Abbot Group chairman looks ahead following $2 billion First Reserve deal
By Jeremy Cresswell, contributing editor
Early March saw the completion of a $2 billion deal that took the UK’s Abbot Group off the London Stock Market and into private equity ownership through First Reserve, but with chairman Alasdair Locke and his management team still firmly in command.
Mr Locke is regarded as a most skilful company builder. The manner in which he picked up KCA Drilling, placed it at the heart of what was essentially a shell company (Abbot) and capitalized on the classic brand’s reputation and management team strengths to create Britain’s only drilling company with real clout is a story of determination and calculated risk taking.
“Abbot was my private company that acquired KCA in 1992,” Mr Locke said. “We went public in 1995, and it’s a company that I have one way and another led and controlled to a certain degree ever since.
“We have used public market places to enable us to grow over the years. But we got to the stage when I came to the conclusion nearly a year ago (late Q1 2006) that the public marketplaces were clearly not valuing Abbot at the right price.
“So, I set off down the private equity route because what we want to do is grow this business … we could double it again (from $2 billion per annum turnover to $4-5 billion) over the next three or four years, which is really what we want to do.”
Mr Locke makes no secret of the Abbot game plan, including that it is likely that the company will return to a stock market listing after three to five years, perhaps longer, but only after growing the company.
“We want to radically turbo-charge this business. We would like to bring a company back to market that’s twice the size. That’s the logical way for an exit to take place,” Mr Locke said.
“Prior to the First Reserve decision, we felt we were doing extremely well with that plan, but we were getting an increasing level of criticism from the city (London stock market) … in our view misinformed, misjudged and some even saying that we weren’t delivering fast enough.
“They see the rising oil price and ask why it is that we aren’t suddenly producing even better results. But that’s never been the case. The correlation isn’t there in that way. It simply cannot be.”
Mr Locke started plotting Abbot’s stock market exit long before the credit crunch that has washed around the world in the wake of the US sub-prime mortgage market debacle.
“With the benefit of hindsight, I clearly didn’t know the credit crunch was coming along. We could have got money, but the City (London Financial District) would have marked the shares down even more, which always makes you vulnerable to a predator at the wrong price in my view … I didn’t see the point of issuing equity at the wrong price.”
The scale of growth that Mr Locke has in mind requires in the order of $500 million – a sizable war chest with which to hit the acquisitions trail, and First Reserve is ready to step up to the plate. He doesn’t want to see Abbot eclipsed by competitors or fall prey to them.
“We’re quite a global leader in what we do already, but we would be a pretty outstanding global leader if we can achieve that (double in size), which I believe we can do.
“Abbot is investing in high-tech equipment for which we have all the skills in-house to actually operate, and we can go out and get very good contracts from the supermajors, national oil companies, in strong growth markets around the world.
“It’s been a deliberate target of mine over at least 10 years to build up a platform for the business in the growth markets as we saw them and still see them … West Africa, North Africa, Middle East, FSU, Caspian and Russia, plus some other areas as well.
“They’re the big growth markets in our industry, and we have a terrific footprint in them. We’ve built up a position where we’re either a market leader or one of the top three players in each of the main markets that we’re in.”
Mr Locke sees substantial growth across all core Abbot business streams – offshore platform-based drilling, ownership and management of mobile offshore drilling units (jackups and tender units), land rig construction and engineering and land rig operation.
The objective is to generate 29% of 2008 budgeted revenues from offshore drilling platforms, 31% from land rigs, 15% from MODUs and 25% from engineering services/land rig construction.
Of these, offshore rig ownership/management is the newest stream, having been essentially kicked off with the Songa deal of early 2006, which brought three jackups under Abbot ownership. They were being reconditioned at the time and represented a much better financial and risk proposition than going for newbuilds.
Two years on, and Mr Locke is not about to hit the marketplace with his new war chest and buy up more units, whether new or pre-owned.
“I think we have enough capital invested in offshore units at the moment … but since we made the acquisition of Songa, we now operate a total of seven tender barges for two different entities … one North American financial group owns three barges; we have a 10% stake in each. The other group … Norwegian-backed … owns four and again we have 10%.
“So we have management of seven units on top of the three that we have … extending the management side of the business.
“We’ve just done a deal with a Nigerian group where we will have three more (new) jackups to manage. One is delivered and two are in-build… We don’t have an ownership interest in these.”
Reflecting on the Songa deal, Mr Locke reminds that MODUs were not new to Abbot as the company had been running two jackups in Iran, whose contracts finished in 2005.
“So it wasn’t as if we were moving into something we didn’t know about. But we didn’t have any assets. We were at the same time getting quite a lot of demand from existing clients wanting us to be in this arena … to enter into longer-term drilling contracts.
“Our main aim is to do the more difficult jackup-based production drilling because that gives us longer-term contracts, therefore greater certainty, and we are targeting that part of the offshore sector where we can do production drilling; where the asset is, therefore an adjunct to providing the service rather than the service in itself.”
All told, Mr Locke hopes that, by 2010, Abbot will have a division that has 15-20 units, including the three wholly owned jackups and the remainder under management. This could potentially include some of the many newbuilds poised to hit the marketplace and which need the kind of experience that Abbot can offer if they are to deliver a return on their owners’ investment.
While a huge effort has been and will continue to be made in terms of building up the MODU side of Abbot, Mr Locke said there is no way he will allow the portfolio to get out of kilter.
“The one thing that I’ve learned in this business over the last 30 or more years is that it is important to keep a balance, and I don’t want to go down the route of all being jackups, or all being land rigs or all in one marketplace.
RIG CONSTRUCTION AND ENGINEERING SERVICES
Land rig construction and engineering services have assumed growing importance since Abbot acquired German company Bentec in 2001 as part of the DEUTAG acquisition. There are two arms to this part of the business.
One is badged RDS, rig design services, which is brownfield engineering. It’s closely associated with a lot of Abbot’s platform-related drilling package upgrade work.
“It’s a very important area because it gets us a lot of front-end engineering work, particularly platform contracts. And if you’re doing the FEED, when it comes to the drilling contract, you’re in pole position to get it.
“But RDS does a lot of other work for people who are building semisubmersibles; Shell’s Sakhalin facilities and so-forth.”
Bentec is the other side of this particular coin.
“When we acquired DEUTAG in 2001, Bentec was technically fine but financially in a sorry state. It had a value, but I wasn’t sure whether it was positive or negative at that particular point.
“Also, it needed refocusing substantially because, if you went at that point and asked Bentec what would they build, they’d show you an array of design books and they could build anything you wanted, which approach clearly didn’t work.
“So we rationalized it down to the type of units that we (today) talk about … the Nomad, a light rig very suited to desert conditions, the Euro rig designed specifically for the European market, and the HR-500 cluster slider rig for the Russian market. All are selling very well.
“We’re also one of the world leaders in SCR (electrical control units) for rigs, which we can build in Germany and sell competitively into the US, even at the current rate of exchange.
“We’ve designed our own drawworks, and we’re selling quite a lot of those.”
“We’re trying to carve niches where everyone’s going to consider us if they want a rig for, say Russia, or a Euro rig for European application,” he added.
Capacity at Bentec is eight to 10 units a year, or up to 12 for smaller rigs. However, Abbot is investing in a facility in Western Siberia, which will be up and running in 2008, with 2009 earmarked for full production.
It will built specifically for the Russian market and is already attracting orders.
“We have a very full order-book in Germany,” Mr Locke said. “Capacity in Tyumen, where the new facility will be based, will be a bit larger and probably able to build 12 medium to large rigs for the Russian marketplace.
“We’ve only gone into that after very carefully looking at the Russian market; examining the potential, making sure we’re not doing something the Russians don’t want us to do.”
Mr Locke pointed out that mobilization costs from outside Russia are so high that building in Russia for the Russian market should prove a winner, including taking care of local content issues.
Mr Locke reckons the traditional platform business that has for long been a staple of KCA DEUTAG has been “terrific” of late and that there is “another clear wave of growth opportunity” ahead.
While the North Sea remains at the heart of that business, the company has won contracts and sees large opportunities in West Africa, Caspian and the Russian Far East (Sakhalin).
Mr Locke is optimistic about the North Sea: “I see some opportunities, particularly as platforms move from the super-majors to independents … but we’re not trying to pretend that the North Sea is a growth story.
As indicated earlier, he sees the winning of design contracts as an important catalyst to KCA DEUTAG securing the actual platform drilling contracts. It applies as much to West Africa or the Caspian of Sakhalin.
Take the Caspian, for example.
“We’ve started initial engineering in respects of new platforms to be built in the Caspian. There are at least three or four more in Azerbaijan alone, and there are other Caspian countries that may come into that equation. We see a very clear opportunity for us.”
As far as Mr Locke is concerned, the focal point for the Caspian business is Azerbaijan; much less so other sectors, at least not yet. But he sees Sakhalin becoming even more important.
“Long-term, Sakhalin Island looks as though it will be much bigger than Azerbaijan, though there are a few political issues and other things to overcome there.”
Mr Locke added that, given Abbot’s Arctic experience, he hopes the Gazprom/TOTAL/StatoilHydro’s Shtokman development in the Russian sector of the Barents Sea will generate opportunities for the group.
“So I see platform growth, probably beyond the horizon of a private equity buyer. I see another wave of platform growth five years out from now. It’s a very good business, and it will continue to give us very good returns.
Today, Abbot, through KCA DEUTAG, operates a fleet of some 61 land rigs, all of which are company-owned except four managed on behalf of TNK-BP, and that’s a rather “special” deal, according to Mr Locke.
“We built them at Bentec, delivered then to TNK-BP, who own them; we operate them, and we have a buy-back arrangement after four to five years.”
Basically, as the company requires new rigs to satisfy growth objectives, they are frequently built at Bentec, though not exclusively. Bentec’s prime purpose is to build and sell rigs to the wider marketplace, though about a third of its turnover is derived from KCA DEUTAG.
“Bentec gives us some distinct advantages, particularly in the Russian market where we have some particular designs that are our own and have helped KCA advance in Russia, just as KCA has helped Bentec. It’s a very symbiotic relationship there,” Mr Locke said.
“We also have the Nomad, which again has been developed between the two organizations and is very suitable for what KCA does.”
Given the pace at which the land drilling market is growing for Abbot, KCA DEUTAG could in theory soak at least half of Bentec’s build capacity in Germany, which is why Mr Locke is determined that the latter builds mostly for external clients.
He points out that the policy is for KCA DEUTAG to order new rigs only against firm contracts or where there is “a very strong likelihood of winning” the work.
“That said, what do we expect to invest in against contracts over the next say 24 months?” Mr Locke asked.
“Looking at our main markets, I would hope that would be in the order of 10-12 rigs. There are two aspects to that. One is how much one can afford … in terms of capital allocation, we’ve addressed that very strongly with First Reserve.
“Also, there is the issue of what can we operationally manage. You don’t want to grow so fast that you jeopardize your existing operation. You have to be certain that you have the capacity … the human and operation resource … to handle that amount of risk.
“Can we manage? Well, we brought nine land rigs into service last year, so bringing on five or six rigs a year is something we can manage quite comfortably.
“We have opportunities under very close negotiation in the Middle East; North Africa (Libya and Algeria), Russia and Kazakhstan. I can easily see growth opportunities in all our main markets where we will be putting rigs into over the next one, two or even three years.
“I think we can nearly replicate the same rate of growth through acquisitions as we can organically.”