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WHERE IS VALUE WON OR LOST FOR

FPSO OWNERS AND INVESTORS ?

THYL KINT, PRESIDENT ULENSPIEGEL PTY. LTD.

26 September, 2016
ULENSPIEGEL WHO ARE WE?

A network of independent, highly experienced oil and gas


project and facilities consultants
FPSO specialists
Principally offshore but also onshore hydrocarbon project
& engineering experience
Oil company and contractor experience
Global coverage
High value add to our clients, cost effective, low overhead
business model

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ULENSPIEGEL WHAT DO WE DO?

Project selection and definition


Field development concept selection, definition and marginal field development
Probabilistic cost and schedule estimating and economic analysis
Project delivery support
Deploy core project management personnel and systems
Independent project reviews and distressed project recovery
FPSO specialist advice
Market analysis, contracting strategies including redeployment assessment
FPSO specifications and contract documentation preparation and negotiation support
Expert advice
Advice to project financiers technical and commercial assessments
Advice on innovative commercial strategies and value enhancement reviews
Expert witness for arbitration / litigation and contract claims assessment
Offshore technology development and qualification support

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What does the economic value of an FPSO project
looks like for the FPSO owner and the oil & gas
client?

What are the main parameters / risks for both


parties?

What is the impact of financing / leverage?

What is the impact of low oil prices?


WHERE IS VALUE
What is the best compromise?
WON OR LOST FOR
FPSO OWNERS AND
INVESTORS?

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WARNING!
DISCOUNTED CASH FLOW ANALYSES

Hereafter a number of DCF analysis results are presented giving NPV, IRR,
ROE, etc.
Warnings are in order as obfuscation always reigns in such analyses
Cash is cash. Cash doesnt care if a lease is a finance or operating lease. Numbers
on books like depreciation are not cash. (Most of those items only impact tax
cash).
IRR calculations should be Present as in Net Present Value. However, in the
FPSO business, due to shipping legacy, they often are not and are Start of Lease
calculations.
Any NPV / IRR calculation can be either Real or Nominal.
Outcomes are affected by many parameters (e.g. interval, escalation, timing decisions,
etc.)

This presentation is based upon Nominal, Full Lifetime Project, Annual


(mid-year), true DCF analyses, discounted back to mid 2016.

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THE PLAYERS AND THEIR NUMBERS
(THESE ARE ASSUMPTIONS NOT REVELATIONS)

The Oil Company The FPSO Contractor


Type Independent ~ Any of 6 Largest
Leverage 50% Debt 70% Debt
Average Cost of Equity 15% 15%
Average Cost of Debt 5% 4.3%
W.A.C.C. (based upon above) 10% 7.5%
Target Project IRR @ Mean >20% >10%
Target Project ROE >25% >15%

An unleveraged analysis yields an IRR and uses the WACC as discount rate for NPV.

A leveraged analysis yields a ROE and uses the COE as discount rate for NPV.

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THE HYPOTHETICAL PROJECT (1)

Average, international, medium complexity-waterdepth-metocean-regulatory project.


Mean ~ 130 MMBBL in 14 years developable with 8 medium Complexity/Depth subsea
wells.
Oil Production starts at 60,000BOPD with 95% uptime and declines as shown.
Australian offshore tax regime.

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THE HYPOTHETICAL PROJECT (2)

Project Formal Investment Decision is Today. Target 1st Oil 1 July 2019. ~33 months.

Lifetime Development Costs if pure EPC (no lease), in 2016 $, are as follows:

FPSO Price if EPIC. (Including 15% Profit) $ 1.0 Billion (Cost =$870m)
Other Field Development Capex $ 1.6 Billion
Sustaining Capex During Field Life $ 2.5 million p/a
FPSO Opex = O&M Rate $ 37 million p/a
Other Opex and Well Intervention $ 44 million p/a
Abandonment $ 122 million

If FPSO is Leased for 8 years fixed + options: Then FPSO Capex for OilCo = $0 and Bareboat
Charter = $485,500 / day for first 8 years and 60% of that for extensions.

Assumed Oil Price from 1st Oil = $ 60 / bbl in Real 2016 $

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OILCO VALUE ANALYSIS - EPC FPSO
PROJECT INTERNAL PERFORMANCE

No Leverage Discounted at WACC = 10%

Project doesnt meet target 20% IRR.

Downside Oil Reserves and Oil Price seriously challenged.

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OILCO VALUE ANALYSIS - EPC FPSO
PROJECT ROE PERFORMANCE (I.E. LEVERAGED)

50% Leverage 8 years @ 5% Discounted at COE = 15%

Base Case of Project does not meet target 25% ROE.

Downside Oil Reserves and Oil Price seriously challenged.

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OILCO VALUE ANALYSIS - LEASED FPSO
PROJECT INTERNAL PERFORMANCE

No Leverage Discounted at WACC = 10%

Project nearly meets target 20% IRR.

Downside Oil Reserves and Oil Price still challenged but far less than EPIC case.

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OILCO VALUE ANALYSIS LEASED FPSO
PROJECT ROE PERFORMANCE

50% Leverage 8 years @ 5% Discounted at COE = 15%

Base Case of Project substantially exceeds target 25% ROE.

Downside Oil Price OK but Downside Reserves still a bit stretched.

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FPSO CONTRACTOR ANALYSIS - LEASED
FPSO PROJECT INTERNAL PERFORMANCE

No Leverage Discounted at WACC = 7.5%

Project just meets target 10% IRR.

Downside cases cover WACC.

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FPSO CONTRACTOR ANALYSIS LEASED
FPSO PROJECT ROE PERFORMANCE
70% Leverage 10 years @ 4.3% Discounted at COE = 15%

Base Case of Project exceeds target 15% ROE.

Capex overrun manageable (11.4% ROE) and unlikely in current market.

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OBSERVATIONS SO FAR
Even this sizeable field with a Base ~ 120 MMbbl and a Downside ~ 85 MMbbl is economically
challenged at $60/bbl.
The key risks for the Oilco are Reserves and Oil prices. Unfortunately there is not much an Oilco can
do about them.
Leased FPSOs are definitely part of the solution. They substantially increase value for the Oilco.
With a 14% capex & day rate reduction the shown Downside Oil case breaks even for the Oilco
(NPV10 =0). Maybe a redeployment can achieve some of that?
CAPEX overruns remain the largest risk for the FPSO contractor. Fortunately this is less likely in the
current market.
Neither party is exactly comfortable with its downside.
However, the FPSO Contractors Base Case is a 8 year lease, which is the Downside Case for the
Oilco. And the Oilco Base Case is a 12 year field life which is an upside for the FPSO Contractor.
There is a mismatch.
For the FPSO contractor, the main upside is contract extensions but there is also a key risk with
residual values. But actually, given that Oilco the base case is 12 years, upside is quite likely.
However, as FPSO projects require financing and financing must be based upon base case, the FPSO
contractor doesnt have room to drop rates. So squeezing the FPSO contractor doesnt work
because if financial performance drops below shown levels, the project is not bankable. And this is
pretty much the same for all players

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ISSUE OF FIXED LEASE TERM

Lease term is a major issue for both FPSO contractors and Oilcos.
And there is a mismatch as Oilcos downside case is FPSO contractor's base case.
What if then fixed lease term is increased?

FPSO Fixed Lease Term


8 years 10 years

BBC for 10%IRR @


$485,500 / day $444,500 / day
WACC
BBC after fixed term 60% = $291,300 /day 70% = $311,150 / day
Oilco downside cases Cash positive over term 2 years cash negative

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OILCO VALUE ANALYSIS - LEASED FPSO 8
8 YR VS 10 YR FPSO FIXED TERM LEASE

No Leverage Discounted at WACC = 10%

There is no material change in economic results.

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FPSO CONTRACTOR ANALYSIS - LEASED
FPSO 8 YR VS 10 YR FPSO FIXED TERM
LEASE

No Leverage Discounted at WACC = 7.5%

No material change in CAPEX downside.

But substantial reduction in residual value risk offset by less extravagant upsides on lease term.

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FURTHER OBSERVATIONS

Oilcos should challenge their no cash-negative ever attitude. On a whole project


lifecycle this may not impact value and in some cases can be higher value.
Author has experience with convincing a major Oilco to sign a longer FPSO lease
contract with potential for two to three cash negative years if downside occurred.
Overall the result was actually value positive.
This enables longer lease terms which reduces the misalignment between Oilco
and FPSO contractor base cases.
It also reduces residual value risk to the FPSO contractor, which is actually much
worse than shown, and is a latent issue in the industry.

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SPLITTING EPC AND LEASE

One approach which is frequently used (especially by larger FPSO contractors) is to


split the project into an EPC which harvests part of the profit and then a different
lease JV which often brings in outside parties.

Though there are many variations, one key aspect is that that the lease IRR is
obviously lower, but the lease JV does typically not take the capex risk.

Continuing with the previous example, lets assume:


Same Capex FPSO ($870m)
10 year fixed lease term case
Same BBC day rate ($444,500 / day)
EPC of FPSO takes a 10% profit. Hence capex into lease is 10% higher. ($957m)

Obviously for the EPC entity, the risk of loss due to capex stands at a 10% overrun,
where as for the all-in-one lease, the NPV did not go to zero until a 15% overrun.
But obviously the profit on the lease is still there/available.

Results for the lease entity are shown overleaf.

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FPSO CONTRACTOR ANALYSIS
SPLIT EPC + LEASED FPSO PROJECT

No Leverage Discounted at WACC = 7.5%

Project just now only meets a 8.4% IRR.

But without risk of capex overrun, downside cases cover WACC.

Upside cases of lease extension remain. Note most likely outcome = 9.2%IRR & $100m NPV

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MYTHS & PITFALLS OF FPSO RESIDUAL
VALUE / BOOK VALUE (1)

One of the major issues with the FPSO industry (and other floating oil & gas assets)
is the issue of inflated residual value / book value. This is especially an issue for the
increasing number of idle assets.
Basically, when competing for a bid, the residual value is the one item which can be
altered at the stroke of a pen. In the above examples, assume the FPSO contractor
wants to reduce the day rate by 10% but maintain IRR & NPV. He can do so by
assuming residual value is realised instantly at the end of the contract (rather than2
years later) and by increasing it by 30%. It can be tempting, especially if the problem
will only arise in 8 yo 10 years
Unfortunately this issue is arising now across the FPSO industry, based upon
decisions taken years ago.
The prevalent model for RV is one that splits depreciation between hull, topsides
and mooring Its an elegant rationalization, but is utter humbug

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MYTHS & PITFALLS OF FPSO RESIDUAL
VALUE / BOOK VALUE (2)

A key aspect of FPSOs is that they are hard to interchange


assets. They are thus highly illiquid assets. So their
depreciation has to be worse than that of fairly liquid
assets.
The shown figure is an example of RV from the airplane
industry, which has far more liquid assets:
Its a good reference, and basically FPSO value decline:
Cannot be better than this as it is a much more illiquid asset.
Must have even more scatter than the substantial scatter
shown.
Continues to depreciate whether used or not.

Furthermore, the experience in the FPSO industry shows


that even quasi-immediate redeployments impose a non
productive hiatus of at least 2 to 3 years.

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MYTHS & PITFALLS OF FPSO RESIDUAL
VALUE / BOOK VALUE (3)

The residual value model used in the above economic


calculations is as shown in the attached chart which
was derived from the airplane analogy.

The residual value used in the above models assumes


value is only realised 2 years after the end of the
contract.

E.g. The $1bn FPSO, if deployed on a 10 year contract,


benefits from the RV at end of year 12 which is still
~$190m.

This is still believed to be optimistic

This is a key reason why Brazil projects are so


attractive No residual value problem

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It is very hard to develop even substantial offshore
reserves (e.g. 120mmbbl) with oil prices below
$60/bbl.
Leased FPSOs are definitely part of the solution.
Capex, even if of limited impact, remains the main
actionable leverage to improve commerciality. Oilcos
and FPSO contractors should collaborate to reduce cost.
Oilcos should consider cash negative downside
scenarios to enable longer fixed lease terms.
Optimistic Residual Values based upon claimed
redeployability are toxic to the industrys long term
commercial wellbeing.
Leverage and Finance is a key ingredient of this
industry.
CONCLUSIONS

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Q&A

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THANK YOU