with Peder Sortland, CEO, Apply AS
Following a terminated IPO attempt, would you start by outlining your main priorities when you took over as CEO of Apply?
Apply needed a more focused strategy as our portfolio had become too broad to stay competitive on all fronts. We were covering too many areas of activity and we struggled to develop them all into a competitive position. This is why we decided to spin off our subsea business, which we did at the tail end of 2012.
The subsea segment is becoming a serious game, played by the very large subsea specialists. Apply did not have the balance sheet to take our subsea business up to a level where we would be competitive with them. The divestment was therefore good for our balance sheet, good for the buyer, Kongsberg, and for the refocusing of Apply as a group.
Apply is now repositioned as a specialist for maintenance and modification (MMO) and living quarters and other topside elements. In this way, we can now focus on securing more competitive positions than if we had maintained our subsea business. Focusing the company in this way was my first priority.
The next priority was to build the backlog and I believe this went very well. Apply ended 2012 with record high backlogs and we expect this to continue to increase through 2013. Right now it is an exciting time for us. Apply has done well with maintenance and modification (MMO) projects on field developments: topside contracts, living quarters etc.
Subsea is the fastest growing segment for the offshore sector and is expected to double between 2012 and 2016. Was there not temptation to carry on with your subsea business?
I agree that the growth figures are strong. However, there is another factor at work in this market, which is the trend towards consolidation. Smaller, bespoke subsea specialists are becoming few and far between. The major competition is between the big players: FMC Technologies, Kongsberg, Cameron, GE and a few others. We are witnessing increased productification and standardization. As such it is hard for the smaller players to survive and structurally, it would not have been easy for Apply to compete at this level.
However, because of the growth in this market, the interest generated by Apply Nemo was very strong. The division had itself been through a productification strategy over the last few years and was starting to make commercial sales. This captured the interest of the large industrial players. Kongsberg had been aiming to increase their presence in subsea and this fitted their strategy very well.
How has money been rechanneled within Apply following the divestment of Nemo?
A lot of our concentration is on expanding our capacity to do larger MMO contracts and more of them. We will also be expanding our living quarters business. These two will become the focus areas within our business.
Looking at where we operate, our MMO business is concentrated on the brownfields of Norway and our living quarters (LQ) business is international. For LQ, we can deliver these as steel or aluminum, as complete structures or as modules. We are very flexible and Apply has delivered all the living quarters for BP on their Caspian operations. The modules were built at our facilities in Sweden and then transported on Russian rivers to be assembled at Baku, Azerbaijan. We also delivered living quarters last year for Shell, Champion 7, stationed in Bahrain and we are also working on living quarters with a Canadian company for the Hebron field off the coast of Newfoundland, operated by ExxonMobil. Back in Norway, Apply will deliver living quarters for the Edvard Grieg field, operated by Lundin. So this business is moving well for us.
Apply also has an operation based in Singapore which is there to give us a better presence in the Southeast Asian markets. From that position we also produce helidecks, which can be integrated with the living quarters that we deliver, but it is also a standalone business. Through this joint venture we deliver most of the helidecks that Keppel Fels put on the rigs and vessels that they build.
Why have you internationalized the LQ business but kept the MMO business domestic?
Living quarters is an inherently international business – you have to supply living quarters wherever there are operations. The international alliances, which have been developing, attest to this being a very international business. Last year you saw partnerships between CB&I and Hyundai Heavy Industries, Samsung Heavy Industries and Technip and a few others. These are global projects and you have to perform work across separate locations.
MMO on the other hand has to be done in Norway. The Norwegian market for brownfield services is a large market and today there is more than enough for us to work on in Norway, rather than taking the business model international.
We may take our MMO business international at some stage and there are global players like Petrofac and others, which already do this. However, we are still in a challenger position in Norway against two big companies: Aibel and Aker Solutions. There are four or five smaller companies of reasonably similar size and there is room for us to grow our market share in Norway. Even Aibel and Aker Solutions are not performing that much MMO work internationally considering their size, so we really have a long way to go.
How will the Norwegian industry’s trend towards the North influence your growth?
For Apply, our business is already there. We have been successful in winning the MMO contracts for the first oil field coming into operation, Goliat for ENI. We see this as a natural extension of our business.
We feel an obligation to do as much work as we can locally; therefore our intent is to build a sustainable local operation around the Hammerfest area. If five years down the road we are still shipping people up to the North to work then we will not have met our objectives in this strategy and it is not a good way to operate. I believe we have time between now and when the field comes into operation in 2014 to successfully implement this expansion. Soon we will move into a new office building, wall to wall with ENI, in Hammerfest.
There are many people from the North who have probably migrated south because they did not see sufficient work opportunities for them. As activities move to this region, more people will be able to stay and we hope to play our part in offering work to this region.
Looking at your internationalization, how is the supply chain developing to keep you competitive?
I would highlight three examples. The first is developing local content. The Hebron project in Canada is a very good example of this, where we have a joint venture with Cahill, in which we provide the engineering and procurement and the construction will be done in Newfoundland by a couple of yards, under the partnership.
Another example would be the helidecks, which we build in Singapore. We have a commercial supply chain, which has developed over many years so that engineering and procurement can be done in Singapore and construction is done in China.
The third element is what we have in Sweden. If you looked at our living quarters business five years ago, it was basically a yard looking for work. Now we have a commercialized supply chain for steel living quarters in Sweden through our Emtunga operation. Interestingly for an offshore business these facilities are inland rather than by the coast. We build modules, which are either assembled in Gothenburg and shipped out or shipped out directly as modules to be assembled on site before being taken to the platform. Deliveries of living quarters to BP in Baku, Azerbaijan is one example of this and we hope additional such business, in the form of the Shah Deniz 2 field development, to come our way. It is about giving the clients flexibility to have a product delivered and assembled how they want it; it is not possible to ship in a finished structure into the Caspian Sea.
Where do you see the limits of your internationalization strategy?
In principal, as long as we are talking about offshore installations, there are very few places where we cannot operate. We have traditionally done work in North America, Europe, Central Asia and the Far East. However this has more to do with concept reasons rather than political reasons. West Africa for example tends to be characterized by huge FPSOs with a lot of space and where living quarters are integrated into the FPSO itself, so it is not an ideal market for us. Looking at political risks, Apply would have to primarily lean on the risk evaluations of the operator and/ or the main contractor.
How will we see Apply in five years?
I would like the company to be able to deliver living quarters around the world. So we will continue our globalization. And I would like us to be established as a firm number three player on the Norwegian MMO market.