It’s no big deal!

November 1, 2012

'After a strategic review Fugro basically decided to exit the capital intensive and volatile seismic segment of the oil & gas exploration market where it does not have a leading market position. It spotted that most seismic companies had indicated fleet expansion plans in the immediate future, creating a “clear window of opportunity” to sell.'

When Fugro made clear earlier this year that it wanted to get out of its cyclical geoscience-related businesses, especially its exposure to the ups and downs of the marine seismic market, months went by with the 'For Sale' sign failing to attract any serious offers. Industry murmurings suggested the biggest hurdle was the asking price (especially the valuation of the multi-client library). But the other big complication was that Fugro wanted to sell its entire fleet of seven marine vessels as part of the deal, when only the four recent C-Class newbuilds were really worth having. In addition it was hard to see how a big acquisition could be justified or in some cases afforded by the very few players in the marine seismic arena.

The end of the last decade saw substantial construction programmes undertaken by all the major contractors. This seemed to leave little scope for more than gradual renewal over time to replace ageing inventory. WesternGeco and Petroleum Geo-Services have been ordering new vessels to come into the market over the next few years, with CGGVeritas expected to follow suit. Meantime newcomers such as Polarcus and Dolphin Geophysical seemed unlikely candidates to be able to raise the kind of cash required, let alone manage the package of businesses which Fugro was trying to unload.

Given the circumstances, there was a surprisingly muted reaction from both industry and analysts to the announcement late September that CGGVeritas is paying €1.2 billion, the equivalent of over $1.5 billion, in cash for most of Fugro's geosciences services. The purchase excludes Fugro's marine seismic data library and ocean bottom node survey business which are to be the subject of separate strategic partnerships between the two companies. A whole raft of other sectors of the Fugro geoscience division are included, such as airborne geophysics, reservoir characterisation, geological and other non-seismic analysis/consultancy, data processing, seismic equipment and data management. Over 2500 Fugro employees will soon have a new employer.

big dealThere has been a surprisingly muted industry reaction to the CGGVeritas €1.2 billion acquisition of Fugro geoscience businesses. Andrew McBarnet provides his spin on the deal.

CGGVeritas is paying in cash financed by one-third equity and two-thirds from debt, plus the proceeds from a new seabed seismic joint venture between the two companies, of which more later. CGGVeritas has already realised the necessary capital increase with a €414 million rights offering. If the rights issue had not been completed by closing, expected next month, Fugro was keen enough on the deal to be willing to provide a vendor loan of €335 million with a maximum maturity of three years .

After a strategic review Fugro basically decided to exit the capital intensive and volatile seismic segment of the oil & gas exploration market where it does not have a leading market position. It spotted that most seismic companies had indicated fleet expansion plans in the immediate future, creating a 'clear window of opportunity' to sell. The move is said to be consistent with Fugro's strategy of building 'strong market positions and a broad, cohesive service portfolio and to maintain a balance of its service across the exploration, development and production phases of the oil and gas industry'. With a much stronger balance sheet, the company intends to continue focusing on growth opportunities in its core, market-leading and less volatile geotechnical and survey businesses.

For CGGVeritas CEO Jean-Georges Malcor, the aim is a more integrated geoscience company. He said the acquisition 'perfectly fits our strategy, significantly increasing our integrated geology and geophysics, reservoir characterisation and development capabilities, along with strengthening our core equipment and acquisition offer in particular with immediate access in marine to high end vessels at a time of market recovery. It also extends our service range to new customers and additional markets such as airborne. The acquired business of Fugro's Geoscience Division fully complements our products and services and enables us to better serve our clients across the complete exploration to production value chain'.

The reason for the general industry reticence on this development seems simple enough. Even though this is a big deal, its impact on the marine seismic marketplace is pretty neutral; indeed from a selfish point of view, the competition is probably happy to see CGGVeritas embroiled in all the integration challenges of a big merger covering a number of business sectors as well as marine seismic.

Just looking at the vessel capacity worldwide, there is no expansion just more consolidation at the top. CGGVeritas was expecting to order new capacity, reportedly another two vessels, by the end of this year. Instead it has bought the Fugro fleet. This instantly meets the company's perceived requirement to increase fleet size without any of the newbuild process to contend with. As already mentioned the purchase includes the four C-Class vessels – Coral and Caspian (14 streamer) and Caribbean and Celtic (12 streamer) – all with equipment supplied by Sercel, CGGVeritas's manufacturing subsidiary, which should make for easier absorption. The general view is that within the totality of the deal, the company neither over- or under-paid for these vessels. Meanwhile of the other three ships in the Fugro fleet, the Pacific is going to be reassigned as a source vessel. The fates of the Atlantic and Baltic are as yet undecided; most likely they will be phased out when their charters run out in the next year or so, but a final decision is said to be dependent upon market conditions.

The net result, therefore, is negligible in terms of the marine seismic fleet size. Perhaps more significant is that with this consolidation at least 75% of the 3D survey market is now in the control of WesternGeco, Petroleum Geo-Service and CGGVeritas. With the addition of Polarcus and Dolphin Geophysical 3D vessels, over 90% of world capacity is in the hands of five companies.

Fewer operators could in theory have benefits in terms of better price discipline, but this remains to be seen.

There is some evidence of prices firming up into next year as demand begins to put pressure on existing vessel availability. Should that trend not be sustainable, then you would expect CGGVeritas to be super-competitive in its tendering. It has way more vessels than anyone else to keep afloat.

geo pacificGeo Pacific will be used as a source vessel by new owner.

Further consolidation could potentially have a negative impact on multi-client specialist TGS. The suggestion is that its access to vessels, especially for high-end 3D acquisition projects, is already being compromised as vessel availability appears to be getting tighter. Furthermore all the significant marine seismic operators, including Polarcus and Dolphin, are trying to capitalise on what is seen as an improving market for multiclient surveys by doing the whole thing themselves, ie identifying target areas for surveys, organising pre-funding, carrying out the project with their own vessels, and selling the resultant library themselves. Very recently Dolphin said it would team up with UK energy consultant Hannon Westwood to help locate and plan multi-client surveys.

The loss of Fugro could be unhelpful for TGS which regularly leased the company's vessels. New owner CGGVeritas may not be so accommodating. One of the oddities of the acquisition deal is that the company is not buying Fugro's multi-client library, which has a book value of over $400 million. Instead, CGGVeritas will act as a non-exclusive broker of Fugro's existing multi-client library and receive commission fees on all multi-client sales, which will steadily decline because Fugro will no longer be adding to the library. CGGVeritas sees the arrangement as gaining access to a broader range of client contacts and exposure to complementary and high potential regions such as Australia and North West Europe, including the Barents Sea, while reinforcing its sales force. Fugro would seem to be better served selling the multi-client library. In such an eventuality TGS might be an interested purchaser, but that would not help with its potential vulnerability on the vessel availability front.

There are two other strategic partnerships agreed between the two parties, one of which is a 'global strategic technical and commercial mutual preferred supplier agreement', as yet not fully defined. The other is a real surprise and may qualify for a 'What are they thinking' award. From the outside it certainly seems a strange accommodation.

The two companies are to form a seabed joint venture, billed as a focused global leader in the rapidly growing seabed acquisition market. It will be 60% owned by Fugro. CGGVeritas will contribute its shallow water, ocean bottom cable and permanent reservoir monitoring services along with its ocean bottom node business. Fugro will contribute its ocean bottom node business and pay €225 million to CGGVeritas, which will be put towards the purchase of Fugro's Geoscience Division.

The obvious question is why Fugro would want to hang on to this aspect of the seismic business. Less than a year ago Fugro paid SeaBird Exploration $125 million for its ocean bottom node business on top of which undisclosed amounts were spent on upgrading the equipment set-up based on the Hugin Explorer, plus the vessel was idle for some months. Achieving a return on its investment already appeared to be a challenge, financially and operationally.

It has been shown time and again that marine seismic services of any kind are a global undertaking requiring a significant fleet size to operate efficiently. Now the company has dived deeper into the ocean bottom node and cable seismic service business, as well as permanent reservoir monitoring (PRM) which at best is a niche market, and sporadic to boot.

Thanks to its purchase of Wavefield-Inseis three years ago CGGVeritas has been marketing the Optoplan seabed fibre optic technology for reservoir monitoring and won a contract from ConocoPhillips for the Ekofisk complex offshore Norway.

Fugro chairman Arnold Steenbakker explained that 'the Seabed Geophysics joint venture creates a market leading business in an attractive growth market which will be supported by our existing subsea capabilities and provides more exposure to the stable and long-term oil and gas production market segment.' Yet you have to wonder why CGGVeritas would want to joint venture in this business if it promises so much. It already has a long term operational ocean bottom cable contract in the Middle East plus a start in PRM, not to mention an inventory of its own nodes ready for deployment to which it added quite recently.

Outside the strategic partnerships, the business rationale of the purchase makes sense in terms of the company's stated objectives. CGGVeritas gains some useful additions to its portfolio with surprisingly little direct overlap. It certainly does not need any data processing from Fugro, but the Robertson and Fugro Jason brands add some oomph to its geological and reservoir characterization offering and indeed make it a more rounded, integrated geoscience company.

The one anomaly here is Fugro's sale of its airborne geophysical survey business, consisting of 35 fixed-wing aircraft and 10 helicopters, used to acquire electromagnetic, magnetic, gravity and radiometric data worldwide. For anyone who knows the history, Fugro Airborne Surveys was the result of a classic Fugro growth by acquisition strategy. In 2000 the company basically went out and bought a dominant position in the market. It now wants to bail. Meantime, if memory serves, CGGVeritas did at one time have an interest in airborne which it discarded.

fugro airborneCGGVeritas is taking over Fugro's airborne geophysical business.

The real test of a merger of this scale is whether it can work and most importantly make money for CGGVeritas shareholders who are having their current holdings diluted to enable the acquisition.

At this stage there is no way of knowing the answer.

What we do know is that CGGVeritas has a lot of experience in merging seismic companies. It was the most aggressive acquirer of companies in the last decade, buying its way to the biggest marine seismic fleet in the world with purchases of Aker Maritime, Exploration Resources, Veritas DGC and Wavefield-Inseis. A lesson that the company has acknowledged from that experience is that the integration of so many vessels of different provenance comes at an economic and operational cost.

In December 2010, less than six months into office, CEO Malcor launched a company-wide reorganisation and 'enhanced profitability plan' with its principal focus on marine. The 'Marine – closing the gap' initiative was aimed at increasing profitability through better utilisation of maritime assets, a lower cost base, and tighter project management. The plan also identified the need for the continued repositioning and upgrade of the fleet in order to meet the predicted growth in demand expected in 2011 (which materialised). It also highlighted the progressive introduction of the company's BroadSeis solution.

Of course this deal is about more than the marine vessels. But, like it or not, the performance of the marine seismic vessels and the seabed strategic joint venture will be watched the most closely going forward.OE

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