Mermaid Marine is a good barometer of activity in Western Australia’s oil and gas sector and the company is looking for ways to diversify, including internationally.
Mermaid Marine is a good barometer of activity in Western Australia's oil and gas sector and the company is looking for ways to diversify, including internationally.
When pundits review the outlook for the Western Australian economy, they acknowledge the mining construction boom is past its peak but point to oil and gas as a sector that will help to sustain activity.
With big gas projects like Prelude, Wheatstone and Ichthys gearing up, there is a lot to look forward to.
But for Fremantle company Mermaid Marine, there is also a recognition the state’s largest project, Chevron’s Gorgon gas plant on Barrow Island, has also passed its peak.
Managing director Jeff Weber makes no bones about this as he evaluates growth opportunities.
“We’re past the peak for Gorgon,” Mr Weber said.
“That’s what I’ve been telling the market, a lot of the volume associated with the downstream side will start to come off, though it’s not going to stop.
“But then Prelude and Ichthys up in the Browse basin and Wheatstone are starting to ramp up, and also the upstream side of the Gorgon project.
“Overall there are a number of opportunities in the construction market, certainly for three to five years.
“As they are completed, there will be long-term production support contracts that will come up. We won’t win all of them but we’d like to win our fair share of them.”
The opportunity in the upstream sector was highlighted last month when Mermaid won a $100 million contract with Subsea 7, to provide nine tug-and-barge sets to support subsea installation works for Gorgon.
For a company with annual revenue last year of $449 million, that’s a very tidy contract to have secured.
Vessel operations
Most of Mermaid’s revenue ($283 million) comes from its vessel operations.
With a fleet of 36 vessels, it does a lot of work for construction contractors like Allseas, Subsea 7, Farstad, Technip, McDermott International and Saipem.
It also does a lot of production support work, particularly for operators with FPSOs (floating production, storage and offtake vessels) off the north-west coast.
“We are the dominant FPSO support operator, certainly up in the north west,” Mr Weber said.
“We have designed and built boats specifically for that market and we’ve got to a position where the big operators like Woodside and BHP are quite happy to use us.”
Another client is Santos, for both its Modec Venture FPSO and for an exploration support contract – the first of its kind won by Mermaid.
Mr Weber said the Mermaid business has evolved substantially over the years.
“We were doing inshore work when we started but as we have grown we’ve moved into the bigger class of vessels,” he said.
“As the rigs get further offshore, and the supply chain gets longer, you need to have more carrying capacity.”
Mr Weber recalled that the first vessel he bought at Mermaid cost about $6 million; the most recent cost $34 million.
Despite its strong position in the market, Mermaid’s vessel operations suffered a big drop in earnings last year.
Its fleet utilisation went from 81 per cent in the first half of the financial year (in line with the company’s 80 per cent target) to 76 per cent for the full year.
The downturn in fleet utilisation contributed to a buffeting of the company’s stock price.
Having peaked just above $4.20 per share in February, it fell to $3.20 in May and has since recovered to about $3.75.
International expansion
Mermaid is responding by seeking more diversity.
“The next area of growth will be international. Over three to five years, we are going to build our international capacity so we have a more balance portfolio,” Mr Weber said.
For Mr Weber, that means anywhere from west Africa to the Philippines.
“We are quite keen on Malaysia, we’ve got a long-term contract in Thailand, Myanmar is just emerging, we’ve got a boat in Indonesia,” he said.
“We are sending more boats up there. From a strategic point of view we need to build that capacity.”
The Australian market is not without growth opportunities, including the multitude of floating LNG projects in the works.
Mr Weber said an FPSO needed one support vessel, whereas the much larger FLNG vessels would need three ‘field support’ vessels.
“They are essentially offshore tugs, and they will safely berth the tanker alongside the FLNG facility,” he said.
“And then, because there are 120 or 130 people on board, there will be a big supply function, but we’re not sure if that will be one or two vessels.”
Dampier supply base
The weakness in vessel operations last year was offset by growth in its Dampier supply base, which generated $150 million in revenue, helped in large part by construction activity on nearby Barrow Island.
For the first time, the supply base ($52 million EBIT) contributed more profit than the vessel operations ($44 million).
Mr Weber said Mermaid was helped by its purchase of BIS Industries’ neighbouring facility.
“We’d got to a point where we ran out of capacity, so that was a good buy, its allowed us to service more customers,” he said.
Looking ahead, he expects the work mix will change.
“The future is long-term production support, so there will still be cargoes through the base, just lower volumes,” he said.
Broome versus Darwin
Mermaid also has a supply base in Broome, in a joint venture with Toll.
“There really wasn’t enough activity for two people to do it well, so we decided to do it together, and we’ve managed to build really good infrastructure,” Mr Weber said.
Mermaid has been supporting offshore drilling campaigns out of Broome for 10 years
Its clients include Conoco Phillips, Santos, Shell and Murphy Oil. And Woodside is planning a two-year drilling program.
Recent wins include five-year contracts with Shell and Inpex to support their drilling programs through Broome.
Shell announced last week the start of development drilling for its Prelude floating LNG project.
To accommodate the expected growth, Mermaid and Toll have spent $25 million on supply base facilities.
An expected upgrade of the Broome wharf is expected to help Broome remain competitive.
Mr Weber said there was keen competition between Broome and Darwin, which had invested $110 million in a marine supply base.
Darwin’s success in winning work was illustrated earlier this year when Shell awarded a $25 million contract to Decmil to build the main logistics support base for the Prelude project.
“The advantage of Broome is that its closer to the fields, and there is no doubt the supply base infrastructure we have built there is world class,” he said.
“So, from a drilling perspective, it makes sense to do it out of Broome.
“In terms of the production support supply chain, Darwin has the advantage that you can do ‘liner transfer’.
“Containerised shipping comes straight out of Asia to Darwin, whereas Broome doesn’t have that facility.”
Mr Weber said Mermaid had considered investing in Darwin.
“We had a look at the Darwin supply base early, the challenge was that we couldn’t make it stack up without government input,” he said.
“We have a very clear understanding of how much activity you need to support a big infrastructure development, having been through the development of the Dampier supply base.
“The first five years was really tough, we didn’t make any money at all, but when you reach a critical mass you start to get some good returns.”
Looking ahead, he expects activity in Darwin will grow, and Mermaid plans to have vessels to take advantage of the opportunity.
In a recent research note, Hartleys’ oil and gas analyst, Simon Andrew, said Mermaid was expected to deliver only moderate earnings growth in the 2014 financial year as supply base earnings growth started to moderate.
“We believe the year ahead will be one of consolidation for the supply base (flat EBIT) countered by stronger revenue growth (20 per cent) from the vessels business,” Mr Andrew said.
