with Jeffrey Weber, Managing Director, Mermaid Marine Australia
Mermaid Marine Australia ended Financial Year 2008-09 on a very strong basis in terms of net profits and earnings per share. As Financial Year 2009-10 comes to a close, is the Company heading into the new year with as much momentum as this time last year?
Yes, I think we are. But it has been a challenging past couple of years for us. The middle of the global financial crisis has had an ongoing effect across the industry with oil prices shooting up to $140 per barrel and then dropping down to $35 per barrel. Any price above $70 per barrel, where oil sits today, is reasonable as we see it.
Our clients are investing money in new developments which has made us a bit fortunate. For example, in the middle of the crisis Woodside still went ahead with the Pluto project which created enough activity for us to keep our vessels busy, maintain our utilization, and continue to grow. At the same time we picked up a new client offshore. We developed operations in Egypt and Angola for a company called GeoKinetics which also pushed us through the global financial crisis and kept us going.
About 50% of our revenue is contracted for production support. Regardless of oil prices production did not stop. It is really just the construction and exploration phases of the business that are impacted by fluctuating oil prices. And additionally, there is always a gap between oil price and activity. When oil prices go up, there is a delay before activity increases, and vice-versa for a lag between falling oil prices and diminishing activity.
But overall this year has probably been just as hard as last year. However we have been lucky with the backend of the previous year’s activities (2008-2009). In the first part of our financial year we were finishing off the pipeline for Pluto. Most of the Pluto offshore part is now just about complete with most of the remaining work being onshore. There was enough work to keep our utilization around 70-75% which we have maintained for most of the year. The next big phase for us will be when Gorgon starts its offshore development, perhaps in August or September of this year.
Yes, we have maintained momentum. We have continued to grow the organization. We have gone out and spent quite a lot of money in the first half of this financial year on new vessels and took advantage of the fact that they were keenly priced. We have acted on the fact that we think activity will increase going forward. We wanted to get out and get ourselves ready to take advantage of that activity.
Our market offer is that if someone gives us a call for a boat, we can help them out. We have to look at what the market will be like in the next financial year and then plan to have capacity to meet our desired demand. We are pretty comfortable with where we are.
The supply base side of our operations has also been very strong. We invested a lot of money on the supply base over the past two years getting it ready to support the Gorgon development. The upgrade work is coming to a completion and we will transfer from construction activity to an operating business. That will give us another step in our growth targets for next year.
Mermaid Marine Australia was founded in 1982 but went public as listed company in 1999. How would you describe the Company’s pace of growth over the past 10+ years covering both the current resources boom and its life as a public company compared to its first 17 years of operations? Would you say that growth is truly taking off now?
It is one of those things where you know you are getting better year in and year out. I joined in 2002. If you tracked our share price from 2003-2005 it did not move a long way, but the company still got better and better. We started renewing our fleet, getting better vessels, and getting bigger contracts. It took a while for that traction to build. We took out one of our competitors in 2006 by buying five of their vessels which was a big step for us. Since that point in time our growth has been cumulative.
The other big change over that period in terms of growth has been with our supply base. You can move boats around to meet the market. But with a supply base it creates a “build and they will come” type scenario. You have to have enough activity to generate a return on that supply base. In my first three years here that return was unacceptably low. But the return has continued to increase particularly over the past three years which has contributed to our growth. When I first started our operations were 95% vessels, 5% supply base. This year the split will be closer to 70% vessels and 30% supply base.
What is Mermaid Marine’s approach to continually enhance the return of its supply bases?
We try not to get too hung up on margins. We are capital intensive. The supply base is now a $100 million asset and we have $250 million of vessel assets on our books. On that basis, you have to keep those assets utilized. An asset is only an asset if it is making money otherwise, it is a liability. The most important criterion is to have the systems in place, the right crew, a strong safety management structure, and the proper work culture that allows you to be a preferred supplier to the oil and gas industry because of its high standards. In order to be a successful contractor to oil and gas companies you yourself must have equally high standards. We have continued to build those criteria up over the past five years because we want to grow into bigger vessels. You have to keep growing your expertise and keep growing your capabilities if you want to grow into those markets. You have to earn the right to win work.
As you mentioned, Mermaid Marine Australia has globalized its operations through its services for GeoKinetics in Egypt and exploration activities in Angola. However the Company’s core growth strategy is decidedly Australia-focused. How do you reconcile the Australia focus with already recognized opportunities in international markets?
We are in about the fourth year of our five year strategy and it has been very Australia-centric. We do not need to do anything outside of Australia at the moment to continue growth. We do recognize, however, that even though it is growing, the Australia market is still relatively small on a global scale. But we are happy to be part of this market and happy to be part of the LNG side of things. It really is a relationship type of business. It takes four years to build the projects which run for 10-15 years, which is where we want to be.
But we do recognize that over time we need to build international capability to continue to grow the organization. We have an office in Singapore which we are developing. Again, a key part of this business is having good credit. Because we have only been operating internationally for two years, we want to build an image of the organization amongst the international crews. We want them to see us as a company they want to work for. So we pay them a little better, we give them better uniforms, and hopefully get people to stick around with us. You have to lead with people. If you have good people on your boats then you can win good contracts.
Within the Australia strategy do you consider the development of offshore exploration and drilling services a core priority?
Yes, since we have very little exposure to those activities. If you look at the oil and gas industry you have the exploration phase; construction and development phase; and then production. All of our contract work is in production and all of our current spot market work is in construction. We have very little exposure to the exploration side of things.
It takes time to earn the right to grow into that market. You have to have good capabilities, a strong balance sheet to be able to afford these boats, and so we are probably a bit behind where we expected us to be at the start of our five year plan. But we did not see the global financial crisis in our plans so that slowed things down in terms of not wanting to risk $80-90 million on boats to service exploration and drilling. But exploration activity is certainly still on our radar. It is a logical place for us to grow into.
Were the investments that Mermaid Marine Australia did put into its vessels and infrastructure over the past few years a tough sell to shareholders amidst the backdrop of the global financial crisis?
To some extent, yes. The way we run our strategy and the way I have talked to shareholders is that we lead with demand. We spend a lot of time working on what the demand profile is and we then buy enough vessels to suit that. We do not just go out and buy 20 vessels because everyone else is and hopefully find something to do with them. We have a pretty good idea of where our boats will go before we buy them. That makes us a bit more conservative than other operators but it stands us in good stead when things get tough.
Having supported many of the big oil and gas companies’ offshore projects in Australia, how do you think they would they grade your service?
I think pretty well. But when I first started, perhaps not so good. We have had to build credibility. Over time we have evolved from small boat operators to managing larger vessels for activities that are more mission critical with a high cost of failure. Our safety management systems are a lot better than in years past as are the caliber of our management team and marine staff. Like with anything, once you start to get good at things then people get attracted to you and your business spirals up. That is the circumstance that we are in. I think we are an employer of choice and there are often good people who come wanting to work for our organization.
The Dampier supply base has been described as Mermaid Marine Australia’s single largest asset. Is it also its single largest competitive advantage?
Definitely. It is a stand alone $100 million asset. It is a tremendous asset for a region such as the northwest of Australia where it is hard to operate because of minimal infrastructure and scarce supplies. People often underestimate the challenges of operating vessels in that market compared to Singapore, for example, where if a vessel encounters a problem there are 20-30 suppliers who can help it at any given time.
We have our own slipway to repair our own vessels and a host of experts in refrigeration and hydraulics who we directly employ to look after our communication. That gives us a competitive advantage on the vessel side of the business.
The supply base itself gives us a number of advantages. First is that you get to know your clients very early on in the cycle. If you are going to do offshore work, the first thing that you do is get an office and a warehouse to store your gear. By the time a client needs a vessel to begin their offshore work we already have an established relationship with them.
Also, people can manage their supply chain better just by coming to us. They can take the warehouse space, set up an office, and use our wharf. If they are major clients of ours we can guarantee them wharf access which is not easy to do up in the northwest. They can manage the risk of their supply chain a lot better on our supply base than anywhere else.
Is there a risk of complacency having such an infrastructure monopoly in a remote area?
Always. You have to make sure you continually improve your services.
But we are too young at this stage to be complacent. We have only just started getting successful so we are still a long way from getting complacent. We really focus on the oil and gas industry so both from the vessel perspective and the supply base operations we look at our clients’ key needs. One crucial need is the reliability of vessels. Second is guaranteed service since the cost of failure for our client companies is high. If a boat breaks down or they cannot get to a rig then the cost of that failure is extreme. We try to get ourselves into a situation where we understand their business very well and are able to service them as best we can.
On the supply base side of things, we acknowledge that supply chains are getting longer so rigs are further offshore. So the time spent along a wharf is dead time. The faster we can get a boat in, loaded, and out again, the better it is for our clients. We have two very good cranes and very well trained crews who know what they are doing. That suites us because it improves the productivity of that infrastructure and it of course benefits the operations of our clients.
What do you see as being the long-term balance of revenues and operations as you grow the experience, expertise, and skill-set of supply base operations?
The vessels are easier to add capacity to than the supply base. You can always go out and buy boats. Increasing your capacity on the supply base side of things is more difficult, but it is something that we are looking at. The way we see the supply base – particularly the one in Dampier – is that it is a staging point. We want companies to put their gear down, get it onto a boat, get it back off the boat, and eventually back out to sea. The land is too valuable for long-term storage. We are looking at more capacity for long-term storage that is further away from the water and therefore cheaper. Through that, we want clients to be able to use the supply base as a staging point. We are going to have more clients that way, but they will not have to occupy as big an area on our supply base. That is a logical way to increase the capacity of the supply base.
We also have the Broome supply base which we see as a longer-term position asset. The Browse Basin is a highly prospective area with good gas. With INPEX, Shell, and Woodside all sitting on sizeable gas fields we are fairly confident that there will be some development up there. The Broome supply base is a footprint for the future. We think we are pretty well positioned to take advantage of a supply base that links to vessels of operation for Broome. We want to develop that base over the next two or three years.
Is the supply base model applicable to international markets and Mermaid Marine Australia’s international expansion?
I think so. In areas like the northwest where there are not a lot of services there is certainly an opportunity to set up a supply base. Or, we could take over a current supply base and run it better, which is something that we are looking at. We are in the early stages of our international strategy. The first phase is to identify which countries have the best prospects in terms of growth, regulatory regime, depth of water which they operate, and their proximity to Australia so that it is easier for us to manage. We have identified four or five countries that fit those criteria. Then we assess the best way to enter those markets. We are not wrapped up in how many boats we have. We are really focused on who are the great clients that we want to work with and how we add value to their operations. If adding value to those clients means that we should operate a supply base, then that is something we will look into.
To what extent have the continuous investments in and upgrading of Mermaid Marine Australia’s fleet been done to keep pace with the growth of its supply base operations and maintain its core business identity as a vessel operator?
When I first took over as CEO we sat down and performed a strategic review. At that stage we were sort of trying to be everything to everyone and I wanted to get some clarity around our strategy. What we said was that we are a vessel company and everything we do should either add to or leverage off that identity. So anything that does that, such as the supply base adding value to our vessel operations, is our business.
Another important aspect that came from the review was to not compete with our clients. We can go out, for example, and put an ROV on the back of our boats. But that would discourage some of our clients from using our vessels since it would directly compete with their operations.
It is all about doing what you are good at and maintaining the widest possible client demand as you can. We are always looking at opportunities for growth. We have enough opportunities just within our current structure of supply base and vessels to keep us going for a while yet. There is no need for us to step outside our comfort zone.
What do you see as the main challenges to maintaining positive, steady growth?
It gets harder every year. In two days time we will finish off this financial year and I will strategize with my team on how to do it all again, plus more. The challenges are always people challenges. Everything else is easy. The competition is for getting good people. It is getting good people on your boats and management team. It is taking your management team that was an integral part of a $100 million market cap company and getting them to continue to be an integral part of a $500 million market cap company. Growth follows people. You have to lead with people. That is the fundamental challenge.
Are there any final messages you would like to convey to our readers about Mermaid Marine Australia?
We have grown substantially because we have good people in the organization. It is an exciting time to be in the Australian market. I think LNG has a long future as an energy source. It ticks all of the boxes in terms of the challenges we have as a global environment and it is a great transitional solution to what might be in the future. Australia and the world need to embrace the benefits of gas. Being exposed to the long term development of that resource is a pretty exciting place to be.