Fugro announces: Limited effects of crisis, same dividend

Monday, Mar 08, 2010

Business development
The financial crisis has led to a world-wide stagnation of economic growth, and Fugro had to mark time in the year 2009 after five years of strong growth in revenue and profit. In the financial year 2009 both revenue and profit reduced slightly compared to the previous year. During the year market circumstances drastically changed.
The sharp fall in the price of oil in the beginning of the year led to reduced spending in the oil and gas sector, which is important to Fugro. Other sectors in which Fugro operates such as mining and large infrastructure were also affected by the economic downturn. In particular Fugro’s exploration related activities were impacted as clients chose to rapidly adjust their spending on such work. 

Fugro has reacted to the changes in market circumstances with strict cost control and, where needed, adjustments in capacity. This has resulted, notwithstanding increasing price pressure in the course of the year, in the net profit margin being almost maintained. The net profit margin in 2009 is 12.8% (2008: 13.2%). 

All three divisions were profitable. However, the Geoscience division, which includes exploration related services, saw a noticeable decline in profitability. The Geotechnical division and Survey division were largely able to mitigate the effects of changed market situation. 

While dealing with the short-term challenges, Fugro’s healthy financial position has enabled the company to maintain its plans for growth in the medium term. This is reflected in the continuation of the scheduled renewal and expansion of the vessel fleet and ROVs. In some cases, as in the marine seismic activities, the planned state-of-the-art capacity expansion will offset the expiring charters of some vessels.

During the year several complex projects, often involving several business lines, were successfully completed, both onshore and offshore. 

Around 75% of company activities are related to the oil and gas industry. With its broad range of services, Fugro is involved in many phases of the life cycle of oil and gas fields. Fugro’s growing involvement in the maintenance of (complex) subsea facilities constructed by the oil and gas industry will have a positive effect on Fugro in future. Fugro is also active in the infrastructure (approximately 18% of revenue) and mining sectors (approximately 3% of revenue). The remaining 4% of revenue comes from other market segments. 

Outlook
The oil and gas industry is Fugro’s most important market sector, representing a 75% share of the company’s revenue. The price of oil as such has no direct influence on the services but can certainly affect the behaviour of Fugro’s clients with regard to their investments. 

The worldwide recession led to a slowdown in the demand for oil and gas in the second half of 2008 resulting in a sharp drop in the price of oil from peak levels of USD 147 per barrel during mid 2008 to below USD 40 per barrel in the early part of 2009. With the world economy slowly crawling out of the recession, demand for oil and gas is gradually being restored, resulting in a recovery of the oil price to around USD 75 per barrel at the start of 2010. The oil and gas industry responded to these developments in 2009 with cost cutting and deferral of projects resulting in a reduction of the global E&P investments of some 15%. External reports indicate that these investments will increase in 2010 by over 10% to about USD 440 billion, not far short of the peak in 2008 of USD 450 billion. This increase is based on a forecasted average oil price of USD 70 per barrel, versus an average price of just over USD 58 per barrel in 2009, and around USD 68 per barrel in 2008. The indications are that the NOCs (National Oil Companies) will increase their investments and that companies which slowed down their plans in 2009 due to reduced cash flows are now also expanding their activities. A relatively strong increase is expected in the spending on exploration work such as marine seismic, which was one of the segments that saw a rapid decline in demand when the crisis started. 

The investment horizon is an important issue and must take account of the fact that for new larger offshore oil and gas fields, the time that passes between the decision to develop a field and the actual start of production is several years. Worldwide, the decrease in production from existing fields through depletion is 6 to 8% annually. 

Considering the lead time required to put new fields into production, the need for continuous investment in production capacity has not been greatly affected by the current economic situation. Fugro’s involvement in the subsea servicing of installations (inspection, repair and maintenance or IRM) has gradually increased over the last few years and these activities are less sensitive to oil price fluctuations. 

The main part of Fugro’s services to the oil and gas industry are provided by Offshore Geotechnics, Offshore Survey, Subsea Services, Information Services and Seismic Services. 

In other segments where Fugro is active, like larger infrastructure projects, there are indications of the start of a recovery during the course of the coming year, partly supported by stimulus programmes by governments, as in the United States. These activities include transportation projects (such as roads and ports), coastal protection, pipelines and water management. The onshore and nearshore geotechnical activities, as well as aerial mapping activities in Geospatial, are involved in this. The decentralised organisational structure, with local operating companies, enables Fugro to respond quickly to changes in demand for infrastructure services that have a national or regional character. 

Due to the sharp fall in prices for minerals and the heavy dependence of smaller clients on external financing for projects, a strong decline in the demand for mineral exploration services occurred in 2009. This decline was partly compensated by applying survey methods that were developed for the mining industry to search for oil and gas. The demand for surveys to locate new mineral resources is expected to recover only slowly. 

In addition to the influence of aforementioned uncertainties in market developments, the exchange rates of the US dollar and the British pound compared to the Euro are important. The larger parts of Fugro’s revenue and cost are in the same currency. However, the translation to Euro’s could be of influence on the reporting of results, which is in Euro’s. Furthermore, political instability can lead to stagnation of projects. 

The economic developments over 2009 resulted in less tension in the labour market and more manageable costs of services by third parties, such as transport of equipment and short-term charters of vessels. 

As there is still uncertainty about the duration of the worldwide recession and the pace of recovery, Fugro continues with measures to control cost such as:

-       restrictions on new investments, unless profitable in the short term or strategically important;

-       flexibility in hired capacity, such as chartered vessels and freelance staff;

-       further optimisation of operational efficiency.

In 2010 Fugro will fully benefit from the cost reduction measures taken in 2009. 

When the recovery of the world economy gains further momentum, the sectors on which Fugro focuses, in particular those of energy, construction, transport, minerals and water, should soon start to offer good opportunities for further growth. 

Expansion and broadening of activities through acquisition will remain part of the strategy. More realistic company valuations than has been the case in some sectors in recent years may enhance these opportunities. 

Based on recent developments there are signs of a gradual improvement in some of the market sectors in which Fugro is active. This is supported by some increasing tender activity for exploration work for oil and gas at sea and a somewhat improving backlog compared to the situation during the last part of 2009. This would indicate that there are less uncertainties than a year ago, but we are starting the year 2010 with a lower backlog and in a tighter pricing environment. Also the relative harsh winter in the northern hemisphere has delayed construction related work in some countries. 

In 2009 Fugro produced record first half year results on the basis of the backlog roll-over from 2008, partly still at pre-crisis rates. It is unlikely under the present conditions that this can be matched in the first half of 2010. We expect that both revenue and net profit margin will be somewhat lower over the first half of 2010 compared to 2009. 

In view of the continuing uncertainties and volatility in market developments and the short-term nature of a number of our projects, as in previous years, we will first publish a quantitative forecast for the entire year in August 2010, at the time of the publication of the 2010 half-yearly report.

Source: Fugro