Lamprell plc

Source: Stock Market Digital

Date :06/09/2007 17:04:52

The right place at the right time: How lamprell sustains the structures of the oil industry

Since its foundation 30 years ago Lamprell has grown to become the leading name in drilling facilities maintenance in the United Arab Emirates. Following its flotation on the AIM market of the London Stock Exchange in October 2006 it is increasing its capacity for refurbishment and new build projects to service a buoyant market

Written by John O’Hanlon & Produced by Kiron Chavda

When Steven Lamprell and other members of the Lamprell family went to Dubai in the late 1970s, he was motivated by the shortage of engineering services for oil companies operating in the region and within ten years the company was able to offer full-scale refurbishment of jackup rigs. Since then it has completed more than 100 rig upgrade and refurbishment projects, establishing itself as a world leader in this area of the oil services industry. Over a 32-year period, Steven Lamprell has presided over the Group's emergence as an increasingly important player in the Arabian Gulf in providing services to the offshore oil industry. He is still actively involved following the public listing of the company, in the role of company President.

In the late 1990s, largely driven by customer demand, Lamprell began to diversify into the new build construction market for the offshore oil and gas sector. Initial projects included the fabrication of calm buoys, mag anchors and calm buoy turntables. Thereafter Lamprell successfully took on increasingly complex fabrication projects, including the construction of FPSO process modules and major external FPSO mooring turrets.

These later projects, together with Lamprell’s jackup rig refurbishment work, demanded more space and Lamprell decided to expand its operations to a purpose built facility in Jebel Ali Free Zone, Dubai. This facility was completed in 2002 and has since been further expanded in response to growing demand. In 2005 it completed its Oilfield Engineering Facility at Jebel Ali, with the capacity to undertake five major land rig upgrade and refurbishment projects at any one time.

Today Lamprell has two further locations in the UAE. The Sharjah facility at Port Khalid, where most of Lamprell’s jackup rig upgrade and refurbishment projects are executed, together with a 50,000 square-metre yard in the Hamriyah Free Zone. This is a temporary solution to provide the Company with enough capacity to undertake new build projects until its permanent facility now under construction at Hamriyah, is completed in early 2009.With all this experience under its belt, it is not surprising that Lamprell has developed close relations with its clients, the giants of the global hydrocarbon industry, including, currently, SBM, Saipem, Nabors, NDC, Diamond Offshore, Ensco, Noble, Transocean, British Gas, Kvaerner and FPS Ocean. Repeat business is a very important component of Lamprell’s order book and quality, timely delivery and price are key drivers in keeping these key customers on board.

On the 16th October 2006 Lamprell became a public company and was admitted to the London AIM market. “This was the most dramatic event in the evolution of the company to date,” commented Lamprell Chief Executive Officer Peter Whitbread. “It presented us with great opportunities for further expansion and the development of Lamprell.” The flotation was the culmination of a very successful year, in which the company outperformed its projections for the year. “With this new corporate structure, with our strong order book and our blue chip client base we are well placed to take advantage of the buoyant oil and gas market. This highly active market shows no signs of easing off for some considerable time to come. So we are looking forward to a long term period of high drilling and construction activity. Lamprell is very much a company which is in the right place at the right time, and we can say with confidence that we are looking forward to another successful year ahead,” he commented at the time.

So what did the listing achieve for the company that it wouldn’t have achieved anyway, I asked him? A lot of it was about putting Lamprell on the map, he says: “It has raised our profile in the industry as a whole as to the commercial strength of the company. The whole structure of our business is a much more open book, and one that has been very positively received by the market. I should say, in fact, that I have been impressed by the amount of positive feedback following the float. People are very much more aware of the Lamprell story.”

Chief Operating Officer David Moran is more excited about the immediate fact that it has made Lamprell more attractive to potential employees at a time when experience and training is at a premium in the industry. Readers in the oil and gas industries will need no reminding that the best people are becoming scarcer as the industry expands and companies have to attract them or grow their own talent. Lamprell is doing both, says Moran. “By being a listed company you suddenly have this new currency of share options. And also the very fact that you are quoted means that people have the opportunity to take part in the business not only through their share options but through their own investments. Having an equity stake in what we do has been perceived as a very positive thing not only by the management team but also by the more junior levels of staff to whom we have also issued share options.”

Apparently the listing was more about the maturity of the company, a stage on the road to a full listing on the main market, than about raising capital for expansion. All that would have happened anyway, and the high profile contracts that Lamprell announced this year were not in any way contingent on Lamprell’s status as a PLC, says Peter Whitbread. “But it has helped our capacity to carry out those projects,” confirms David Moran. “We recognised that we were heading towards capacity utilization as far as our land area was concerned. Land area and quayside access are a critical issue for our business. However the upside of that was that we had to become very innovative in maximising the use of the available space.” He calls it footprint utilisation – making sure that the ‘slots’ in the yard are booked well in advance, with the co-operation of the client, so that there is minimum downtime, and the rig is being worked on all the time it is there. This is possible in the present market climate, he says, and it enables Lamprell not only to fill its order book but also to make sure its projects are fitted in end to end.

This is where it really helps to have so many repeat projects from the same clients, says Whitbread. “They support you in the process. A good example, though just one of many, is the FPSO market leader SBM. We are completing several large projects for them and began another at the beginning of this year – certainly the listing did us no harm in their eyes, but once again personnel is a significant factor because one of the key drivers is maintaining the execution of the projects that we undertake, and we have to be able to devote the project managers and trained operatives to deliver the job.”

Locating the work

Though oil rigs are such large structures, it becomes apparent why land and quay space is so vital when you realise that at least 96 percent of Lamprell’s operations are carried out at its three facilities in the UAE, very little on location. “We do a limited amount of upgrade work outside of the region, but as an exclusive service to certain customers where we feel very comfortable with the operational arrangements there,” says Whitbread. “For example we are carrying out the refurbishment of a unit in the Black Sea at the present time for a Romanian company. In this case we build the large steel structures, the drill floor and cantilever, here in Sharjah, then ship those to the Mediterranean, and work in a temporary yard there by sending over project management and certain key personnel, but using mainly local skills to carry out the project. It is quite a difficult exercise. We feel that we can add value more effectively by carrying out the activities in our own facility though.”

The same thing holds for new build work, he adds. “For example we have just finished a very large structure for British Gas in India, which was built at Jebel Ali. In total 5,000 tonnes of process topsides were built here, but were installed in India, so though we have both new build clients and rig refurbishment clients, the focus is on our facilities here. We are really confident that we are in the best place to service the needs of the global industry.”

The myth of growth constraints

The management team at Lamprell is acutely aware that the oil and gas sector is cyclical, and that it is currently on a growth cycle. And Lamprell does intend to grow. The demand seems to be strong across the market, says David Moran. “We’re seeing a lot of demand across all the key areas of activity; from those on the refurbishment side of things and from the operators of onshore and offshore drilling rigs, and of course the FPSO business and also in process modules for different structures. We are expanding the business organically in all three of those key areas because we expect to see that level of demand holding up for many years to come.”

Peter Whitbread agrees that the market will rise for at least five years more. “There’s increasing demand and not that many new facilities coming on stream, so everyone’s pretty busy at the moment.” His estimate is that the operators in the Persian Gulf alone are six rigs short on their operational requirements, a state of affairs they have been living with for some time. “There’s been a shortage this year, there’s a shortage next year, and there will probably be a shortage in 2009, so there’s an ever-expanding level of operational activity here, and there are not that many yards that are able to meet that demand!”

Hamriyah

This upswell of activity was predictable, which is why Lamprell planned two years ago to increase its acreage and quayside footage and to establish a new fabrication yard at Hamriyah. “We foresaw the huge amount of additional demand in the region,” says Peter Whitbread. We saw our clients’ long-term plans for a great number of additional rigs coming to this region, and we saw that for us to grow ourselves, we would need to develop the company further. We needed to make some sort of commitment to a larger facility that would give us the capacity to meet all of the clients’ requirements and expansion that we were recognizing. It was at that point that we made the commitment to go to Hamriyah, and I have to say that everything that we see now reassures us that we made the right decision.”

The temporary leased yard keeps the existing work going; the new site under construction will allow a step change, though, to a fuller portfolio of work. “It’s going to give us the capacity to do some different things. Though we build process modules that can be integrated onto FPSO tankers, we don’t have the facility to bring tankers alongside to install the modules at present. When Hamriyah is ready we will have the ability to do that type of enhanced work ourselves. But across the board we can see that there is going to be a long-term major application for all of the services we are going to be able to offer at Hamriyah.”

The $50 million investment committed to Hamriyah will go to equipping the site with the necessary steel cutting and welding equipment. The processes will be automated and computer controlled where possible, according to David Moran, to further cut the lead time for project completion. “It is very much an expansion of what we have in Jebel Ali.” I think that at Hamriyah it’s going to be a possible to have many more automated processes. This is the kind of thing we already do at our Sharjah facility, but by having a lot more computer controlled equipment, particularly steel welding, we can significantly increase the amount of work we do, and improve the quality control at the same time.”

Phased entry to new markets

As a matter of policy, Lamprell held off coming into the offshore jackup new build race, but not because it didn’t think it could do the job. “There’s probably nobody in the world who has greater familiarity with what it takes to build and commission rigs than we do,” says Peter Whitbread. “We’re bringing that skill base with a high level of confidence to the new build market. Many people have been asking us for years why we didn’t start building new jackup rigs sooner. There were a number of reasons. One of them was that we only wanted to enter the market when the pricing level was sensible, as it is right now. A lot of people entered this business very early on at the wrong prices with the wrong level of skill base and expectation for delivery, and they have suffered quite considerably. We were more cautious and realistic. We feel that we have entered at the right time, with all the right skills and tools available to enable us to deliver structures significantly faster than any competitor.”

The ability to deliver fast is vital to Lamprell’s strategy, so keeping slots open against customers’ schedules means that it can steal a march on its overstretched competitors, says David Moran. The company is currently celebrating its first venture into this business with the confirmation on July 26th of a contract to supply a LeTourneau Super 116E jackup drilling rig to Scorpion International Ltd., to be delivered at the end of the first quarter of 2009. It is setting itself quite a challenge here. A new jackup drilling rig normally takes some two years to construct from scratch, but Lamprell is confident that it can have the rig ready for commissioning in less than 20 months. Scorpion is a new client, and clearly is satisfied that Lamprell can deliver as promised - in addition to the award of the first unit, options have been agreed for a further four units which can be exercised over an 18 month period from December 2007.

How is this going to be done in the time? Don’t look for anything too radical, says David Moran. “The industry is very conservative, and the LeTourneau design is one of the most tried and tested in the offshore drilling industry accounting for a third of the world’s rig fleets. In the drilling industry there is a great preference for using already proven technology, and there is a corresponding reticence about trying completely new technology. A lot of what we do is about improving on productivity; small gains as opposed to using radically different technology.”

There is a global shortage of jackup rigs. The design and basic structural components for the new build Lamprell rig are obtained from LeTourneau Industries, and the rig customized and built by Lamprell around these components to the customer’s specification. When completed the rig is towed to its operating location and literally’ jacked up’ till it stands on the sea bed. Lamprell is making use of its existing skills and experience in the repair and refurbishment of land based rigs to have started building new land rigs as well, targeting the important markets of the Middle East, especially the Kingdom of Saudi Arabia.

The supply chain

By choosing the Le Tourneau design, and forming an alliance with LeTourneau Inc, the new build supply chain is relatively easy to manage. “In the current marketplace, the drilling equipment tends to be what you might call the long lead items, but LeTourneau itself supplies much of this equipment,” says Peter Whitbread. “We have a very strong relationship with them and, I’d like to think, a degree of preference and support which enables us to avoid these supply chain bottlenecks.” Making sure that deliveries are made in time will of course be crucial to the successful execution of the Scorpion contract.

However Lamprell has been in the business a long time and has long standing relationships with all the key suppliers. “We tend to source material and components from a well established group of equipment and material suppliers, and we get a lot of support from them even though the whole oilfield supply chain is going through a period of extremely high demand,” says David Moran. “We remain very focused on their capacity to supply us as well during this level of high activity, so a lot of dialogue takes place. I think we have managed that process extremely well to date, however we recognized at an early stage that the provision of equipment was a key factor in maintaining our aggressive schedule and we brought the suppliers in at an early stage in the contract and scheduling process.”

As an example, he cites one of the most important new contracts announced this year, the construction of two jackup lift boats for the Great Yarmouth, UK-based company Seajacks International. The first of the special purpose four legged self-propelled jack-up units will be delivered in 2009, and are worth $112 million each – if options for the three additional units are taken up the entire deal would be worth $560 million. Winning these contracts took a lot of planning, says Moran, and a key part of the process was establishing that all of the equipment deliveries were verified with the suppliers. “We had an existing relationship with most of them, and in other cases we audited the company’s capacities and track record. Now it is up to us to make sure that orders are placed in a timely way and monitoring the lead times as we go.”

From an operational point of view, watching the performance of the suppliers is particularly important at the moment – the expanding market means that they also have full order books, and as David Moran points out with some understatement: “We are in contracts where delays could significant financial implications for both ourselves and our clients, so we are very sensitive to the need for guaranteed delivery dates both from our suppliers and for what we as the prime contractor are manufacturing!” However Lamprell has won these contracts on its track record for good supply chain management and reliable delivery and it is this, as much as the overall price, that gives clients the confidence to award these major multiple projects to Lamprell.

One of Lamprell’s most significant reference legacy contracts, and one that illustrates its supply chain, project management and delivery capabilities extremely well was for a SBM / Siemens Consortium, which ordered three gas compression barges for its operations in the Kashagan oilfield in Kazakhstan. This is the biggest oil and gas development in the world and calls for large scale equipment. “Flash gas compression units are found on FPSOs, and there they tend to be small modules,” says Moran, “but the Kashagan project is on such a scale that they take up a whole barge – we are building three of these units, but when the whole complex is put together it will comprise 35 barges all hooked up to provide what is essentially just one processing unit.” It’s been a great selling tool, agrees Whitbread.

IT systems

The materials procurement process has become even smoother since Lamprell implemented a MatriX materials management system from Absolute IT, an independent business and technology solutions provider in Dubai. In fact the partnership dates back more than eight years now with Absolute upgrading the systems continuously and providing all the user training to Lamprell’s staff. “We are on site two or three times a week,” says Absolute’s Managing Director Michael Jamieson

The materials procurement process is now managed and controlled by using ProcuremaX with other MatriX systems assisting in most areas of the company’s business and operational processes. These include EstimaX (estimating), QuantimaX (material take-off), ControlmaX (project material control) and StockmaX (inventory and stock management).

More recently the company purchased a 3D modelling system called ShipConstructor. This is the dominant AutoCAD-based 3D product modelling and production planning software for the marine industry. “We have spent a lot of money on IT over the years to enhance our engineering and maximise efficiency in the yard,” says Moran. “We’re building up a very strong commercial contracts function within the business. A key driver for that is the fact that on our rig refurbishment contracts a lot of the work is through variations and change orders and one has to be very flexible and very quick to incorporate these changes in terms of developing pricing, engineering and execution.” Finally, he says, the commercial invoicing and other factors relating to projects also have to be very flexible to accommodate these change orders.

While Peter Whitbread is reluctant to discuss details of the new contracts that are being discussed at present he is confident that the order of the day will be continued growth over the coming several years at least. The market is very buoyant, and the order book is looking healthy over that period regardless.

The policy for the next three years will be sustainable organic growth, confirms David Moran. “Having seen fairly aggressive growth between 2003 and 2006 we have made no secret of the fact that we see growth happening at a more level pace than previously. Any company that expands rapidly needs to draw breath and consolidate its position. We now see the need to have a period of consolidation to support that next phase of growth.”

The management team, he adds, is seen as being relatively risk averse. “Having just come to market as a public company we want to be seen as a company that under promises and over delivers. We’d rather the investment community and our shareholders regarded us as conservative than radical; bear in mind that this business has grown entirely without the use of debt and purely from the use of reinvested profits from earlier years. We still don’t envisage the need for debt at this point in time, though that option is always open to us if future projects justify it.”

He also considers it very important to the business going forward that the major projects taken on recently, like the 116E rig or the Seajacks contracts don’t dwarf the other parts of the business. It would perhaps be seen as risky to commit the entire business to jackup rigs, for example, as demand for which has been cyclical in the past (however the world’s largest offshore drilling contractor Transocean expects demand in the Middle East to exceed supply until 2009 at least).

Succession matters

Early in 2009 Peter Whitbread will be handing over the job of CEO to David Moran, completing a handover process that has been planned and underway since before last December’s IPO. It is not exactly a seismic change. Whitbread will become Executive Chairman and will continue to be very active in developing new client relationships. “In truth it’s not going to make such material difference; most of my interests are going to be focused round business relationships, marketing and developing the company’s activities, and the job of CEO is really just an added element to what he’s currently doing.”

However for David Moran, though he makes light of it, it will perhaps be a relief to have just the one job to do. An accountant by training, he was Lamprell’s CFO until 2004 when he was given the additional role as COO, responsible for the operational, finance and administration aspects of the company. However during the IPO process, it was a significant strain to manage both roles. No wonder he can say: “Life has actually got a lot easier for us since we made the appointment of Scott Doak as our new CFO in March this year! Scott has been with us for nearly four months now and has proven to be an extremely effective asset. We are very confident not only that we made the right choice, but that we found somebody who can be involved in the growth of the company for the longer term.”

“Clearly it was part of our succession plan to put in the right personnel at a senior level to support the growth of the company going forward. Bear in mind that Peter and I have worked together as a team now for nearly fifteen years, since Lamprell was a very small company – when we joined in 1992 turnover was less than $10 million, and in 2006 it had grown to $329 million. We’ve both been with the company as it’s grown and these moves are just a natural extension of our work as a team with myself as CEO and Peter as Chairman.”

Whitbread and Moran have been working together to strengthen the management team as a whole. Chris Hand, formerly commercial manager and the architect of the office IT system, was promoted to Vice President this year, creating space to bring in younger managers as the organisation develops. The eventual move to a full listing on the LSE should be a seamless affair, very much less taxing than the flotation on AIM, says Peter Whitbread. “People often say ‘you only do it once!’ I think that is very true. But when you come out of it you find yourself in a very positive environment. The feedback we had from investors, shareholders and analysts has been very positive. Neither of us had any experience in running a public company but so far I think we seem to have got it just about right. Our clients are quite a demanding bunch as I’m sure you know, and they would certainly let us know if we weren’t doing things right.”

The next move will not be long delayed, he indicates. “In our AIM admission document we made it clear that we would be moving up to the main listing eventually. I don’t see that as being anything like the initial IPO. We have a very strong Board of Directors with a lot of experience, especially people like Peter Birch and Nigel McCue who have extensive experience in public companies; part of their role is to guide us in putting all the right building blocks in place and making sure the transition takes place very smoothly. We’re confident that by the end of 2008 we will have moved up to the main list.”

Peter Whitbread will be just as busy as ever, giving the clients the attention they expect and gaining new ones for Lamprell. As we spoke he had just returned from Singapore and India which had, he said, gone very well. “The great strength of the company has been that we have always given a lot of support to our clients, keeping close to their projects and making sure that we are available when they have problems to discuss,” he reflects. “When we were a small company and had two or three drilling companies in our client base it was a lot easier to give them a lot of attention and still do your day job. Now we have the entire drilling community, and most of the FPSO community on our books, and their expectations from us are very high. It seems though to make a lot of sense to focus on what I like doing anyway!”

Finally, Peter admits that while going public affected perceptions more than operations, it certainly had an impact internally. “As a private company with just one owner we didn’t have any major reporting lines at all, David and I just used to discuss what we wanted to do and then get on with it. The public responsibilities that are now placed upon us are very time consuming. What really hit us was the sheer workload associated with doing what we’re doing now. The accountability, discussions with analysts, investors and the banks, the annual reporting and all the procedures associated with being a public company are a huge additional work burden which is suddenly thrust upon you.” You get the impression that he will not be sorry to hand much of that over to David Moran!