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RIU GoodOilConference notes build-own-operate planning trend then examines senior debt options

Westpac is expecting limited growth in mature markets, with countries such as India to emerge as growth markets as China matures.
GoodOil Conference session
FAR Ltd managing director Cath Norman addresses the RIU GoodOilConference

RIU GoodOilConference Perth has been told by Westpac Banking Corp’s (ASX:WBC) (NZE:WBC) (FRA:WBC) (NYSE:WBK) energy and resources director Mark Beeley there has been a continuing trend over the past 24 months for projects to be built, owned and operated by the same parties.

While acknowledging the approach’s benefits, the Westpac Institutional Bank director profiled Senior debt in his Financing Considerations opening address as another option for companies to explore.

READ: RIU GoodOilConference acknowledges Trump effect on crude oil supply and emerging market factors

Upstream Production Solutions technical general manager Neil Clegg followed later in the morning with a projects focus during a talk titled Flexible Operations Models for today.

Clegg acknowledged people needed to decide whether to operate an asset themselves and stressed there was no right or wrong answer.

Financing considerations

Beeley noted the comments of his colleague, Senior economist Justin Smirk yesterday, who highlighted the current state of the economy in a talk titled Trump, China & Electric Cars, What is Next for Oil & Gas.

Smirk told GoodOil delegates: “The general economy is undoubtedly in a better place.

“The global economy is creating greater demand, so the demand profile is better than people anticipated.

Adding to the momentum, Beeley said today: “We believe it is a good time to be dusting things off and getting on with growing your companies.”

READ: RIU GoodOilConference told crude oil is back, with further market recovery expected

Learning more about FAR Ltd's West African strategy at the company’s booth.

The Westpac director told this morning’s crowd the builder-operator-owner (BOO) model was great but it should be used with care.

He noted the BOO financing model had been a trend he had noted over the past 24 months and it was continuing.

Beeley said: “When you’re a small company and you’re offered this all-in solution, one of the quirks that our team and people have come to me to describe wanting to do this financing option is that the people that provide the main (finance) want a guarantee from your financiers for them supporting the obligations you’re going to be taking on.”

The guarantee means a company’s bank must become involved in project funding despite the company not taking it on its balance sheet.

“The BOO model, I think, is great when you can do it and for the right circumstances but use it carefully.

“Lots of people will come and operate it as a solution, what you need to think about is, ‘Is this critical infrastructure, is it my core business, should we be in the long-term holding this asset?’

READ: RIU GoodOilConference Perth attracts oil and gas plays on the hunt for juniors

Beeley highlighted one of the benefits of the BOO model for contracting businesses – not having to bid on each stage of project development.

“BOO really developed for funding of government infrastructure as a model and quasi-user infrastructure in general and it’s really good when it’s a specialist non-core use of infrastructure but, therefore, it’s not something that’s really part of the strategy for why and what the company stands for.

Beeley highlighted the model’s hidden costs, reminding the audience of external BOO parties’ push for company guarantees.

He touched on the “obvious benefits” of the engineering, procurement and construction (EPC) model such as retention of control, the benefits of equity as “the best starting point” and convertible notes.

“Just simply, I hate convertibles,” he said.

Tongue-in-cheek, Beeley said: “I think for most people who have put together a convertible, the honeymoon period for a convertible note for funding is probably about 20 minutes. After about 20 minutes, you’re just looking to see how you can get out of a convertible.”

Looking at some of the technology on show at RIU GoodOilConference.

He acknowledged a benefit of convertible notes over equity, saying, “They are less expensive than pure equity and they are bit more complex but in terms of timing … they can be done a bit more quickly.”

Beeley also gave high-yield debt a look-in.

“Another theme in the market is high-yield debt and I don’t mind high-yield debt, if execution-and-timing is your thing and you’re willing to pay for it – and you do pay for it – then high-yield debt is quite a powerful solution.

“It’s relatively unstructured but leeway is not so good. High-yield notes are not that flexible ... and in terms of execution risks, that can be something that catches you out.”

The Westpac director highlighted the comparative benefits of the institutional bank’s “core business” of senior debt.

Senior debt can be corporate or project-based in nature, with Beeley noting companies taking the project route sometimes made a change to corporate-based senior debt to improve flexibility.

He said: “Nearly every customer conversation I have ever had started with someone wanting corporate debt rather than project facilitation and that just has resulted from wanting that flexibility.

“You want to be able to leverage (and) any new development, the project just has that ability.”

READ: RIU GoodOilConference Perth and WA Petroleum Day to put oil and gas players centre stage

The South Ballroom and foyer is hosting displays and company stands.

Project finance can also be attracted for single-assets or multi-asset projects.

Beeley asked and answered: “Why do people want corporate facilities, again because of that flexibility …. and I respect that.’

The Westpac director noted a trend in projects from a linear focus from asking “Can we do this?” before the question “Should we do this”, to looking at both factors together, with a strong focus on relationships.

“When you go to a bank, we do finance gold, we do finance oil and gas, we do finance all these fossil fuels, we do plan new developments but clear principles and what they really mean are really important to us, so that’s our why, and it’s very important to have that conversation.

“What do we do about it, well that’s where it’s all about relationships, so let’s start talking and that’s really the advert part of this.

“If you do want to be getting your projects done, seamlessly, quickly and transforming your companies as you all said you were going to do, then you need to be forming banking relationships early.”

Flexible operations models

Upstream Production Solutions’ Neil Clegg spoke about flexible operations models for today and the future.

The technical general manager mooted a number of definitions of flexibility then gave a picture of the various operations models on a continuum.

He said: “If you imagine on the lefthand side over there, you’ve got an operating model where the owner is actually doing all the operations and maintenance themselves.

“On the righthand side, you contract out that part of your business.

“There’s a slight complication on that, if you lease it, you just bring in a third person, you actually own the facility.”

Clegg said: “Where you sit on that continuum is actually the same question for everybody but the answer is always different.

“It depends on what you want to do with your asset, do you want to do it yourselves, or do you think you’re actually better at managing your business and leave these operations with someone else and manage them as a contractor.”

Upstream’s manager flew the equivalent of a Swiss flag, “There’s no right or wrong answer in this place but when you think about ‘How am I going to manage my asset’, it’s a similar story.”

Right size is important

Clegg argued it was about running your organisation at a suitable size to deliver efficiency.

“You need that right-sized organisation for that base level of work.

“You are really looking for, ‘What is the right size for my organisation.’

“Anything goes can be factored into the system.”

He highlighted some workers could perform integrated roles and multiskill.

Eventually, the organisation must ask when it should bring on more people and how.

Clegg said: “If you need help, where are you going to go get it from.

“That’s what I really wanted to talk about, what are those enablers to being flexible.

“We can be more flexible and efficient.”

Common safety standards, such as in Queensland where there is a Safer Together program for multiples projects was one way. Another was national standards and flexible working practices.

Clegg said: “How we treat people will dictate whether they come back. There’s a lot around sharing and duplication, none of this is rocket science.

“When you think about moving forward in the future, how could you take some of these principles and make them work.” 

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