Annual Report 2010 - SBM Offshore

Strategic
Irregular order intake
Inherent to the oil and gas capital goods business is the
irregular nature of the (high value projects) order intake.
The 2010 situation of stable-to-rising oil prices resulted
in the sanctioning of new projects throughout the sector.
The future looks promising in our markets despite
ongoing delays in some projects in the industry. The
Company attempts to mitigate the risk of an irregular
order intake with the following strategies:
• prioritising its marketing activities on the projects
most likely to go ahead and according to the
resource skills available;
• a continued emphasis on developing low cost and
effective technology based solutions to provide a
competitive advantage;
• diversifying its product line and offering solutions
to oil and gas producers in a range of different field
development configurations;
• direct employment of a core of competent engineers
and project managers around which temporary contractors
can be hired, and detailed engineering can
be outsourced, dependent on demand;
• diversified project execution locations – Monaco,
Houston, Schiedam and Kuala Lumpur – to provide
flexibility and responsiveness to client needs. This
also provides diversification in the sourcing of skills
and cost reduction opportunities. Further projectbased
diversification may occur in response to
specific local content requirements;
• growth in the lease and operate as well as parts and
services business to generate a predictable and
profitable long-term earnings stream;
• out-sourcing construction work to eliminate the
risk of irregular utilisation of construction capacity
except where local content provides a means of
securing a competitive advantage such as construction
at the PAENAL yard in Porto Amboim, Angola.
This yard will be operated under a joint venture with
Sonangol and new partner DSME to satisfy the local
content ambitions of the authorities;
• investing in the sustainable technologies of offshore
wind and wave energy technology.
Report of the Board of Management
Business mix between supply and lease
contracts
Salecontracts generate revenues and profits during
execution, and in most cases the related progress payments
allow for a neutral cash flow and thereby reduce
the Company’s need for capital. Lease and operate
contracts are capital intensive although the lease payments
generate long-term stable cash flow, EBIT and
net income. While the Company’s preference is to
maintain a balance between supply and lease contracts,
it has to be recognised that clients usually select
the contracting method most appropriate for each
specific project.
Cost structure and resources
The flexible structure of the Company is set up to provide
protection and even benefit from macro-economic
forces with globally diversified execution centres and
a workforce composed of both permanent employees
and short-term contractors. Overall, the Company’s
internal costs are biased towards Europe giving an
exposure to the European economy and currency.
The short to medium term is managed by forward
hedging although the long-term exposure remains.
The exposure to a worldwide shortage and high cost
of experienced oil-field resources remains a critical
risk that is best managed over the long-term with the
on going human resource development programmes.
A major challenge in the past has been the contracting
of suppliers and subcontractors in a very buoyant market.
This buoyant market situation may well return and
the Company has been working to mitigate the risk by
developing its own resources with training and experience
and also by identifying and diversifying external
resource providers. Being situated at the “buyers” end
of the supply market, the pressure on margins is minimised
by using long-term relationships, commercial
agreements, firm vendor commitments, escalation formulae
and options. In the current market situation, the
Company believes this challenge is more acute than
in the last two years as demand for oil services related
products and equipment seems to be increasing to
previous levels.
SBM Offshore – Annual Report 2010 89