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Interview

Loui Kannikoski – Founder & MD, Bhagwan Marine, Australia

Loui Kannikoski highlights several of the marine service provider’s recent milestones and how they’ve ultimately helped position the company as the largest Australian vessel operator servicing the oil and gas industry. He also explains how Bhagwan has adapted its fleet to meet growing industry demands – particularly with introduction of its newest vessel Bhagwan Dryden – while also depicting the potential service opportunities as the bulk of the industry transitions into production.

Bhagwan Marine has become the largest Australian vessel operator servicing oil and gas with 650 staff members and over 150 vessels. Can you elaborate on a few of the most pivotal decisions that have contributed to and helped maintain this positioning?

Over the last several years Australia has undergone a massive construction boom, probably the largest in its history, especially with the onset of projects such as Ichthys, Gorgon, Wheatstone, and the few CSG-LNG plants in Queensland. Riding alongside that growth, we’ve consequently expanded three times in scale, having accumulated 180 vessels in our fleet at one point. The scope of these vessels extends from water taxis all the way to small DSVs, but mainly construction vessels to service both the oil and gas and mining industries. We even had to bring in a minor equity partner in order to accommodate the influx of business and effectively meet the burgeoning demand.

Anticipating the end of Australia’s construction era, we also bought a business out of the UK called Marine Towage Services (MTS) to expand our fleet internationally.

What were the initial underlying aspirations in targeting this specific niche?

We actually never expected the business to grow into what it is today. Together with my wife and my parents back in 2000, we started Bhagwan Marine and expected to be a very small player in a niche market, constructing purpose-built vessels to meet industry needs. When we first started, it was common practice for the industry to use old fishing boats when conducting offshore activities – leaving significant opportunities for a company such as Bhagwan to design vessels for clients that are fit for purpose and push the boundaries on safety, efficiency, and innovation.

Putting our money where our mouth was, we bootstrapped the needed capital to build our first vessel for an Apache job on Varanus Island and slowly built up our capabilities from there – gradually establishing working relationships with many of the other major names in the industry such as Woodside, BHP, Chevron, ect. In addition to comprehensive customer service, we had always strived to provide our clients with the best in class vessels; so, it was seen very early on that we were going to be a serious player. And although I was a main driver behind the company’s conception, our people have been the most instrumental and pivotal component of Bhagwan’s continued growth and development.

Would you say that there was a noticeable market gap in offshore support vessels when the company first entered the industry?

There weren’t many purpose-built vessels at the smaller end of the offshore maritime support industry – speaking more towards crew transfer and utility-type vessels. At the time, the general sentiment was that clients would be comfortable settling for less. From the outside looking in, we immediately acquired the sense that there was a better way of doing things, so we conceptualized a couple of designs specifically geared towards industry demands and ultimately received very positive feedback from the companies that we approached.

What consideration factors have ultimately shaped the structure of Bhagwan’s fleet, and how has it changed in response to market dynamics?

For us, our efforts have focused on looking at the current state of the industry and evaluating what exactly is needed next. What we decided to do in the early days is look at the quality, European-built vessels in the smaller end of construction like the in-shore, shallow water vessels. We were mainly buying boats out of Europe from people like Neptune and Damen, which we still have very good relationships with. At this stage, we may even be one of the largest private owners of Damen vessels in the world. We projected the most demand in these small and sturdy assist vessels – particularly in accommodating the dredging market – as opposed to the larger and more expensive end of the scale, which was already well catered for by other players.

The structure of our fleet has often been influenced by future workloads. For example, in anticipation of a few projects currently in Australia’s pipeline, we’ve reserved several distinct vessels for prospective service contracts, which we would’ve otherwise sent to Europe. But, especially with the cyclical nature of oil and gas, circumstances are always changing. What’s more important for us is integrating a level of flexibility into our business model to effectively cushion these fluctuations.

As Australia’s oil and gas industry transitions from construction to operation, how do you see the needs of the industry changing?

It would be a lot clearer if we weren’t going through the current downturn. But the transition to production has always been of interest for me because that’s the period in which we effectively started the business – in the production and maintenance phase, which typically generates more long-term contracts and an added layer of stability. So, we’ve actually been looking forward to this happening. We’re probably in the last six months of construction with Wheatstone, after which point we will evaluate a few other prospects in terms of construction work.

But as the central scope of work contracts shift to operations and maintenance, we’re identifying new niches where our vessels, and the associated technologies, can truly add insight. For example, with respect to smaller inspection, maintenance, and repair (IMR) vessels, we constructed the Bhagwan Dryden, a 57-meter ROV and Air Dive Support Vessel. This truly innovative vessel has several key features such as shallow draft, DP2, four point mooring system, and emergency hybrid capabilities, which have collectively garnered significant interest in the industry so far.

How do your operating strategies differ when operating in a country like the UK?

The UK is quite different from our Australian operations, in that it’s primarily focused on towage. During down cycles its important to maintain a level of diversity to fill in market gaps when required. In Australia, for example, we’re already quite diversified, with portfolio segments covering subsea, offshore, and port services to counteract fluctuating supply and demand dynamics.

Essentially, the strategy for the UK business is to replicate the model that we’ve created in Australia. During winter months, revenues in our European business are relatively depressed. So, we’re trying to expand the scope of our capabilities in the UK to mitigate earnings volatility and more comfortably absorb seasonal or economic swings in the market.

The legacy owners of the company we acquired to enter the UK are now running our operations there. So, there’s been no notable pushback so far, as we’re taking a slow and strategically phased approach, while incorporating any feedback that we receive along the way.

How has the competitive landscape for marine service providers evolved alongside the development of Australia’s oil and gas industry? And to what degree has this landscape fuelled the company’s M&A ambitions?

At least in the last 12 months, there haven’t been many entrants into the market. Many of the companies that are currently operating in this space are indeed challenged. The charter rates that marine operators could command just a few years ago have decreased substantially, forcing many companies to barely break even in order to sustain operations. Now, players are embroiled in constant battles with oil companies to elicit better rates – an unfortunate trend that will continue until prices improve.

Regardless of what decisions other companies have made, all of us in the industry agree that it’s a challenging time. We’re the same as most other companies, in that we’ve had to make difficult changes to really get through this period. However, we reacted quickly to the market at the early onset of the most recent downturn and executed our decisions quickly. But it’s all for the survival of the company in order to truly take advantage of the opportunities coming up.

We’ve worked long and hard at building this company, and we will consider avenues that will help us maintain that trajectory. That being said, however, contrary to our historical decisions, we’re not looking for any particular acquisitions at the moment, mainly because we see this as a time to streamline our own business and improve cost-efficiencies. However, if an opportunity comes along that creates a strategic advantage for the business, then we’ll certainly find a way to make it happen.

In light of these challenges, what approach has Bhagwan adopted to remain competitive and create value for its stakeholders?

From where I sit, it’s very clear that we have to concentrate on giving our clients the best value for their money. We started the business based on this principle – effectively setting our constraints around what the client wanted and finding a way to work around that. Now, more than ever, we have to go back to those roots. We’re centered on approaching clients with ideas on how we can save them money, while providing them with the best in-class service, products, and equipment to truly drive value.

What would you consider a few of the most salient challenges that you’ve had to overcome from the perspective of an entrepreneur?

When we were first starting up, aside from financing, the biggest challenge had always been getting the industry to trust a relatively unknown contractor. There were many people who were focused on coming into the market and making as much money as possible within a limited time frame and then exiting shortly thereafter. But that’s never been our focus. We’ve always dedicated ourselves to building long-term, sustainable, and productive relationships with our clients that continue well into the future.

In terms of resources, capabilities, and reputation, where would you like to take the company in the next three to five years?

The company has grown to a level of corporate scale, which requires an influx of capable people with proper training to stay competitive. As we push through tough times and eventually enter into another growth phase with larger vessels, I would certainly like to bring more talent on board to pursue more managerial roles and ultimately elevate the company’s entire standing. For me, I see myself eventually stepping aside allowing the next generation to take over and assume a more client relationship management and business development type role.

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