, they see global supply becoming more difficult, big depletions and declines, and they believe that when demand comes back they will be there to supply the world.”
So, outwith the North Sea, what proportion of Petrofac’s business comes from NOCs v IOCs or others?
“Most of our international business is NOC or NOC-affiliated,” said Asfari.
“We established in the Middle East because 60-70% of world reserves are in that area. Ultimately, the investment is going to go to where the reserves are.
“However, I wouldn’t say that’s the epicentre of Petrofac; Europe is a very large part of our business, too. In terms of contribution to the bottom line it’s not as big, but in terms of being a centre of excellence and competencies and source for talent, Europe is very important.”
He agreed that the very nature of Petrofac meant that the company was able to steal a march over others when, in 2002, it entered the North Sea through the acquisition of PGS Production while competitors had their guard down.
“The strategy that we pursued is paying off. We’re one of very few companies at Offshore Europe this year that has aspired to at least 20% growth in earnings this year and continued growth thereafter. There’s no one else in the service sector that I’m aware of that has not had an earnings decline.
“To do 20% is fantastic in any market; to do it in this one is quite exceptional.”
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