with Atle Jacobsen, CEO, Dolphin Geophysical AS
You formerly worked for PGS, Stolt, Multiwave and Wavefield Inseis. What attracted you to set up Dolphin Geophysical and how does the company’s approach compare to these other companies in its approach to the seismic market?
After selling off Wavefield Inseis to CGG Veritas in 2008, I worked for a short period within CGG Veritas before leaving the industry for a while. Then in 2010 I began to see a potential rebound in the industry, based on the fact that the market had been depressed for some time. The stock performance of seismic companies was still low, oil was priced around USD 70 per barrel and Lundin had not yet made their Avaldsnes discovery. Nonetheless, my business partners and I felt that there were signals in the market that an up-cycle was on the horizon. We therefore created Dolphin Geophysical with a cautious business model that was adapted cost-wise to the state of the industry at that time. We began with the mentality that the company needed to be able to make money in a low-returns environment and we capitalized the company around that principle.
Fortunately, our assumptions about a rebound in the industry were correct and we have been heavily involved throughout 2011/12 in the recovery of the seismic market as well as the continuous positive cycle of the industry. Over this time, Dolphin Geophysical has been chartering more vessels and acquired a small processing company to add to our capabilities and overall offering. Dolphin Geophysical was therefore created at a good time and it is always exciting to be involved in the fast growth of an industry. Personally I am happy to have the opportunity to build up a successful company. I have been involved in fast growth with other companies before, but there are always new things you can learn and bring to a growth model.
In that case, what do you feel you learnt this time?
This time we looked at becoming more diverse than in the past. I used to be more focused on seismic vessel operations, which is a narrow growth opportunity for a seismic company. This time we have sought to offer a greater variety of seismic services and we have recruited people with strong experience in multi-client and processing. This has given us a 3-phase growth structure focusing oncontract seismic, multi-client and processing.
Contract seismic remains the backbone of our work, but we are also looking to have a better revenue mix in the future. At the start we were 100 percent focused on contract seismic and have been developing multi-client as we went. Looking at Q2/3 this year, multi-client represents around 20 to 30 percent of the total revenue base with contract seismic as the remaining 70 to 80 percent. Soon we would like to achieve a mix where multi-client and contract seismic together represent around 90 percent and 10 percent will then come from processing.
Dolphin Geophysical was based on a low-cost model of operation, remaining asset light and engaging in time charters. What are the opportunities and limitations of this model as the seismic market takes off?
One of the key advantages in our business model is that we remain flexible and can upscale and downscale our fleet with the market. Our firm vessel contracts are for 3-5 years with options to extend afterwards. If the market falls then we let the vessels go off contract with no assets sitting idle on the balance sheet. It is also a lot less capital intensive than owning the steel, allowing us to expand faster during the up-cycle.
In my view, it is actually quite hard to find drawbacks to this model. The only limitation I see is that we lose the ability to integrate the full seismic operation within one operating unit. With this asset-light model we therefore give up having an in-house marine group; instead this is subcontracted and you have to manage these relationships differently.
The seismic market is very different in 2012 to how it was in 2010. Do you see any potential to change the growth model?
No, the most important thing is to choose your own business development model. For example, TGS Nopec are a pure multi-client company which does not even charter the vessels it uses and does not have operational people or equipment. Instead, they access capacity from the other seismic players, contracting over short periods of time. At the other end of the spectrum, there is PGS which owns and controls all parts of the seismic business: both contract and multi-client. They have a fully integrated solution and therefore need to have a 20-30 year view on each of their assets. Dolphin Geophysical lies in the middle, working both contract and multi-client, but not owning the vessels, or committing to a 30-year view on the industry’s future. Our planning is over an 11-year time horizon.
How is Dolphin Geophysical now positioned in the international seismic industry?
Looking at the supply picture, Dolphin Geophysical has around 7 percent of the global market share. We currently have time charters for 5 seismic vessels and we have two more vessels coming into operation by end of Q1 2014, which totals 7 vessels. A global market presence of 7 percent in a global market of USD 12-13 billion offshore seismic market is not bad after two to three years of operation. We now have a sufficient size to become a supplier to the major buyers of seismic services and we have recently won large contracts with Shell and Statoil outside of Norway. Dolphin Geophysical has reached the size where people are starting to pay attention to us and we are building a contractual and pre-qualification relationship with the international oil companies.
What do you think have been the success factors?
The main factor in the growth of this company was that very early on we were able to gain access to distressed assets and access to long-term capital, with a shareholder base helping us with additional funds as we grew. Dolphin Geophysical also has the in-house experience to build a fast growing seismic business. When the capital was there and the deals were on the table, it was very important to have a management team capable of seizing the opportunities and executing our strategy. Each quarter we have seen higher financial performance results and have the best industry margins, based on our low-cost profile. We are outperforming the established players in these margins and this is attracting both employees and investors.
Most of the seismic players in Norway are located in East Norway, what do you gain from being in Bergen on the West coast?
Most of the listed companies are in Oslo, however CGG Veritas have a large office in Bergen. Bergen Oilfield Services went into receivership during 2011, but this was another substantial seismic player based here. Most of the ship-owners involved in the industry are also located on the West coast. There are also smaller technology companies like Octio, working in Bergen. Nearby you can also find the manufacturing facilities for WesternGeco’s marine cables. There is a sizable seismic community in this city and there is a good basis for finding qualified people over here. Relative to the small size of the city, this is a good location for the seismic industry. There are also some oil companies and clients with a presence here.
The main challenge for the industry in Norway is gaining access to people. How does Dolphin Geophysical manage this?
We are fortunate in being able to recruit outside of Norway. In Bergen you will find our technical operational group and finance department. In Tunbridge Wells in the UK, a scenic area outside London, we have our processing office, our multi-client office. This is a nice environment for these geophysicists to work, located in the countryside. In addition to this technical presence we also have our global sales office in the UK. This dual presence gives us flexibility in recruitment. There is no need to exclusively target Norwegian geophysicists; we are a global company operating here and you will be hard pressed to find a Norwegian manual, technical book or signboard in this office. In fact, our employees speak Norwegian only when they go for a drink after work.
In terms of building your technical capabilities, what is your approach to new seismic technologies?
Dolphin Geophysical has never been a front-runner in developing the best technology, rather we have been buying the best technology off-the-shelf for use in our operations. However, when we acquired a company called Open Geophysical we did gain access to developers and code writers, which improved our processing technology development. I would say that we have been good at developing new technology in broadband acquisition where we have our own branded technology called: SHarp, which has a strong uptake in the market. We have recognized where the industry is going and we are focusing on being able to provide competitive products to our peer groups. The most important factor here is having the people who are able to read where the industry is going.
The growth story of Norway has driven many companies to focus on this market rather than their international operations. What is the case for Dolphin Geophysical?
Around 30 percent of our revenues come from Norway, however this is around 40 percent when you take into account our operations for Norwegian companies such as for Statoil in Tanzania. Norway remains a major market for us and it is much easier for us to operate here because of our relationships and background knowledge. However, we will continue our international trend, we are active in Brazil, West Africa, East Africa, North Africa and the Caribbean where we have activity at the moment. The company globalized from day one because this is a seasonal business, limited by the weather window in the North Sea with operations lasting from late April to October every year. You therefore need to move abroad to ensure business during the winter season.
We have taken a strategic decision that Brazil will become an increasingly important market for us and have started increasing our investments in this region.
Brazil has presented many challenges to Norwegian companies trying to turn a profit. What has been your approach to market entry?
The Brazilian market will actually be managed through our Houston office and is completely run and controlled by Brazilians. I believe we have the right structure in place and of course we have been frustrated at times by this market and the different nature of business, holiday structure, business practices and their view on how to get things done in an efficient manner. Much of this is mitigated by having Brazilians in place who understand the market. We therefore focused on the people first and then started placing investments.
Closer to home what does the trend towards the Barents Sea region on both the Norwegian and Russian sides represent for the growth of Dolphin Geophysical?
We have a lot of activity in the Barents Sea in 2012 and this will remain buoyant in 2013, driven by the 22nd Licensing round and the awards which will come. We are now looking at the 23rd Licensing round because in this industry you need to remain one step ahead. The former grey zone with Russia and the Jan Mayen ridge are two huge potential areas and we have already worked on behalf of the NPD in this region. It will be interesting to see if these new areas are included in the 23rd round. If they are then there is a lot of new acreage coming up for grabs and clearly that will drive the demand for oil services.
Of course, where the government chooses to open up acreage is a highly political discussion. However, with successful development of the Barents Sea region, the pressure would be taken off developing areas such as Loftoten which will be a much tougher political decision. Lofoten is one of the richest fishery areas in the world and has one of the most scenic coastlines in Norway. There is therefore openness and willingness on the political side to carry on expanding in the areas where the industry has already been successful. It looks like the Barents Sea will see continuous development on the back of Skrugard and if more discoveries are made like this then the oil companies will be happy and the political pressure to open Lofoten will subside.
What is the potential of going into the Russian side of the Barents Sea?
Our interest in this region is huge but it is extremely difficult to enter Russia; it is a protected market. I have been many times to Murmansk and Saint Petersburg to understand how to enter the market. The only way is through cooperation with Russian companies and business ties with Russia can be extremely challenging. It is also an active military area around Murmansk, complicating the process further.
On the other hand, there are now Russian companies looking at operations on the NCS and Norway is open about allowing these companies in. Over time, the protection of Russian waters will change as they cooperate more with Norwegian