What are they thinking?

November 2, 2011

Andrew McBarnet puts the decision-making of marine seismic companies under the microscope.

Carrying on where we left off (OE last month), the future of financially troubled SeaBird Exploration and its ocean bottom node (OBN) seismic acquisition business remains unclear. An unexpected turn of events, unresolved at the time of writing, has muddied the waters and invites more general questions about how and why companies make the decisions they do.

Last month it seemed to be a betting certainty that Petroleum Geo-Services (PGS) would step up to the plate and acquire the OBN operation. In January this year PGS had signalled its interest by agreeing a strategic cooperation with SeaBird to further develop OBN. The agreement provided PGS with exclusive rights to offer SeaBird's autonomous seabed recording technology at market terms in Brazil in solutions combining OBN and streamers. In return SeaBird gained access to PGS' extensive worldwide marketing network and geophysical expertise and there was an expression of interest in developing further areas of cooperation, such as data processing and use of PGS GeoStreamer technology on SeaBird's 2D vessels.

Most crucially PGS agreed a five year convertible loan of NKr240million to SeaBird with an annual interest of 9% payable in cash or in kind. The loan can at any time be converted into ordinary shares at an agreed conversion price per share until the maturity date. At the time CEO Jon Erik Reinhardsen of PGS said: ‘This agreement enables the two companies to provide a complete seismic offering in deepwater areas, in areas with complex geology, and in areas with heavy infrastructure on the sea bottom. SeaBird is the market leader for nodal seismic operation in deep waters. The cooperation with PGS will further strengthen that position.'

To the outside world this seemed like PGS locking down a future share in the node business which SeaBird has done much to pioneer with successes, albeit sporadic, offshore West Africa, the Gulf of Mexico and the North Sea. The financial commitment could also be interpreted as helping to prop up the heavily indebted SeaBird. That obviously did not pan out as planned because in September SeaBird was compelled to plead for mercy from its stakeholders regarding a default on bond payments and was granted a grace period to produce a restructure plan. In other words something had to give.

Yet PGS did not take up the cue as expected. Instead, it emerges that a white-ish Knight in the form of Fugro has got to the letter of intent stage of buying the OBN business from SeaBird for $125 million. In late October due diligence was in the process so there is no guarantee that the transaction will be completed, something SeaBird will be acutely aware of. Five years ago in acrimonious circumstances it pulled out of an intended deal to buy Global Geo Services (GGS).

Unholy mess

There has been no comment from PGS on the proposed Fugro/SeaBird deal. Its only reaction was to issue a statement that it was withdrawing its two members on the SeaBird board of directors ‘in order to avoid any speculation related to conflict of interest in the upcoming decisions that will be put forward to the board in SeaBird as a part of the ongoing restructuring of the company'. This is basically code for ‘we have got ourselves into an unholy mess of our own choosing, and don't really know how it's going to be sorted out'.

If the Fugro purchase goes through, SeaBird is going to be left extremely fragile and owing money even after the OBN business sale, no matter the brave words from company CEO Tim Isden that ‘SeaBird has an excellent record in the 2D and smaller streamer configuration 3D market, and we will seek to capitalize on our position'. PGS investors must be wondering how the loan to SeaBird is going to be recovered and what will happen to the exclusivity agreement for node operations in Brazil.

A somewhat related question is why PGS has apparently cooled its enthusiasm for SeaBird's node business. It may simply be that the company was not prepared to compete with the 125 big ones being offered by Fugro. In a sense that would be understandable given the outcome of some of the company's recent purchases. The NKr2256 million acquisition of Rieber Shipping vehicle Arrow Seismic did not turn out well when a Spanish shipyard failed to deliver on the newbuild commitments to which PGS had bought into. Then there was the $270 million purchase of MTEM, the electromagnetic technology spin-out from Edinburgh University, proudly described by venture capital investor SEP as the ‘highest price paid by a trade buyer in this sector outside of the US and the second highest ever paid for an early stage technology company in this sector'. Any significant return on that investment is still a work in progress.

More interesting would be if PGS, on closer acquaintance in the last few months, has revised its view of the value of the OBN seismic approach. This could be a technology and/or economic issue. There is no real quibble with the effectiveness of OBN seismic for achieving improved imaging of the subsurface in the circumstances mentioned by PGS CEO Reinhardsen. FairfieldNodal is garnering business for its OBN system, and CGGVeritas recently committed to adding more Trilobit deepwater nodes to its inventory suggesting an expectation of oil company demand.

It may therefore boil down to the specific technique used by SeaBird. PGS may also have been concerned about the operating cost and productivity of SeaBird's current set up and the price tag for engineering a next generation system which was due (for example, SeaBird had plans for a new OBN vessel). It is all speculation at this point.

What, then, is Fugro seeing that PGS doesn't?

Geo Caribbean, part of Fugro's modern seismic fleet.

Any discussion of this should be prefaced with the observation that the Fugro Group knows a thing or two about acquiring businesses. It has tentacles in a vast swath of geotechnical operations worldwide built almost entirely by acquisition. In the seismic area it demonstrated a few years ago that it was prepared to back off if the price wasn't right when it withdrew from a bid battle with CGGVeritas for the Norwegian seismic company Exploration Resources including Multiwave Geophysical (of which a little more later).

Fugro does have the advantage of having been involved in SeaBird's OBN seismic operation for a number of years as a result of its supply of ROVs used for node handling on board the dedicated SeaBird vessel Hugin Explorer. Apart from that, diving into an emerging technology such as OBN seismic seems an unusual move for Fugro. In the marine seismic sphere it has no record of R&D related to seismic acquisition. It has always preferred to buy-in the technology for its vessels, for example solid streamers and advanced navigation and positioning.

So, the $125 million purchase, already substantial, would only be the start of the expense, financial and technical, to maintain the competitiveness of the technology. Also, whatever the proponents of ocean bottom seismic services claim, the demand for both node- and cable-based systems has been sporadic, largely coming from major operators with potentially recoverable reservoirs substantial enough to justify the additional cost compared with the towed streamer alternatives.

Flavour of the month

If Fugro has a hidden agenda, then it might be that the company feels that in certain respects it is falling behind the competition. Along with its main rivals, the company took steps to stay in the hunt by investing in new capacity in the shape of four top-of-the-line 3D/4D seismic newbuilds Geo Coral, Geo Caribbean, Geo Celtic and Geo Caspian. So far, however, it has not come up with a broadband solution to seismic acquisition. This is now the flavour of the month for collecting the best high resolution subsurface data now being touted by PGS with its GeoStreamer GS technique and by CGGVeritas with BroadSeis.

WesternGeco meantime claims comparable results through Q-Marine.

Although it is early days, it is also noticeable that Fugro has not yet got into wide-azimuth seismic projects.

So in both these technology areas Fugro is more on a par with Polarcus, which may lack a long track record but does have a growing fleet of brand new vessels to dazzle oil company clients.

One other passing thought is that Fugro does not enjoy any presence in Brazil, which is one of, if not the hottest markets, for marine seismic services in the world.

There is no doubt that deepwater seismic reservoir characterisation and monitoring solutions will be increasingly required and that Petrobras as the predominant oil company client is open to innovative technology; for example, PGS has a fibreoptic based permanent reservoir monitoring system being installed on the Jubarte field. An OBN seismic offering could offer Fugro a passage into this regional market. However, it is not a possibility on which you would stake too much good money, so this would be more of a potential fringe benefit for Fugro.

Of course it is not actually realistic to analyse the latest manoeuvering over SeaBird's OBN business simply in terms of the geoscience arena alone. There is much more to it than that because public companies such as SeaBird, Fugro and PGS are accountable to their shareholders and that means their management have to take care of a whole other business.

It sometimes feels that there are two parallel universes. One world (most employees) is preoccupied with all the activity involved in research, producing and marketing of impressively sophisticated equipment and services for seismic and related geoscientific activities. But senior management also has to deal with another world, that of the company stakeholders, where return on investment is basically the only criterion. This means that the company has to continuously construct as positive a narrative as possible about its operations. There is also unrelenting pressure to perform and to grow. This is obviously not a phenomenon exclusive to geoscience companies, it's how business in a free market operates. But you have to wonder how such pressure affects acquisition and many other decisions, not forgetting that top management is invariably incentified to increase profit and expand a company's operations.

Coming into the seismic business at the ground level illustrates how the world changes for a young company. There are plenty of examples in the past decade or so of small companies run by bright geoscientists with a new technology or service that experiences early success. Names such as Electromagnetic Services (EMGS), Offshore Hydrocarbons Mapping (OHM), MTEM and maybe Reservoir Exploration Technology (RXT) spring to mind (Norwegian seismic companies such as Multiwave Geophysical and WavefieldInseis do not really come into this category as they were conceived as investment vehicles from the start). Lack of capital turns out to be a frustration for these fledgling companies, so the logical step is to bring in investors. Now the aim is to grow sufficiently – and rapidly – to justify an IPO launching the company onto the stock market, or attract a takeover by a major player so that the investors can get their money back. By then a whole business apparatus has ballooned around the management in order to comply with all the rules and regulations involved. The character of the company inevitably changes. Quite often the original management are replaced by those better qualified to deal with this bigger financial world.

The bottom line

Quarterly results and other live presentations by public companies available on the web demonstrate the kind of dialogue to which senior management have to be accustomed. Question time at the end is devoted to inquiries from financial analysts who, if the truth be known, show up to assess whether the company's stock is worth promoting. Their emphasis is on EPS, EBIT, ROCE, gearing, debt ratio, not on geoscience, and companies are notably circumspect in their responses. They have to be, these guys have the power to affect stock prices. Yet judging from some of the questions, their understanding of the seismic business is often less than stellar. But, from their perspective, that is not so important, the numbers are what matter.

It is an interesting exercise to place some of the high profile acquisitions in the marine seismic business of the last decade or so under the glare of the analyst's gaze and assess their value. As you would expect there have been hits and misses.

For example, has CGG reaped the rewards from its merger with Veritas DGC followed by the purchase of of Multiwave Geophysical and WavefieldInseis? It certainly enlarged the company's marine seismic fleet to become the biggest in the world, but has subsequently involved the company in some major additional investment to standardise the vessel operations and done nothing to reduce its debt. Was that worth it?

Did WesternGeco get all it wanted from buying Eastern Echo, a company still at the planning stage in its aim to build a fleet of new vessels? Looking back it enabled WesternGeco to jump the queue for construction of new vessels and at the time that seemed to be a benefit worth paying for. Arguably the jury is still out on just how efficient the innovative Ulstein XBow design adopted by Eastern Echo and subsequently followed by Polarcus for its fleet and by CGGVeritas for two vessels proves to be.

More recently, the industry is still puzzled by the TGS decision to buy Stingray, a would be supplier of fibre optic based seismic permanent reservoir monitoring systems. It has no obvious connection with its multiclient 3D operations, which count as the single most successful business of the last decade in this sector of the industry.

PGS and Fugro have still to tell their shareholders a fuller story behind their respective strategies regarding SeaBird, so we cannot rush to any final judgements. In a sense we are witnessing with SeaBird the unravelling of one small company, but it is providing a fascinating insight into how the bigger players think. OE

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