Where Is Value Won or Lost For FPSO Owners and Investors?
Where Is Value Won or Lost For FPSO Owners and Investors?
26 September, 2016
ULENSPIEGEL WHO ARE WE?
26 September, 2016
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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.)
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.
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.
Downside Oil Reserves and Oil Price still challenged but far less than EPIC case.
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?
But substantial reduction in residual value risk offset by less extravagant upsides on lease term.
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.
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.
Upside cases of lease extension remain. Note most likely outcome = 9.2%IRR & $100m NPV
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
26 September, 2016
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Q&A
26 September, 2016
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THANK YOU