Oil and gas E&C contractors 4Q preview

We think the offshore contracting industry is poised to rebound from a difficult 2009

Stephen Ellis 26 January, 2010 | 11:31AM
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We think the offshore contracting industry is poised to rebound from a difficult 2009. Last year customers delayed project awards, which lowered near-term levels of order intake for the contractors and made bid tenders far more competitive. The more competitive bid tenders will probably result in lower levels of profitability for most contractors as the projects are executed in 2010 and 2011. Still, we believe the major offshore contractors such as Technip, Saipem, and Acergy maintained good pricing discipline during 2009, and we do not expect their operating margins to return to 2005-07 levels. We think this pricing discipline will serve them well in 2010, as costs appear to have bottomed and, as a result, we expect customers to move forward with previously delayed project awards. We believe an improved order outlook for 2010 will be a reoccurring theme for the contractors this quarter.

We think one of the biggest opportunities in 2010 for the offshore contractors may be in floating liquefied natural gas (FLNG) units. The units are a potentially highly attractive option for oil and gas companies as it places gas liquefaction facilities directly over offshore fields, which eliminates the need for expensive offshore pipelines and extensive onshore infrastructure. Industry consultants have identified over 100 fields where the technology could be applied, and the first unit could be in operation in 2015.

Technip has been an early leader in the space, as it has secured front end engineering and design (FEED) contracts with Royal Dutch Shell and Petrobras. Shell's proposed FLNG unit, which could cost $5 billion, is initially slated for use in its Prelude field in Australia. The Prelude field has 2.5 trillion to 3 trillion cubic feet of gas, and the FLNG unit is expected to have an annual capacity of 3.5 million tons of LNG annually. The Petrobras unit is targeted for the pre-salt fields in the Santos Basin and is expected to have an annual LNG capacity of 2.7 million tons. The considerable engineering challenges involved in these types of efforts should result in strong pricing and profitability levels for the offshore contractors.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Royal Dutch Shell PLC B1,831.32 GBX0.48Rating

About Author

Stephen Ellis  Stephen Ellis is a senior stock analyst on the Energy Team.