Lamprell: Oil and gas award winners

Source: Exec Digital USA

Date :4/17/2008 1:35:52 AM

COO David Moran tells Exec about Lamprell’s double award winning 2007, its strategic diversification and the increasing demands of public company life.

Written by James Hurley & Produced by Glen White

Golf legend Gary Player once said: “The harder I practice, the luckier I get”. David Moran, Lamprell plc’s Chief Operating Officer, himself a keen golfer, clearly believes that it’s a principle that also applies to business. After all, what Player really meant was ‘the more experience I have, the greater my expertise’. That’s a fairly accurate description of how Lamprell, a leading provider of specialist engineering services to the international oil & gas industry, built the foundations for its continued growth and the rewards for the ongoing diversification it is expecting to enjoy this year.

“Four or five years ago, $20 million was a big contract for us. Now a $200 million contract is our bread and butter,” says Moran. “We’ve built up to that over a period of time - we’ve taken on the risk element of handling larger EPC contracts by becoming highly proficient. The elements of what we do are broadly similar and you become highly proficient through repetition.”

In other words, in different scenarios, the same sorts of skills are required. Lamprell has proven project management proficiency and is very good at managing processes, open work spaces and a large workforce to achieve very aggressive schedule goals. “Our business is all about repetition – doing what we do time and again within the frameworks that the client expects.”

Diversification

This simple philosophy has taken the company a long way in its 30 year lifespan. Steven Lamprell first spotted a shortage of engineering services for oil companies operating in Dubai in the late 1970s. The company that he established was soon offering full-scale refurbishment of jack-up rigs and has now completed well over 120 rig upgrade and refurbishment projects. But it hasn’t all been plain sailing, as Moran explains.

“We got to a point in the mid 90s, with the decline in the oil price where we felt the pain as it hit upstream drilling activity and downstream development. We saw a rapid retraction in revenue from $65 million one year to $25 million two years later.” Despite this, the company still managed to make a nine percent profit in 2000 on the basis of a highly focused approach to managing its cost base. However, the lean spell served as a wake up call to the company. “We realised that we needed to broaden our customer base and recognized that while we were an oil and gas services company we were too focused in one area. That was a risk to the quality of revenue on a month-by-month and quarter-by-quarter basis.”

What came next was a diversification that was very much founded in the expertise Lamprell had already established. “We didn’t want to go down the road of becoming a bulk steel fabricator. We wanted to retain our expertise for complex operations and by building process modules we were able to focus on an area which had a high level of skill and would be complementary to what we were already doing at the time, as well as the qualifications and experience levels we already had,” explains Moran.

The company’s move into the new-build of FPSOs (Floating Production Storage and Offloading) sprang from one of its long standing relationships – another pillar of the Lamprell philosophy. Its association with SBM - one of the world’s leading FPSO designers, owners and operators - began in 1998, with the construction of CALM buoys. Over the course of the next three years, the company strengthened the allegiance, adding projects of increasing scale and complexity. In 2000, it committed itself to a 15-year, $20-million investment in new facilities, beginning with an expansion in the size and capability of its base at Sharjah. “SBM said that if we were prepared to build a facility in the Middle East, they would be prepared to support us.” Lamprell built its Jebel Ali facility, which occupies an area of 160,000m², in 2002. “That underpinned our ability to move onto the next stage. It was very much a deliberate strategy to build up a company that would be in a position to do a flotation or private equity deal at some stage in the future.”

AIM

Lamprell floated on the AIM market of the London Stock Exchange in October 2006 with the intention of increasing its capacity for refurbishment and new build projects to service a buoyant market. The last time Exec spoke to the company, some eight months ago, Chief Executive Officer Peter Whitbread commented that this was “the most dramatic event in the evolution of the company to date”. But why the public option and not the private equity deal that had also been considered?

“We felt that this was going to yield the best value from the point of view of the future organization. We recognized that we were very much in a sweet spot as far as the market was concerned. The client base had broadened in line with the expansion of the Jebel Ali facility. It was the ideal opportunity to do an IPO to obtain share ownership for the management team and the employees and meet their aspirations to be stakeholders in the business,” explains Moran.

“In order to continue to expand at the rate we wanted to, we needed to move on from private ownership. The IPO was the culmination of the strategy of moving into the FPSO market and building a complementary facility.”

Lamprell’s strategy sees it enjoy the benefit of both ‘ends’ of the oil price, offering the maturing business improved protection. “We get on the upstream end through drilling and exploration, and now the CAPEX downstream development market as well. In any cyclical market you would see activity in both environments. We’ve got a high degree of elasticity in all of our business interests. We’re well protected in the event of any downturn,” he says. “It was a strategic diversification and broadening of what we were doing as a company without moving out of the core values of what we wanted to achieve with respect to high returns on capital.”

So what does Moran say to the market’s detractors who might suggest that there are too few companies of Lamprell’s quality listed? “In time the AIM market will be a lot like NASDAQ .It is a market that is directed towards growth companies and allows them to grow at a faster rate than they would if they were on the main list. One of the reasons we came to AIM was the speed at which we wanted the IPO to occur. We made the decision to do it in Spring 2006 and it fitted us in terms of timetable and how we were structured as a company.”

Public life

It was Moran who was given the potentially tricky task of taking a very independent company public. This was done with the intent of diversifying Steven Lamprell’s sole investment in the company and for the management to have the option of an exit as well as the opportunity to move onto a wider platform. The company, under Whitbread and Moran’s guidance, must have done something right, as it was voted ‘Best Newcomer to the London Stock Exchange’ at the London Annual AIM Awards evening last November.

“Other companies might have had a better share price performance than us, but I think the award went to us because of the acceptance of Lamprell by the investment community as a whole and our increasing investment base. The analyst community took our story on board, liked it and believed in it. I think we have been perceived to be a very open company with plenty of transparency and that has paid dividends. As a management team, we have focused on developing a relationship with investors and growing into public life,” explains Moran, “very much an extension of the approach we have with our clients”.

Indeed, when Lamprell went through the due diligence process, it was acknowledged that it ticked all the boxes for a main listing anyway. It chose AIM as it offered a more “graduated transition” to public life, Moran explains. He also believes that the junior market provides a strong growth environment in which smaller companies can enjoy the freedom of a less stringent regulatory regime. “It fitted how we were structured as a company. We had a fairly small management team that had to take on all the responsibilities of public company life and grow into them in a reasonable time frame.”

Yet the quality of the company’s corporate governance, coupled with its desire to access wider sources of capital and a broader investment community, means that a full listing “in the not too distant future” is probable. “We want to move up to reflect the desire in our investment community. It would be a natural progression and is in the best interests of our shareholders,” says Moran.

Indeed, after we spoke the company publicly announced its intention to move to London’s main market as it announced a significant contract worth almost $51 million. Senior management will be “shifting seats” as part of the proposed move. Chairman and Chief Executive Officer Peter Whitbread will have his roles split, continuing as CEO but stepping down as chairman so current Deputy Chairman Peter Birch can become non-executive chairman. Nigel McCue, currently a non-executive director, will become chief operating officer in May, while David Moran will become the director of corporate communications.

Lamprell said it had won the $50.9 million contract to upgrade and refurbish the Al Ghallan drilling unit from the National Drilling Company; that deal represents around nine percent of forecast 2008 revenue of $558 million. The contract is to upgrade an offshore drilling rig – the Ghallan jackup drilling unit - for the national drilling company in the United Arab Emirates (UAE). The project, part of the NDC strategic Rig Integrity Assurance Program, follows Lamprell’s successful completion of the NDC Junana upgrade project in 2007. The contract covers all aspects of the project execution including the construction of a new cantilever, substructure, drill floor and accommodation block. In addition there will be significant condition-based refurbishment of hull steel work, fluid systems and the rig will be completely repainted. The work will be undertaken at the company’s Sharjah refurbishment facility beginning in the second quarter of this year, and it is expected to take eight months.

Client selection

While Lamprell’s move into the new-build of FPSOs presented the company with a steep learning curve, it was one of its more traditional rig refurbishment projects that provided the stiffest test of Lamprell’s expertise last year. The Nabors 660 jackup rig, owned by Nabors International, the American offshore contractor, suffered extensive damage by Hurricane Katrina in 2005. A $75 million contract represented the company’s largest and most challenging refurb to date.

“This was a massive rig that had been pretty much destroyed by Katrina. To take it apart and rebuild it was technically more difficult than a new build. Big chunks were literally blown away by the storm, so it was essentially a new build within an older unit,” explains Moran.

But why would Nabors Industries want to send its rig 660, badly damaged by the hurricane in the Gulf of Mexico, all the way to Lamprell’s Hamriyah yard for repair? “It is an interesting example of how we like to do business,” Peter Whitbread told Exec last year. “We had gone to the USA to purchase a semi-submersible launch barge to extend our ability to put big elements of marine equipment into the water. The barge had to be brought over anyway, so we went to Nabors and offered a free ride for the rig, followed by repair and upgrading at Hamriyah. We think that it was looking outside the box because we do like to think of ourselves as being a little bit creative when it comes to adding value for our clients!”

It was a tricky and dangerous job. For example the drill floor which was lying precariously lodged against the leg section on the starboard side of the rig had to be removed – a real safety challenge for which the Lamprell engineers were specially commended.

“I think Nabors took a very brave step in taking what was basically a destroyed rig and saying, ‘with Lamprell partnering with us we think we can get this to market well ahead of a new build.’ Everybody wins,” agreed David Moran.

Lamprell can bring the resources to bear that can get this kind of job done on time, even if the goalposts move. “If a project doubles in value from $10 to $20 million, we don’t double the timeline proportionally. That’s the beauty of what we do and why our margins have been sustained at the level they have. People recognise it as an advantage – when you’re earning $200,000 a day on a rig, every day it spends in the shipyard is a lost opportunity. All things being equal, if you miss a day’s production, you only get it back with the last barrel of oil that comes out of the well.” In other words, Lamprell is committed to ensuring that clients maximise revenue. “We brought that rig back to market in 15 months for less money than a new build and it’s out earning a similar day rate. That rig will be paid for in not much more than three years.”

Lamprell doesn’t advertise heavily, but it does do a lot of direct marketing. “We know who our client base is and who we want to work with,” as Moran puts it. “We’re very selective. We’re in the fortunate position of being able to pick and choose which projects we want to work on; those we can work positively with and where everyone comes off as a winner. That drives the success of the business.”

This has led to a number of successful long term relationships with firms including Global Santa Fe, for whom Lamprell completed four successful refurbs last year, SBM, Nabors, Ensco, Noble, Transocean, British Gas, Saipem, Aker Kvaerner and a raft of new adopters that includes BW Gas, Fred Olsen Production and FPS Ocean.

“We’re a relationship based business,” confirms Chris Hand, Lamprell’s Vice President Commercial. Hand is responsible for the commercial and contractual aspects of all of the company’s proposals, project and procurement activities. “We’ve got traditional relationships with the core suppliers of the materials and components that we buy on a regular basis. Our repeat business focus means we get good reaction times from suppliers and a good quality service. Kidding yourself that saving a little on cost is good in the long run would damage the quality of service and our reputation for delivery and meeting promises,” he says.

“Supply chain is all about values and principles,” agrees Moran. “We’re a demanding customer and we expect people to adhere to the same standards as us with their client relationships. We have a lot of long standing sub contractor and supplier relationships. I’m a great believer in that, because people will stand by you - when times are hard you find out who your friends are. We’ve been through that cycle in the past and an underlying philosophy for us as a business is that you stand by the people that support you when times are hard.”

Is that approach too personalised for a rapidly growing public company? “We’re trying to take the best bits of a family business and make it into corporate culture,” he responds. “As we’ve grown, the ethos of a family business has been carried through in the way we conduct ourselves. We believe in relationships, handshakes and the way business used to be done. We’re not overly contractual; we’re not looking to score points from anyone. We expect to be doing business with the same guys over the long term.”

Of course, as Lamprell moves onto bigger projects, it will have to deal with suppliers that it hasn’t dealt with before as it buys equipment it hasn’t previously needed. “We’ve had to broaden our strategy,” Hand explains. “We’ve recruited a new procurement manager who has a real background in strategic procurement. Whilst we’ve got a really successful foundation, we’re at a stage where we’re trying to take it to the next level and reflect that success in an expanded environment.”

Historically, proactive communication and strong supplier relationships have been the cornerstone of Lamprell’s success, and this will help when looking for new supply chain partners. “We’re not unknown in the market place so some of those relationships can be built by proxy,” he says.

Hamriyah

All of this has led to an enviable reputation within the industry, and the company received further recognition of its efforts when it won the Lloyd’s List Middle East and Indian Sub Continent Energy Award for an unprecedented third consecutive time in 2007. “To win the award three years in a row against some very stiff competition speaks volumes,” says Moran.

It also reflects the increasingly public profile of the company. “Our ethos is no longer just about making the business strong - it’s about how we tell people we’re a better choice to invest in than another company.” This results in a tangible strain on the time of the company’s senior executives. “Suddenly people from the outside are demanding your time and you have no extra man hours to cover it,” Moran laughs.

He feels that the firm’s existing website doesn’t fully recognise the company’s full core value. “We espouse and know what that is internally, as do our clients, but we want to sell that message more explicitly beyond the people that we do business with. For example, Exxon and Woodside recognise the advantage of Lamprell and focus their clients at us, but we need to say that on a broader basis.”

To that end, the company has recently employed a new financial PR company, M:Communications in London, UK. “We think we will get our message to a much broader platform - we want to make our message comprehensible beyond the industry. There is a danger of people taking a simplistic view of what we do and it isn’t until they come to the facilities that they appreciate the complexity.”

Complexity is something that Lamprell does well. Following the success of its Jebel Ali facility, Lamprell commissioned a leading consultant to design and manage the construction of the new state of the art facility, that when completed, will be one of the most modern in the Middle East. The main focus for the company’s activities over the next twelve months will be the development of these new Hamriyah facilities, which will be brought online in 2009. It will have a quayside capacity to execute up to ten jackup rig upgrade and refurbishment projects at any one time. It will also contain large covered and open fabrication areas that will allow Lamprell to expand upon its major new build projects, such as the construction of jackup rigs and the integration of process modules onto FPSO vessels.

“Our biggest challenge is bringing on our new capacity. We see a lot of change and organic growth right across our key areas of activity from land rigs, offshore rigs and the new build of FPSOs and jackups,” enthuses Moran.

“We’re building a very versatile business and Hamriyah is at the center of our growth story. It will double our physical land area and more than double our quayside access. That will give us the springboard from which we can continue the growth we’ve already experienced.”