Gonzalo Gil
Oro Negro
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Golden Opportunities Seized Through Bullish Investments

Wed, 01/22/2014 - 14:20

Q: How has Oro Negro’s reputation in the investment community evolved since its first transactions?

A: We recently completed financing for the first four jack-up rigs we have under contract with PEMEX. It was a very successful transaction in which we placed US$725 million in bonds, which were oversubscribed more than threefold. We were able to do this through a well-balanced structure by having a certain degree of deleveraging while allowing us to keep some of our cash for future growth and investment. The strong market enthusiasm shown toward our transaction is an objective measure of Oro Negro’s credibility and positioning for future growth.

Q: What do you see as the main opportunities in the different segments of the oil and gas industry?

A: Certain segments within the Mexican oil and gas industry require massive investment and therefore have very promising growth prospects. Fortunately, these areas are a natural extension of our current activities. For example, the deepwater segment on the Mexican side of the Gulf of Mexico is virtually virgin territory. The Energy Reform makes it feasible for investments to be made to develop those prospective resources. Oro Negro has two advantages: our operating capabilities and our recruitment of experts that have managed the full array of offshore drilling assets in over 50 countries. Due to these, Oro Negro can diversify its asset class by incorporating assets that are suitable for deepwater and ultra-deepwater activities. In addition, we are able to increase our economies of scale by leveraging our onshore operations across a bigger fleet. One of our challenges was that we were pioneering a different way of marketing and contracting services with PEMEX. We took a risk by investing in capital-intensive assets, without having any promises or assurances that those assets would be contracted by PEMEX. We did it with the conviction that PEMEX would have to contract them to meet its reserves replacement and production targets. Now, the industry is undergoing a major transition. For a long time, PEMEX used a single evaluating factor for its service providers, which was the lowest unit cost of service. We are now moving into a new era where value is seen as the key concept. But value has a broad definition: it covers the integrity and the quality of the operation, the financial soundness of the counter-party, and a level of efficiency that translates into low opportunity cost, among other factors. The pace of this cultural transformation could have posed a risk but the Energy Reform will likely act as a catalyst for the introduction of best practices and open market standards.

Q: Access to capital is a critical success factor, what are the main strengths of Oro Negro in this area?

A: We are participating in a very capital-intensive industry so having a sound capital structure is very important. We have a very strong equity sponsorship and we have invested over US$500 million of equity capital into the business. At the same time, we have the ability to continue to invest significant amounts going forward. This is an advantage as very few Mexican companies can deploy resources on that scale. Scale in this business also translates into a sustainable competitive advantage, given the scalability that is inherent to our operation. Furthermore, the capital structure involves not only the equity component but also debt. Oro Negro has proven successful at tapping into the international debt markets and is well-positioned to fund its growth. Oro Negro is the brainchild of a firm that has been very active in the oilfield services industry in Mexico for the last 12 years. This lineage grants us a thorough understanding of industry dynamics, the administrative process surrounding the PEMEX contracts, and the access to local talent. When you add all those elements combined with our capital structure, where our largest shareholder is effectively the Mexican pension funds, a very unique entity emerges that combines worldclass operations and assets with solid financial structure and unparalleled local content credentials.

Q: What are the advantages of being a local player in an industry where large international players are set to enter?

A: We must be competitive on a global scale and Oro Negro is a company that has international projection. We have assets that can work anywhere in the world with the exception for the harsh environment of the North Sea. We selected the highest quality assets within our asset class, not only in terms of manufacture origin, but also in terms of specifications. We have built a world-class operating team that has worked in over 50 countries with tremendous success across the full range of offshore drilling assets.

Q: What role do vertical and horizontal integration play in Oro Negro’s strategy to prepare for the post-Energy Reform future?

A: We have a very clear capital markets orientation. We are building our business to be able to quickly tap into capital markets. Our growth plan is driven by what will create most value for the company from a capital markets perspective. The choice between horizontal or vertical integration, or both, will be tied to the perception of value creation, given how public markets react in the context of the Mexican energy sector. On the other hand, we do not need to restructure anything now that the Energy Reform has been approved. We have a company that is very transparent in its corporate governance, that is very well capitalized, and that is managed with an institutional approach. The Energy Reform does not impact this construct, positively or negatively, other than to elevate the expectations for a company with the characteristics of Oro Negro in a sector with tremendous potential for growth.

Q: How does your development strategy compare to that of your competitors?

A: PEMEX’s needs are enormous and it requires a significant number of reliable service companies that work with very high standards and that have the capacity to continuously invest in modernizing the sector. Our strategy is solely based on our particular strengths and capabilities and the way we understand the market. What other people in the industry are doing does not really impact us. Oro Negro is different since it is a relatively new company which has developed its operating capabilities and strengths through an investment program. We targeted companies for acquisition that would add to our operating capabilities through a combination of scalable infrastructure, operational set-up, and human capital. In addition, we have been very selective in investing in the assets that we believe drive the contract assignment process. That is different from other companies that have been in the business for many years.

Q: What operational strategy does Oro Negro use to make sure every single one of its investments turns out to be profitable and productive?

A: We are very diligent in our investment activity, which has focused on internalizing capabilities that are firmly established within the industry and that have a scalable aspect to them. Our first acquisition, Todco Mexico, which is now our operating company, has one of the best track records in terms of the metrics that PEMEX applies to evaluate its service providers. It had the highest safety scores, which is of paramount importance, and had one of the highest drilling asset utilization levels across all asset classes operating in Mexico. It was a relatively small operation with enormous growth potential. Once we acquired the company, we began investing in assets and building the human capital component by attracting and retaining the best and brightest in the field. That is the approach that Oro Negro will continue to apply when analyzing further investment opportunities.

Q: As opportunities appear, which steps is the company taking today to secure the required financing to grow tomorrow?

A: At the moment, we have clearly established a meaningful presence in the international markets through our bond issuance. Going public will be another step in broadening our financing sources. While we remain private, we continue to invest in the business and our shareholders continue to deploy capital to fund growth opportunities, and our initial capital contribution has almost tripled in less than two years. This signals a very strong commitment from the shareholders to the company and provides us with a unique advantage. We have the capacity to continue to invest in the business to fund growth opportunities.

Q: What are Oro Negro’s ambitions for the coming years?

A: We have three rigs currently operating for PEMEX and we are going to add two more during 2014. One more rig is being delivered and may begin operations by the end of the year, and three more rigs will be delivered before the third quarter of 2015. As this process continues, we want to ensure that we materialize all of the benefits of scale. We have significantly improved our systems and have invested a considerable amount of capital and time in putting them in place to obtain scalability. We will be focusing on this throughout 2014. In addition, we are actively looking at different investment opportunities to continue building the company in anticipation of our capital market event.