Gonzalo Gil White
Oro Negro
View from the Top

Mexican Player Seeks to Move Beyond Jack-Ups

Wed, 01/21/2015 - 09:45

Q: What have been the key events for Oro Negro over the past year?

A: One success was our issuance on the Norwegian high yield bond market in 2014. This transaction was crucial as it allowed us to refinance all of our short-term facilities, and obtain the necessary proceeds to make the final shipyard instalment on our fourth rig, Decus, which is now in operation. This was a landmark transaction for Oro Negro as it was the largest issuance ever in the Norwegian high yield bond market. As a Mexican company, we feel very proud to hold such a distinction in a highly-specialized oil and gas market. This transaction reflects the market’s positive perspective on the opportunities available in Mexico, and particularly in the segment in which Oro Negro participates. Our decision to carry out this issuance was very timely. We had no competing issuances in the market, which enabled us to grab the attention from the investor base. We held a four-day road show, divided between New York and London, which allowed us to close the book in a short period of time. The offer was oversubscribed by 3.3 times, with roughly US$2.5 billion of demand for the US$725 million that was issued. We received more than 233 firm offers from investors located in Europe, the US, and Asia. Similarly, the issuance was very well distributed among the global investor community.

Q: How much of that investor interest was due to the opportunities developing in Mexico compared to being exposed to Oro Negro and the drilling market?

A: It involved a little bit of both. These are debt securities, which are offering investors a fixed return secured by the assets themselves. I would say that the main underwriting considerations for investors were focused on the company and the assets securing the transaction. Nonetheless, we operate in a market that is exciting and the prospects for the company are inextricably linked to the jurisdiction in which we operate. Notwithstanding the volatility that we have seen in recent months, Mexico is a bright spot in the global energy scenario, given its Energy Reform and the significant growth that is expected to occur in the market as a result.

Q: How would you rate doing business with PEMEX, given the creation of its drilling subsidiary and the changes to its procurement function?

A: It is a little early to make any definite statements in that regard. Nevertheless, the environment will definitely change and PEMEX is trying to modernize in order to streamline the decision-making processes and become more efficient. PEMEX knows that, in order to become the preferred choice among service providers, it needs to improve its contract template and become more flexible in its contracting structures. All of these changes are positive. Our existing contracts were defined prior to the Energy Reform. Given that the new regime allows PEMEX to pursue long-term associations, we hope to become strategic suppliers to the NOC through the construction of our rigs.

Q: What will be the main drivers that will allow companies like Oro Negro to win contracts under PEMEX’s new framework?

A: It is important to understand a number of factors that play a role in PEMEX’s new way of contracting. First, these assets are highly correlated to production. The effectiveness in their use and the quality of the service being provided should be key considerations for PEMEX when selecting its service providers. Even though we are a young company, we have a track record of making effective use of brand new assets. As soon as assets come out of the shipyard, they are more prone to experiencing downtime since they have not been put to the test for hidden defects, if any become apparent. Oro Negro has been averaging 95% in effective utilization across its fleet, which represents a very solid performance that will be among the key drivers in PEMEX’s selection process. Paired with this, we are a Mexican company with over 15 million Mexicans being represented in our ownership structure as a result of Mexican pension fund investments in the company. Our institutional setup and high national content give Oro Negro a unique positioning in the marketplace. Finally, the quality of our assets is also very important. We have a homogeneous fleet of the highest specification rigs within their asset class built by the leading shipyards in the world, representing a competitive advantage in terms of versatility, economies of scale, and efficiency. Therefore, combining all of these factors with the attractive delivery dates for our rigs under construction should enable the company to be a preferred service provider to PEMEX, as well as to new entrants into the market.

There is pent up demand for our assets as PEMEX will have to grow the size of its fleet in order to meet ambitious production targets. Mexico is currently producing roughly 2.3 million b/d but production is expected to yield 3 million b/d by 2018 and 3.5 million b/d by 2025. Furthermore, since shallow water reservoirs represent 80% of proven reserves and more than 50% of 2P reserves, Mexico will see a significant need for development work and well workover services. This promotes a very healthy demand for jack-ups, in addition to the demand of appraisal and exploration activities. Modern, premium jack-ups provide tremendous efficiencies for the operator when compared to conventional rigs, notwithstanding differentials in day rates. Once the cost of drilling a well is normalized, operators can save 25-35% of costs by utilizing premium rigs instead of conventional rigs. The drivers of these cost savings are the speed of drilling, allowing more wells to be drilled in the same amount of time, and the logistical cost reduction resulting from the larger storage capacity of premium rigs, which reduces the frequency of supply trips to and from the platform. In addition, other qualitative factors play an important role in the migration from conventional to premium rigs, most notably productivity driven by the drastic improvement in living conditions for employees. Finally, contingent liabilities, both from a loss of life and from an environmental standpoint, are reduced when employing premium rigs as opposed to conventional rigs. Assets that have been operating uninterruptedly for more than 30 years entail risks associated with structural fatigue that may lead to serious accidents. Summing up all of these factors leads us to conclude that the displacement of conventional assets is an irreversible trend. The combination of fleet expansion with fleet replacement is creating a healthy demand for premium rigs, such as the ones owned and operated by Oro Negro.

Q: What kinds of companies do you think will be in the best position to win the deepwater contracts?

A: It would be a combination of companies like us that have experience working in Mexico but lack deepwater expertise and firms that have deepwater drilling expertise and a great track record worldwide but lack working experience in Mexico. There will definitely be room for both. Being a Mexican company has its advantages but that will not be enough. We have to be able to compete on equal terms with other companies in areas such as operating capabilities, processes, and QHSE standards. Even though we are a young company, we have been able to prove that we can develop a company that has the highest standards in terms of operating procedures as well as asset quality. Therefore, we plan to replicate the same working standards of our shallow water involvement in our deepwater ambitions. Having the right experienced team will be essential to guarantee unconditional reliability to our future clients.

Q: What are your major objectives within the current scope of Round One?

A: We see opportunities within our asset class. While many jack-ups have been constructed, the ability to differentiate operator-built assets from speculation-driven asset construction is essential. We foresee opportunities to consolidate in the near future in order to expand our fleet. These opportunities will not only include speculators who build rigs but also smaller companies that lack the capital to develop these projects. We will be targeting companies that make the most sense, whether they are Mexican or foreign. We also expect opportunities to diversify into other asset classes that will experience demand as a result of the Energy Reform. These assets may involve deepwater capabilities, as well as aggregating certain services around the drilling function in order to be able to provide turnkey solutions to new companies in the market. Operators entering the Mexican market for the first time may favor comprehensive services that reduce disruptions in the supply chain of critical services.

Q: Oro Negro’s statement of purpose is to become an integrated and diversified oil and gas service company. How likely is it for you to start developing other activities unrelated to drilling in the coming years?

A: We have the ability to aggregate services in a way that can be scaled to our current operations. We think the radical transformation that is taking place in Mexico creates opportunities to offer integrated services. This is not a mature market, but one going through an inflection point. The country faces a medium-term challenge in offsetting the decline of its mature fields, while also being able to develop all of its prospective resources. Mexico’s value chain is populated with legacy assets, which are the product of long-lived criteria for assigning contracts focused solely on cost. As the assignment criterion has changed, a positive disruption will bring challenges that will require the ability to invest in capital goods. These need to adhere to new technical specifications and guarantee proven results in a given timeframe in order to meet projected targets for production. That is precisely where we see opportunities in providing integrated services that deliver turnkey solutions for drilling operations. Oro Negro has the investment capacity to do so, and it will take advantage of this aspect to carry out its ambitions.