KCA Deutag Q2 2014 Investor Presentation Deutag Q2 2014... · whose possession this presentation...

www.kcadeutag.com

KCA Deutag is a leading international drilling and engineering

company working onshore and offshore with a focus on safety,

quality and operational performance

Second Quarter 2014

Investor Presentation

Disclaimer

1

The distribution of this presentation in certain jurisdictions may be restricted by law. Persons into whose possession this presentation comes are required to inform themselves about and to observe any such restrictions.

This presentation contains forward-looking statements concerning KCA Deutag. These forward-looking statements are based on management’s current expectations, estimates and projections. They are subject to a number of assumptions and involve known and unknown risks, uncertainties and other factors that may cause actual results and developments to differ materially from any future results and developments expressed or implied by such forward-looking statements. KCA DEUTAG has no obligation to periodically update or release any revisions to the forward-looking statements contained in this presentation to reflect events or circumstances after the date of this presentation.

2

Agenda

1 Key Highlights

2 Commercial Developments

3 Business Overview

4 Group Results

5 Summary

Q2 Key highlights

KCA Deutag is a leading international drilling and engineering company working onshore and offshore with a focus on safety, quality and operational performance

1Group revenue and EBITDA of $540.9m (Q2 2013: $547.5m) and $89.0m (Q1 2013: $62.6m) respectively, driving improved LTM EBITDA of $350.4m

2Improved operational and financial performance from Land Drilling, RDS, Platform Services and MODUs

3 Strong quarter for new contract wins across the Group

4Contract backlog of $8.9bn (as at 1 August 2014) across a blue chip customer base

5Significant year-on-year reduction in Net debt/LTM EBITDA leverage – from 5.0x at Q2 2013 to 3.6x by Q2 2014

3

Integrated Land Drilling Offshore Drilling Services & Design

$187m LTM EBITDA (54% of total)¹ $160m LTM EBITDA (46% of total)¹

Land Drilling Bentec Platform Services Rig Design Services (RDS)

• Leading international premium drilling rig owner and operator

• Design and manufacture of high-end premium land rigs and components

• Leading global platform service operator outside North America

• Rig design engineering from concept to commission

• Operations: Russia, Africa, Middle East, Europe and SE Asia

• Facilities: Germany, Russia, Oman

• Operations: UK North Sea, Norway, Azerbaijan, Russia, SE Asia and Africa

• Offices: Aberdeen, Baku, Bergen, Houston, London

Market-leading international drilling & engineering company

4

Design &

Engineering

Design &

ManufactureOwn & OperateOwn & Operate ManageManage

• Rigs: High end fleet of 52 drilling rigs, 4 workover rigs

• 94% of new rigs since 2007 have been built by Bentec

• Facilities: Capacity for 12-16 rigs and 50 top drives p.a.

• Staff: c.3,230 managing drilling operations on 39 platforms

• Approx. 60% ofplatforms designed or refurbished by RDS

• Staff: c.880 engineers and support staff

¹ LTM EBITDA pre-exceptional items, excluding MODUs and prior to allocation of central overheads. EBITDA by segment for 2013 has been re-presented to reallocate support costs which were previously shown as central overheads (such as HR, Supply Chain and IT costs) to the operational business segments. 2014 figures are presented on the same basis.

5

KCA Deutag’s integrated offering - from concept to production

• RDS’s offering was supplemented by a team of drilling operations personnel from Platform Services in 2011

- Rig Manager, Toolpusher and Maintenance Supervisor were all part of the FEED

- The Driller assumed his permanent role in Canada during the last stages of Detailed Design

• Drilling operations contract was awarded to Platform Services in 2014 and has two phases:

- Phase 1 (3-4 years) – drilling operations input into construction and commissioning

- Phase 2 (minimum of 8 years) – drilling operations

CLIENT CONCEPT FEEDDETAILED

DESIGNCONSTRUCTION

SUPPORTCOMMISSIONING AND START-UP

ExxonMobil ��

• RDS’s involvement on Hebron project:

Europe (inc

North Sea)22%

Russia19%

Africa19%

Caspian 12%

Middle East 10%

SE Asia9%

Other9%

Houston

Ben Loyaljack-up rig

Baku

London

Stavanger

Bad Bentheim

Tyumen

Nizwa

Ben Rinnesjack-up rig

St. Johns

Bergen

Dubai

Land Drilling Platform Services RDS offices MODUs BentecRegional offices

Continued strong market position and balanced portfolio of assets across highly attractive international markets

Aberdeen (HQ)

1LTM EBITDA excludes results from the Ben Avon jack-up which was disposed of in March 2013 and is stated before normalisation adjustments and excluding central overheads of $53m.Map excludes work over land rigs, defined as being below 900HP.

PRESENCE IN KEY AREAS

North Sea /Norway25 Plat.

Europe & Caspian8 Rigs

Caspian7 Plat.

Russia15 Rigs

Middle East

12 Rigs

Angola3 Plat.

Africa16 Rigs

RussiaSakhalin3 Plat.

Brunei 1 Rig

Myanmar 1 Plat.

126

55 5040

15

0

30

60

90

120

150

Europe NorthAfrica

MiddleEast

North Sea Russia

Ye

ars

LTM Q2 2014 EBITDA split by region

6

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

TR

IR p

er

200,0

00 m

an

ho

urs

Total Recordable Incident Rate Improvement

TRIR (average)

7

Health, safety and environmental performance

Jun-14

KCAD TRIR at end of Q2 2014 was 0.471 injuries per 200,000 man hours worked

IADC industry average 0.812 for 2013

1 Total Recordable Incident Rate per 200,000 man hours. This is a rolling 12 month average.2 KCAD Total Recordable Incident Rate is directly comparable with IADC’s Total Recordables (RCRD) statistic. IADC figures are annual and are not released until after year end, therefore no 2014 information is available.Note: IADC stands for International Association of Drilling Contractors.

• Sustained progress made on improving TRIR performance

• Several milestones reached during the quarter regarding LTI-free periods of up to 10 years

Significant new contracts – Land, Brunei Shell Petroleum (BSP)

8

Contract natureContract for the construction and operation of a new build land rig in Brunei, with design and fabrication of the rig to be undertaken by Bentec

Contract length & timeframes

Drilling expected to commence late 2015

Customer BSP

“This new rig for BSP is very high profile within Brunei. Given the desire for best in class drilling efficiency and safety, we are extremely excited to be partnering with BSP on this project and continuing to deliver world-class performance. This is a very significant land drilling contract for KCA Deutag and I am especially proud of the many employees and functional teams that contributed to its award. Drilling is expected to commence in late 2015.”

Andy Hendry, President of KCA Deutag’s Land division

Significant new contracts – Land, Russia

9

Contract natureContract for the construction and operation of a new build land rig in Russia, with design and fabrication of the rig to be undertaken by Bentec


Drilling expected to commence in H1 2015

Customer Top ten Russian oil producer

“This contract win is particularly pleasing for us. It not only expands our operations in Russia but further cements our position as a leading global premium land drilling contractor.”

Andy Hendry, President of KCA Deutag’s Land division

10

Contract natureContract to carry out front-end engineering design (FEED) work on Statoil’s Johan Sverdrup development in the Norwegian North Sea

Customer Subcontracted by Aker Solutions, for Statoil

Contract value $10m

“We look forward to delivering a safe, efficient and cost effective solution for Statoil’s Johan Sverdrup development, whilst building a long term relationship with both Statoil and Aker Solutions. This will be the fourth major Statoil project we are currently working on from our London office. We have developed a strong relationship with Statoil through the high quality of Greenfield projects delivered in London and our strong focus on project execution from our offices in Norway.”

Simon Drew, President of RDS

Significant new contracts – RDS, Aker Solutions / Statoil

Significant new contracts – RDS, Wood Group Mustang / Statoil

11

Contract natureContract to carry out pre-FEED work on Statoil’s proposed Snorre C Tension Leg Platform (TLP) in the North Sea


Team of 15 - 20 engineering and management personnel at RDS will work on the Snorre C drilling facility design for the next five months

Customer Wood Group Mustang

“We are extremely proud to be selected by Wood Group Mustang in the early stages of this key development. This Project builds on our workload of Statoil Projects and strengthens our portfolio of TLP rig designs. We look forward to applying our experience and collaborating closely with Wood Group Mustang and their customers and partners to meet the goals of this phase of the Snorre development.”

Simon Drew, President of RDS

12

Contract natureProvision of the Ben Rinnes jack-up rig in various locations offshore Angola, for drilling and completion services


Two years with two-year extension options

Customer Sonangol

Contract value $170m

“We are extremely proud to partner with Angola’s national oil company. This award is a reflection of the quality and strength of our operations across the globe, and our approach to working with our customers to understand their needs and provide them with drilling solutions for the future. Angola is the second largest oil producer in Africa and it continues to be a major hub of activity for KCA Deutag. We have worked hard to build a strong presence within the region and this contract will only serve to enhance our operations even further.”

Rune Lorentzen, President of KCA Deutag’s Offshore division

Significant new contracts – MODUs, Sonangol

13

Healthy backlog providing high level earnings visibility for the future

$1,072 $895$1,885

$3,852$54 $127

$4,445

$4,626

0

2,000

4,000

6,000

8,000

10,000

May to Dec 2014 2015 2016 and thereafter Total backlog$m

Contract Option

Total contract backlog as at 1 August 2014

Contract backlog by BU as at 1 August 2014

$1,975m

$269m

$6,250m

$109m

$298m

Land Drilling

Bentec

Platforms

RDS

MODUs

$762 $1,115$2,223

$4,099

$6$120

$4,675

$4,801

0

2,000

4,000

6,000

8,000

10,000

2014 2015 2016 and thereafter Total backlog$m

Contract Option

$768m $1,235m $6,898m $8,900m

Total contract backlog as at 1 May 2014

Contract backlog by BU as at 1 May 2014

$1,635m

$273m

$6,370m

$144m

$55m

Land Drilling

Bentec

Platforms

RDS

MODUs

$8,478m$1,126m $1,022m $6,330m

NB: Backlog figures exclude revenue generated in the year to date.

Q2 2014

Q21

2013Variance

2014 YTD

20131

YTDVariance

$m $m $m % $m $m $m %

Revenue 188.9 168.4 20.5 12.1 356.9 319.0 37.9 11.9

EBITDA pre support costs allocation1 48.4 39.2 9.2 23.3 86.9 69.5 17.4 25.0

Support costs allocation (2.8) (2.6) (0.2) 7.7 (5.6) (5.0) (0.6) 12.0

EBITDA post support costs allocation1

45.6 36.6 9.0 24.5 81.3 64.5 16.8 26.0

Margin % 24.1 21.8 22.8 20.2

14

• Robust Q2 2014 performance with utilisation of 80%

• Largest EBITDA improvement came from Russia, driven by increased CDS activities and recommencement of operations for a rig which had been redeployed during Q1

• In Europe/Kazakhstan, EBITDA improvements versus Q1 2014 and Q2 2013 were driven by improved fleet utilisation

• Africa saw EBITDA improvements versus Q2 2013 with two new rigs delivered in Algeria

• Decrease in Middle East EBITDA due to rig redeployment costs

Financial Performance to 30 June 2014

Land Drilling

1 EBITDA by segment for 2013 has been re-presented to reallocate support costs which were previously shown as central overheads (such as HR, Supply Chain and IT costs) to the operational business segments. 2014 figures are presented on the same basis.

Q2 2014

Q21

2013Variance

2014 YTD

20131

YTDVariance

$m $m $m % $m $m $m %

Revenue 63.7 77.9 (14.2) (18.2) 90.0 118.8 (28.8) (24.2)

EBITDA pre support costs allocation1 6.9 9.4 (2.5) (26.6) 7.7 12.7 (5.0) (39.4)

Support costs allocation (0.7) (0.7) (0.0) (0.0) (1.4) (1.5) 0.1 6.7


6.2 8.7 (2.5) (28.7) 6.3 11.2 (4.9) (43.8)

Margin % 9.7 11.2 7.0 9.4

Bentec

15

• Q2 2014 saw a reduction in revenue and EBITDA compared to the same period in 2013, however there was improvement versus the low level of activity in Q1

• Variances continue to be attributable to the manufacturing completion status of current rig orders and timing of component sales

• Increases in component sales and after sales services were achieved during Q2

• Order backlog remains strong, which will support higher activity in H2 versus H1

• Fulfilment of seven rig order for customer in Algeria remains on schedule

• Top drive order intake continues to progress well



Platform Services

16



Q2 2014

Q21

2013Variance

2014 YTD

20131

YTDVariance

$m $m $m % $m $m $m %

Revenue 208.2 185.5 22.7 12.2 396.8 355.0 41.8 11.8




23.7 18.0 5.7 31.7 46.9 36.1 10.8 29.9

Margin % 11.4 9.7 11.8 10.2

• New contract awards during 2013 in Angola, the Far East and Canada contributed to strong EBITDA growth versus Q2 2013

• Small increase in North Sea EBITDA compared to both Q1 2014 and Q2 2013, driven by operations with Statoil in Norway

• Activity levels in Azerbaijan and Sakhalin remain in line with both Q1 2014 and Q2 2013, although Sakhalin achieved improved EBITDA due to favourable exchange rate movements reducing local costs

• During Q2, pre operations work began on the Hebron platform drilling operations and maintenance contract

RDS

17

• []


• Continued strong performance from the RDS business, albeit EBITDA growth versus Q2 2013 is relatively flat

• As expected, small reduction in EBITDA versus Q1 2014 as the Hebron detailed design project neared completion

• Contracts to carry out FEED work on Statoil’s Johan Sverdrup development and pre-FEED work for Wood Group Mustang on Statoil’s Snorre platform add to existing greenfield contract backlog


Q2 2014

Q21

2013Variance

2014 YTD

20131

YTDVariance

$m $m $m % $m $m $m %

Revenue 82.8 85.0 (2.2) (2.6) 178.8 166.4 12.4 7.5




14.4 14.2 0.2 1.4 31.4 24.4 7.0 28.7

Margin % 17.4 16.7 17.6 14.7

MODUs

18

• Reduction in EBITDA in comparison with previous quarter as the Glen Tanarbarge came off contract towards the end of Q1 2014

• Awarded a new contract for Ben Rinnes jack-up in Angola – rig was thus redeployed during the quarter, leading to lower EBITDA in Q2

• Ben Loyal remains on contract in Mexico and continues to perform well

• Significant overall improvement in EBITDA versus Q2 2013 largely due to losses incurred on the Glen Esk in 2013, which is now stacked

• All three self erect tender barges are now stacked but new SPAs have recently been signed for their disposal during Q3


1EBITDA by segment for 2013 has been re-presented to reallocate support costs which were previously shown as central overheads (such as HR, Supply Chain and IT costs) to the operational business segments. 2014 figures are presented on the same basis.2Post reallocation of support costs.

Q2 2014

Q21

2013Variance

2014 YTD

2013 YTD

Variance

$m $m $m % $m $m $m %

Revenue 35.6 39.5 (3.9) (9.8) 76.3 78.7 (2.4) (3.1)

EBITDA pre support costs allocation1 5.3 (4.8) 10.1 (209.5) 17.9 (2.2) 20.1 (903.4)

Support costs allocation (0.5) (0.5) 0.0 0.0 (1.0) (0.9) (0.1) 11.1

EBITDApost support costs allocation2

4.8 (5.3) 10.1 (189.9) 16.9 (3.1) 20.0 (640.3)

Margin % 13.5 (13.5) 22.1 (4.0)

Group ResultsFinancial Performance to 30 June 2014

19

Revenue and EBITDA ($m) Q2 2014

Q2 2013

2014 YTD

2013YTD

Revenue from business units 579 557 1,099 1,040

Consolidation adjustments (38) (9) (44) (18)

Total revenue 541 548 1,055 1,022

EBITDA from business units 94 73 182 133

Corporate costs/other (5) (10) (12) (14)

Total EBITDA 89 63 170 119

Cash Flow and Working CapitalFinancial Performance to 30 June 2014

20

Working Capital

9

(60)

1Denotes the effect of foreign exchange rate changes on cash and bank overdrafts.*Deltas denote working capital movements from Q1 2014 and Q1 2013 respectively.

Free Cash Flow

9

• YTD operating cash flow position remains strong, driven by overall improvement in EBITDA versus 2013

• Cash flow from investing activities is higher QoQ and YoY due to:

- Increased capital expenditure for new builds

- Higher interest payments

- Disposal proceeds from the sale of the Ben Avon in Q1 2013

• Increase in working capital in Q2 2014:

• Increased inventory / WIP for Bentec due to ongoing construction of seven rigs for a customer in Algeria

• Higher receivables given relatively lower position in Q1, which benefitted from collections from rigs shipped by Bentec in Q4 2013 and advance payments from customers

• Partially offset by increase in trade payables, albeit this increase was lower than in the equivalent period in 2013

(30)(20)

(60.0)

(50.0)

(40.0)

(30.0)

(20.0)

(10.0)

-

10.0Q2 2014 Delta* Q2 2013 Delta*

Cash

Im

pact

of

Delt

a (

$m

)

Working Capital Delta

Working Capital Delta

Q2 2014

Q2 2013

2014 YTD

2013 YTD

Cash flow from operating activities 42 34 124 (13)

Capital expenditure (61) (33) (83) (73)

Proceeds from sale of Fixed Assets 1 (1) 4 51

Net interest (50) (35) (54) (46)

Other (3) 0 (1) 2

Cash flow from investing activities (113) (69) (134) (66)

Equity injection 0 19 0 59

Foreign exchange1 (5) (1) (6) 2

Net Cash flow before debt drawdown/(repayment)

(76) (17) (16) (18)

Drawdown/(repayment) of debt and debt issuance costs

(81) 43 (83) 31

Net cash flow (157) 26 (99) 13

21

Disciplined Growth

350

>400

c.50-55

$200

$250

$300

$350

$400

Q2 2014 LTM EBITDA from New Rigs Pro Forma with New Rigs

EB

ITD

A (

$m

)

2014 2015 2016

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Rig 1

Rig 2

Rig 3

Rig 4

Rig 5

Rig 6

Rig Client CountryCost($m)

Contract length

Rig 1 BP Khazzan Oman c.34 5yrs + 2x1yr options



Rig 4 Lukoil Russia c.27 3yrs + 2x1yr options

Rig 5 Shell Brunei Brunei c.35 3yrs + 3x1yr options

Rig 6 Undisclosed Russia c.27 3yrs

New build land rigs scheduleNew build contracts

Significant uplift in EBITDA from six new rig contracts is anticipated

Pre-award Under construction Operational

• Growth capex to target strict return criteria, with robust investment appraisal process implemented

• Active pursuit of long-term contracts with blue chip clients

• Focus on countries with existing operations, allowing the Group to benefit from operational synergies

• Targeting up front contributions from clients in order to optimise cash flow profile of new projects

• EBITDA profile of projects provides excellent scope for further deleveraging

1Excludes profits/losses from the Ben Avon, which was sold.

1

1,260 1,296 1,230

1,169 1,265

253 273 304 325 350

5.0x4.8x

4.0x

3.6x 3.6x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

-

200

400

600

800

1,000

1,200

1,400

Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014

Net

Lev

era

ge

Net

Deb

t an

d L

TM

EB

ITD

A (

$m

)

Net Debt / LTM EBITDA Evolution

Net Debt LTM EBITDA Net Debt / LTM EBITDA

22

Capital StructureNet leverage as at 30 June 2014

Amount Outstanding

Coupon Maturity Facility Rating1

Recovery Rating

Net Leverage2

Cash 30.4

Revolver ($250m) 22.0 L+400 May-19 B3/B 3/3 0.1x

Senior Secured Term Loan 375.0 L(100)+525 May-20 B3/B 3/3 1.1x

Total Bank Debt 397.0 1.1x

UK Finance Senior Secured Notes 375.0 7.250% May-21 B3/B 3/3 1.1x

Globe Luxembourg Senior Secured Notes 500.0 9.625% May-18 B3/B 3/3 1.4x

Total Institutional Debt 875.0 2.5x

Finance lease & other debt 23.5 - Aug-183 - - 0.1x

Net Debt 1,265.1 3.6x

1All facilities have ratings outlooks of positive / stable.2Based on Q2 2014 LTM EBITDA of $350m; all LTM EBITDA figures exclude profits/losses from the Ben Avon, which was sold.3Applies to finance lease only.

Closing remarks

23

• Continued strong performance in Q2 2014 provides an excellent foundation for H2 and beyond

• Strong quarter for important new contract wins, with more in the pipeline

• Excellent backlog of $8.9bn underpins future earnings

• Geopolitical environment in some of our key markets remains challenging

• Actions continue to optimise the business portfolio and increase business efficiency in 2014

• Growth opportunities are only being pursued where they provide robust capex returns driving increased cash generation based upon long term contracts

• All of this is underpinned by a stable and experienced management team focused on further delivery of results

24

Q & [email protected]

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