with Dag W Reynolds, CEO, SeaBird Exploration Norway AS
Having been instrumental in building Seabird Exploration a few years ago, you came back to run the company after it found itself in financial difficulty. How would you assess the turnaround so far?
As the first CEO of Seabird, I was responsible for developing the company and subsequently taking it public between 2004 and 2007. Therefore when coming back to the organization I was confident that a turnaround was possible because I had put together the core team and knew that there were many good people in this organization. I was pleased that whilst the company was widely considered a bad investment by the investor community, it maintained a very strong relationship with its client base.
The restructuring and turnaround has actually gone surprisingly well. The management team has been able to follow the plan that was worked out before I came back quite successfully. One of the key factors is that we have been working closely with the board of directors and with the major stakeholders to implement the restructuring of the business model.
In this process, the key initial step was to cut costs because the company was at the brink of bankruptcy. We released more than 40 percent of the operational staff and this change in the size of the company meant that we had to completely rearrange our management and reporting lines in order to create a more dynamic environment. The overall idea behind the restructuring was to make the company more scalable in order to better respond to a very volatile market, which is an inherent characteristic of the oil and gas industry.
Although we were cutting back costs, we ring fenced all our investment in HSE systems and core operations in order to maintain our strong track record. It was this prioritization which allowed us to maintain a good reputation within the industry, whilst losing our good reputation among investors.
In order to take the company back to full health, it has been imperative for us to build confidence with all stakeholders – clients, suppliers and investors. After all, we have been turning the company around on extremely limited cash resources. Our funding has been heavily restricted and strict rules were placed on spending the little cash that we did have.
Generating confidence among the subcontractors when they could see that we had outstanding bills that we would honor our agreements took time, but it has worked. In the first quarter we were focused on keeping the company going and building subcontractor confidence. The second stage has been to generate confidence in the investor community and with the creditors and bond holders. This is where we are today. We had to be very strategic in our management of different stakeholders at different points in this process.
The seismic market is strong at the moment. How crucial have these market fundamentals been to your recovery and good results in 2012?
Strong E&P spending is driving the seismic market and there is a renewed concentration on virgin areas which is the zone for 2D seismic – our business. However the seismic market is volatile and the 2D market more so than the 3D market. When there is an upswing we swing quickly upwards and this explains the strong performance in Q3. However, in a downturn we nosedive and this is why we have been working on making the company more scalable.
In a good market situation, we want to increase our capacity but we do not want to add fixed assets to our balance sheet. We are looking to be more opportunistic and have more short term contracts which will enable us to take on more capacity when we have a good market and then let it go when this market dies down. Oil and gas is a risky business and it is always hard to know how long a particular business cycle will last.
As long as we do not squeeze the market rates to extreme levels we will be able to maintain a large market share and even increase this during the present up-cycle. If we can keep the rates at USD 100,000 per day or less we will still generate a healthy margin until the oil price takes another nosedive, which is an inevitability.
In this current cycle, where do you see your target markets?
There are some clear candidates for the frontier 2D work like Brazil and East Africa. Considering the growth story in Norway, North West Europe will remain strong. There are massive frontier areas coming up in the Mediterranean, but timing there is uncertain due to permitting issues. Southeast Asia is also an interesting market and becoming a very active area, however, it is huge and it is important to not steam ahead and bleed profit margins in this region.
On a sector breakdown, the multi-client market has really matured over the last few years, having started to become an established business model in the early 1990s. Oil companies now appreciate this type of seismic data because it grants them access to cheaper information. Oil companies will say that there are limitations in this data because they do not specify the surveys. However, they are still very willing to buy it and signs point to this sector continuing to grow.
The marine seismic business is a commoditized industry and companies need to be opportunistic. If you are PGS and are delivering a standard product: 3D seismic, then you are selling data for a certain price and incurring a specific production cost. With an oversupply of vessels, the contract rates may be too low and you then need to switch to multi-client because the profitability of this activity is much higher. This dynamic has not always been the case, where multi-client failed to generate the returns.
The risk profile associated with multi-client operations is higher. For a company which was in financial trouble, how cautious do you have to be in entering this market?
Seabird is very careful and we do not classify ourselves as a multi-client company. The company instead partners up with others in the multi-client business in selective survey and we intend to continue this approach to the business.
We are always developing our ability to participate in the good multi-client projects. With our current vessel capacity we have an edge in the supply side. However, we have to be careful, given that most of the clients are the multi-client companies themselves and we do not want to start competing with them in the market.
What does Seabird bring to these partners?
Seabird has some key strengths within the market and I would say the principal value is that we can take 2D vessels and operate them more efficiently than anyone else. For example, we can operate a seismic vessel at less than 50 percent of the cost of a PGS operated vessel and this gives us a significant market edge.
We have a lot of repeat customers because they are happy with the way that we run our business from the safety of our operations to the data quality we provide and our statistics are at the top of the industry. Therefore, if you are an IOC and want to conduct 2D surveys, there are not that many companies with the required HSE in place, like Seabird. There are around four companies: Dolphin Geophysical, PGS, CGG and Seabird who can provide this standard of 2D survey.
Seabird Exploration is also an innovator in this market and has filed a patent which increases our flexibility when it comes to seismic data acquisition. We can now tow a far longer streamer than anyone else in the industry and we are conducting the testing for this at the moment. It is generating a lot of interest and it should become commercial in the second half of next year.
There has been a lot of good innovation when it comes to seismic imaging and processing but when it comes to acquisition all we have been doing for over 20 years is adding more streamers and making larger streamers. We have not questioned the methodology. This was why we took a step back to look at what we are trying to achieve and created this technology.
The technology is called ultra-long offset 2D and we are very excited about its prospects. There are 5 majors interested in the technology at this stage and the multi-client companies are pushing us to have this in operation. We are starting with a 20km streamer although we will be able to expand this further.
How do you see the development of Seabird Exploration post turnaround?
In the coming years you will find us as a more asset-light company with more flexibility. Hopefully the up-cycle will continue and we will bring more innovative approaches to the seismic market, without huge outlays of capital.
Seabird is the leader in the 2D market and whilst the other players focus on bigger boats and more streamers, we Intend to continue to own and develop this market. We have another market developing under the radar screen of the other companies. The Voyager Explorer and Geo Pacific are carrying out smaller selected 3D work, predominantly as proprietary surveys for the oil companies