The well documented and protracted down cycle in the offshore oil and gas sector has yet to precipitate the wave of restructuring and insolvencies amongst South East Asian sector companies that many have predicted. This may yet happen following the recent, surprise failure of Singapore energy services company Swiber Holdings, prompting an inevitable spillover effect on connected companies and SMEs servicing the same value chains as Swiber. It may well be that the same lenders and bondholders, having been caught out by Swiber's fall, reconsider the level of patience they are prepared to extend in future potential default situations.
In the meantime, players in the wider sector have nevertheless been taking steps to weather the effects of operating against a perfect storm of negative circumstances represented by a prolonged period of low oil prices, the award of fewer and fewer offshore vessel contracts and market overcapacity driving competition.
With many companies facing the headache of servicing high debt burdens or repaying or refinancing large scale maturing debt against a landscape of weak cash flows and declining asset values, a number of common options are being explored by parties in the offshore sector.
Improving the balance sheet
South East Asia's offshore sector has seen a spate of divestments and refocusing of activity in the past few months as players look to improve their balance sheets.
Emas Offshore recently announced the sale to PetroFirst of its group's combined 80% stake in the floating production storage and offloading (FPSO) unit Lewek EMAS, on charter to Premier Oil at the southern Vietnam Chim Sao field. The transaction was explained as being consistent with EMAS' strategy of moving away from the ownership of FPSO assets.
Similarly, as recently as August, Singapore-listed, Asian focused oil company Krisenergy, acknowledged, when releasing its latest accounts, that its capital requirements for the coming financial years meant it was now having to seriously consider all of its options, including asset divestment, private placements and equity raisings.
Alongside these traditional balance sheet bolstering strategies, another trend has seen parties in the FPSO owning and operating sector exploring forms of equity release as a strategy, similar to that which has been adopted by a number of owners in the oil storage sector.
This offers the FPSO fleet owner an avenue to raise cash for either investment in future projects or for debt repayment via the sell down of their stake in a selection of the more valuable assets and projects on their books, whilst retaining some form of participation via either an equity interest or some form of involvement at an operational level. This might be effected for a single asset, or via a more comprehensive hive off of multiple assets fitting similar criteria. One example of this is the PetroFirst joint venture between First Reserve and Petrofac, established to purchase a number of existing FPSO/mobile offshore production unit (MOPU) assets from Petrofac and invest in new assets and projects all with a view to the continued utilisation of Petrofac's sector capabilities.
Potential investors into these structures are typically made up of financial investors. The key criteria, when cherry picking strong assets, will be the ability to eliminate or reduce the risks faced in the FPSO owning business. The key considerations such investors will look at include:
- charter backed assets available at low prices
- projects having reached production stage
- modelled and predictable cash flow, secured by reliable guarantees
- certainty around fixed charter term, term extensions and locked in charter rates
- existing access to, or retention of, sector operational expertise, as typically financial investors will want day to day operational control retained by a more experienced operator partner.
For multi-asset structures, projects identified as suitable for hive-down may be reorganised into a newly established subsidiary of the existing owner. The third party investors then pay cash consideration to the existing owner to provide the equity release and may also contribute new money to the new subsidiary to improve cash flow further or even acquire new assets.
In addition to whether a project meets the commercial criteria laid down by investors, the choice of projects will be determined by a number of practical aspects related to the implementation of the structure. From a legal perspective, multi-asset hive offs will commonly require a form of pre-transaction reorganisation of the existing owner's group to provide incoming investors with a cleaner structure and reduced risk profile for the selected assets. This also has the benefit of reducing the due diligence burden on investors. The feasibility of such restructurings will necessitate consideration of a number of relevant issues, including:
- Consents: parties will need to assess the need for, and seek consent from, a range of stakeholders in the existing projects: charterers; lenders; joint venture partners; and regulators where licences have been issued.
- Existing debt / security arrangements: alternative to requiring lender consent, it is not uncommon for the incoming investors to want to reduce debt service costs by refinancing with their own preferred lending sources familiar with their structure, and benefiting from their improved credit strength.
- Charter / Operation & Maintenance (O&M) arrangements: a separation of the charter and O&M aspects of current projects may be required, with charterers typically looking for reassurance around continuity in personnel and service levels when considering granting any approval that is required for the restructure.
- Existing local partner: local law may dictate a minimum level of local content or ownership at either an equity or operational level. Incoming investors may themselves be cautious about the added dimension to the commercial and governance relationship this presents.
Alongside retaining an equity participation, existing owners hiving off assets in this manner may also look to negotiate buy back or call option rights over the sold down FPSO assets (or the SPV holding companies) at the expiry of the fixed charter period. This may suit the incoming investors on a number of levels: securing future employment for a bespoke FPSO is something the new platform may have neither the expertise or appetite to cover and having a fixed right to put the non-active asset back may be attractive.
As the PetroFirst model shows with the Lewek EMAS FPSO acquisition, once established these structures can evolve to target interests in additional units from other third parties meeting similar criteria.
Finally, it is worth noting that depending on the nature of the existing owner, and the level of distress in the existing owner's group, a key aspect of implementing any equity release or hive down project will be ensuring that any restructuring and key asset transfer are completed in a way that protects the existing owner and incoming investors from any issues arising under any subsequent insolvency of the existing owner's group.
A number of innovative financing solutions are likely to emerge as participants navigate through this difficult period, and new investors entering the sector take advantage of the current buyer's market.