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Interview

with Roberto Monteiro, CFO, OSX

05.07.2010 / Energyboardroom

One of the main pillars of OSX’s business plan is the projected $30 billion in investments to come from OGX. How much are these two companies relying on one another to succeed?

OSX was conceived to provide an integrated solution to OGX but aside from this the market is booming in Brazil with the pre-salt discoveries so we see opportunities outside of the group. For example, Petrobras is putting out a tender for 14 drillships which is something we’re considering participating in.

That being said, OGX is our anchor client and given the order book they provide us there are special conditions in terms of pricing and other factors. This frame agreement is very unique in that it provides us with a large basis for investment while also allowing them to obtain their equipment from the local market.

When we met with SINAVAL, Mr. Rocha unoted that there were six shipyards that survived the 1990s yet in the past decade 20 more have entered the market. What is it that OSX offers that these other newcomers cannot provide?

Due to the size of our order book we are able to construct a state of the art shipyard with over $1.7 billion in investments.

We’re building a Korean-sized shipyard with their technology and similar lifting capacity on 1.7 km of seafront within a 4 million m² area with up to 220,000 ton integration capacity. This is comparable to the offshore division of Hyundai. It’s a different story to rest of what is going on in Brazil.

In this business, size matters a lot and it’s a key factor separating Brazil from Korea. In Asia you usually have a yard resembling an assembly line for the production of vessels. Hyundai is bringing all of this technology to OSX.

How did OSX and Hyundai find one another as partners for this development?

Obviously, our order book is big for Brazil but even for Hyundai it’s an important account. All of the international shipyards realize Brazil is the hot market: with the potential for 100 billion barrels reserve it’s as big as Kuwait or Iraq with the one difference being that it’s all offshore! This is the biggest offshore market in the world, with the second biggest potential lying in Nigeria at one-third the size.

There are two ways for foreign companies to come into Brazil. Either they can enter by producing their own yard and relying on Petrobras’ orders such as Jurong’s approach to the market or they can look for a local company that already has a foothold. The latter of these options is much less riskier and you can see Hyundai’s faith in this by the fact that they’re not only bringing their technology but also taking a 10% equity stake in the venture.

From OSX’ perspective we wanted to find the best shipyard in the world, so with this in mind we visited Korea and made an analysis of potential partners where Hyundai stood out.

Of course, OSX can build a Korean-size yard with Korean technology but you don’t have the Korean, on-the-ground expertise. How are you building the talent to create a world-class shipyard?

When we think about a shipyard we consider four components: layout, quai, lifting capacity and knowhow. The first three you can buy but the fourth takes some works. Our agreement with Hyundai is comprised of two stages. As of today, the Korean engineers are working on the layout alongside our executive project utilizing the Brazilian company, EPC in Minas Gerais.

This is the very beginning of the knowhow transfer. Throughout the construction period, will receive visits from Hyundai so they can show us what’s right and what needs fixing. After the shipyard is running we will have up to 50 Koreans at a time working in Brazil while 30 Brazilian engineers practice in Korea. The key positions at the shipyard will initially be fulfilled by the Koreans so that they can teach our team.

Aside from this private initiative, we’re also working with the University of Santa Catarina in Florianopolis. We’re implementing the Institute of Naval Technology (ITN) which is focused on training Naval Engineers who can later use their knowledge in our shipyard. OSX is trying to convert this knowhow from Korea into an asset for Brazil and we’re doing it at both the undergraduate and technical levels.

Despite such a good story, OSX still didn’t have as strong of an IPO as initially anticipated by the market. What this the fault of the overall investment environment? How has this impacted your investment plans?

I wouldn’t classify the IPO as unsuccessful. The beginning of 2010 had some difficult winds and it’s not like every other IPO on the market was smooth sailing this year: the same week we decided to go forward, other companies walked away. OSX reduced the asking price by 20% which attracted other investors but in doing so we also realized this wasn’t the fair price we should enter the market on. As a result, we also reduced the size of the IPO because it wasn’t worth giving up the initial amount of equity at this price.

Some people have been confused by look at the numbers and see we meant to raise $3 billion but only managed to attract $1.4 billion. In reality, since we cut the number of shares in half, this wasn’t an unsuccessful offering. We have still been able to put the company together and ensure our business plan. On top of this, EBX has granted us a put option of $1 billion on top of what we have raised to make up for the difference from the initial target. With this put option on EBX I know that whatever happens to the market that OSX will be fully funded to pursue our business plan.

Does this mean we can expect a second offering when winds get better?

It’s a clear possibility, because if the market conditions improve I obviously won’t pursue the put option but rather go to the market.

At the moment OSX has one FPSO under contract for OGX – the OSX – 1 – which is the first of the leasing program. When can we expect more of this business to deliver?

As of today we have the OSX-1 which is a 20-year contract as well as the technical description for one FPSO and two fixed platforms representing orders already in place. We’re working with OGX very closely because they’re still determining the type of oil and just how much they should be extracting. They are still working on their production plan in order to define their orders.

I would venture that by the third quarter of 2010 we should have a more concrete order book with OGX. The potential is there.

The main reason for this is that OGX has been a lot more successful in their drilling than originally forecasted. Our plan was based on a 6.6 billion barrel reserve estimate using an independent report from 2009 that calculated a 34% hit ratio in the Campos Basin. The way things are looking, we have every indication that there will be more than the initial estimate on the horizon.

Looking outside of OGX, a lot of international companies are looking at ordering vessels in Brazil, for the Brazilian market. At this point in time, do you think it’s possible for Brazil to be competitive on the global market?

It depends a lot on the type of shipyard you are considering. If you use the existing capacity of Brazil then you likely will not be competitive at all. This because you would have to build the hull in one yard while another piece of the topside in a different location and so on before integrating it all in one location. It’s insane to consider the amount of double work and logistics that would have to be considered to do this kind of a project with Brazil’s infrastructure today.

If you consider a state of the art shipyard in Brazil then the story is different. Brazil’s labor less expensive than Korean labor but what we still need to develop is the knowhow. Nevertheless, we know we can create this: Brazil creates airplanes why not ships? We need to come up with a way to train a large number of people to produce these units.

OSX and the EBX group looks to be a company focused on building up key industries for the development of Brazil, such as the case with OSX and the maritime industry. What’s your take on this?

This is what we’re working for; we carrying the flag to bring back this industry to a competitive level in Brazil.

Korean shipyards have the government support and were initially built to create jobs. This is why the government typically gives a performance guarantee to the companies buying vessels so that they effectively don’t run any risk of the shipyard itself. It’s unique and in a way subsidizes the industry.

Here in Brazil,the development of local content is a huge opportunity for job creation. Moreover, it makes sense for this industry to exist in the biggest market in the world.

So yes, OSX realizes this is a transformational project.

What’s it like for you to work on a project that can really make a difference for Brazil?

It’s really an honor because it is all about participating in a project that helps Brazil move ahead. We have the opportunity to bring jobs directly to 8,000 people and bring knowhow from the other side of the world to develop our own institute of naval technology.

To give you an idea on how we approach this project, we’re currently preparing the environmental licensing so we’re looking for the best possible way to implement our plan with minimal impact on the surroundings.

We also have a concern for the societal impact of the development. Biguaçu is a city of 60,000 residents and we have the potential to provide 8,000 jobs so the impact is enormous and we have to consider that not everyone will be from this location originally. Our project will bring more people into the city which is why developing through REX – the real estate arm of EBX – a housing project to support the development.

These considerations are all apart of the 360° approach that the EBX group takes.

Do you have a final message you would like to send about the industry environment today?

We’re living through a solid economic situation in Brazil as we have currently passed through one and one half crisis. While were not quite out of the second one yet, Brazil is weathering the turbulence very well.

Brazil is growing as is its institutions so I feel we have everything to be a larger player in the future. Within this scope, we have a great opportunity in the oil industry which is clearly a booming market. OSX is happy to play a role within this framework alongside a big and promising client like OGX. I’m very confident on the future of Brazil, this industry and OSX.

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