2005 Annual Report - SBM Offshore

Report of the Board of Management
the MECC, the clients and external specialised contractors
playing the roles of families and the media. A debriefing takes
place immediately following the termination of the exercise
which is fully documented with the lessons learnt being
incorporated into the Emergency Contingency Plan (revised
annually).
Treasury and Financial Risk
Payment risk
Before the acceptance of each contract, a detailed review of
its terms and conditions is carried out from a commercial,
financial, and legal point of view. Bank or parent company
guarantees are negotiated with customers and if there remain
any doubts as to the financial strength of specific customers,
payments due in respect of supply contracts are covered by
Letters of Credit.
Lease financial risk
When making a proposal to lease a floating facility to a client,
four main risk factors have to be evaluated:
• Client risk
• Country risk
• Residual value risk
• Reservoir risk (if applicable)
If the client is a company of insufficient financial strength to
guarantee full payment under the lease, then a parent
company guarantee will be sought. In addition, and
depending upon the size and location of the project, and the
Company’s overall exposure to a particular country or client,
the Company will secure limited recourse project finance in
order to transfer most of the risks to international banks.
Lenders insist on having a detailed technical review
performed by an independent expert of their choice.
Beyond the traditional fixed day-rate lease model, the
Company sees an increasing tendency for clients to look to
contractors to share risk by linking part of revenues to
production throughput, or even to oil price. The Company will
take a careful approach to such circumstances firstly by
capping the risk to an acceptable level in the worst case
scenario and secondly by ensuring an appropriate balance
between the potential risks and rewards. It will continue to
use project finance and hedging instruments when
appropriate.
Residual value risk relates to the portion of the unit which is
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not amortised when the initial guaranteed lease period is
over. Deciding on the level to be accepted involves taking a
view on the likelihood of the lease continuing, the technical
reusability of the unit and the future demand in the market.
The Company maintains a cautious approach when
establishing this key parameter by keeping the residual value
well below the anticipated market value.
Experience shows that almost all lease and operate contracts
have been extended and no unit has been redelivered with a
book value higher than the scrap market price. This provides
considerable comfort and indicates that contract extensions
are inherent to the oil companies’ contracting model whereby
initial periods are established systematically in the most
conservative manner.
Treasury risk
SBM Offshore is exposed to financial market risk, mainly
relating to currencies and interest rates. The functional and
reporting currency of the Company is US Dollars, and almost
all offshore revenues are in US Dollars. There are however
significant cost elements and some investments in Euros and
other non-Dollar currencies leading to potential exposures on
operating costs and equity. The lease business is particularly
capital intensive and substantially financed with floating rate
debt giving rise to interest rate exposures.
The policy of the Company is to minimise profit volatility and
to hedge all significant currency and interest rate exposures,
using mainly fixed rate instruments. The Company does not
engage in any speculative activities. The market value risk on
financial instruments and in particular interest rate swaps can
be significant, and under IFRS rules variations therein can
impact profitability where the hedge does not accurately
match the underlying exposure. The Notes to the Financial
Statements provide details of financial instrument policies,
accounting treatments and market values.
The central control room of the FPSO Xikomba offshore Angola