Dockwise. Size matters

Transcription

1 Dockwise Size matters

2 Thursday 19 February 2009 Report Dockwise Size matters We initiate coverage on Dockwise with a Buy rating and a NOK 7.50 target price, which provides 42% upside. The company s strategy of moving up the value chain should grow the scope of the business and should improve visibility and predictability of earnings. Deleveraging after completion of the capex program should benefit the risk profile and is a trigger for share price appreciation due to the high financial leverage. Rating Price target (12m) Price : Upside: Buy NOK 7.50 NOK % Forecast E 2009E 2010E Sales (USD m) EBITDA (USD m) EBIT (USD m) Recurring Net Profit (USD m) Recurring EPS P/E NM EV/EBITDA FCF Yield (%) NM NM Dividend Yield (%) Oil Services Norway Market capitalisation NOK 1,211m Avg (12month) daily turnover 532,000 (shares) / NOK 6.7m (value) Reuters DOCK.OL Bloomberg DOCK NO Year to December, fully diluted Share Price Performance % Dockwise is market leader in offshore heavy lift services -1m -3m -12m Dockwise is the global leader in heavy lift services to the offshore industry with a fleet of 16 ships in different sizes and Dockwise configurations. The company also holds a position in the luxury yacht segment with a fleet of 4 ships. The majority of MSCI Europe the business relates to transport and installation of oil and gas related exploration and production units, with the MSCI Norway remainder comprising e.g. dredging ships, navy ships, barges, cranes, and dry-docks. Moving up the value chain should bring several benefits Traditionally, the majority of the business is spot cargoes, which has benefits and drawbacks. In our view, limited visibility is the main drawback. However, Dockwise is moving up the value chain by also targeting onshore and floatover cargoes, which are booked well in advance. This should grow the addressable market, should improve visibility and predictability of earnings, and could benefit spot pricing because at the beginning of each period, a larger part of the fleet should be sold out, thereby limiting supply to the spot market. Recent trends show this strategy is paying off. In fact, visibility has never been as good as today, albeit that a large chunk of spot business still needs to be taken in. Debt burden is both a risk and an opportunity The balance sheet is stretched due to M&A, conversion of ships, and cash generation only reaching full capacity as from Capex is set to return to maintenance levels so free cash flow should get a boost, providing the means for debt reduction. Nevertheless, covenants are still a risk, as we estimate net debt/ebitda to decline from 8.8x (2007) to 4.9x (2008) to 3.6x (2009). The latter compares to the covenants maximum of 3.85x for that year, and is based on estimates that reckon with a more subdued trend in 2009 than in On the other hand, market cap is so modest within the EV, that a positive surprise on cash generation should be a strong trigger for share price appreciation. Initiating coverage with a Buy rating and a NOK 7.50 target price We initiate coverage with a DCF-based target price of NOK 7.50, based on conservative input. This provides 42% upside, justifying a Buy rating. Fleet replacement value even points to NOK 11.00, based on recent data. A peer group comparison makes no sense as the range of multiples is incredibly wide, and the business models are very different. Agenda FY 2008 results Q1-09 results Q2-09 results Analysts Michael Roeg michael.roeg@rabobank.com Fabian Smeets fabian.smeets@rabobank.com Rabo Securities Amsterdam Equity Sales Equity Sales Trading 27 February May August Rabo Securities Equity Research Please note the disclaimer on the last page of this document

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4 Table of Contents Dockwise 4 I - Company profile 6 II Moving up the value chain 12 III Moving up the value chain: the Fantastic Three 18 IV - Debt burden, both risk and opportunity 24 V Recent trends, prospects, and our estimates 26 VI - Valuation 33 VII Financial information 37 3 Rabo Securities Equity Research

5 Dockwise Company profile Dockwise is the global leader in transport and installation services in the heavy lift segment to clients in the offshore, onshore and luxury yacht segments. The company owns 20 ships in different sizes and configurations, of which 16 in Heavy Lift and 4 in Yacht Transport. The Heavy Lift fleet will be fully operational as from 2009 as two ships (Trustee and Triumph) are converted with completion scheduled for Q4-08. A third ship (Mighty Servant 3) is refurbished after it sunk in December 2006, with completion scheduled for Q1-09. Two of the smallest ships (Dock Express 10 and Dock Express 12) were recently divested. The Heavy Lift division comprises 89% of 2008E sales and 97% of 2008E adjusted EBITDA. Its clients are active in oil & gas exploration and development, dredging, port operating, and defence. The Yacht Transport division comprises 11% of 2008E sales and 3% of 2008E adjusted EBITDA. Its clients are owners of luxury yachts. Guidance for FY 2008 is adjusted sales of around USD 500m, growth in adjusted EBITDA of at least 60% to USD 225m, capex of USD 220m, interest costs of USD 82m, and depreciation and amortization of circa USD 75m. For FY 2009 and beyond, management guides for capex to return to a maintenance level of circa USD 50m per annum. Valuation Target price: We set our target price at NOK 7.50, based on the outcome of our DCF model. DCF model: Our model generates a fair value of NOK 7.48 per share, based on a conservative scenario of declining operating profits until We use our detailed projections for and for , we assume flat sales and an EBITDA margin that fades to 35%, from circa 42% in For capex, we use USD 50m p.a. for , and for 2012 and beyond we use USD 100m p.a. The latter implies USD 50m in capex p.a. for fleet renewal and/or extensions. If not for the latter, the business would end in 2029 as by then, all ships should have reached the end of their life cycles. For intermediate growth and growth-to-infinity we use 0% each. Fleet replacement value: Competitors Fairstar and OHL recently commissioned four ships with an average purchase/conversion price of USD 91.5m. Based on the remaining economic life span, we estimate an EV for Dockwise s heavy lift fleet of USD 1,162m. We value yacht transport at USD 37m, using a target multiple of 5x EV/EBITDA 2009E. This results into a fair value of USD 11 per share. Peer group comparison: Compared to other oil services companies, Dockwise is on average 16-28% cheaper on taxadjusted EV multiples. However, the range of multiples is so wide, and the business models of all companies are so different, that we believe it makes no sense to draw any conclusions. Investment case We initiate coverage with a Buy rating and a DCF-based TP of NOK 7.50, which provides 42% upside. Fleet replacement even suggests a value of NOK 11.00, based on recent data, but lower steel prices could perhaps push this down somewhat. Shift in strategy is very beneficial, underpinned by recent trends. Management is changing the company from a pure spot focus to a mix of spot and long-term business. This grows the addressable market, improves visibility and predictability of earnings, and could benefit spot pricing as it lowers capacity available to the spot market. Recent trends clearly show this strategy is paying off. In fact, visibility has never been as good as today, albeit that a large chunk of spot business still needs to be taken in. Debt burden, risk and opportunity. M&A and fleet conversion has kept debt levels high, posing a risk re the debt covenants. We expect net debt/ebitda to drop from 8.8x (2007) to 4.9x (2008). However, growth in profits combined with a start in deleveraging was recently awarded with lower interest rates. Cash generation should reach full capacity in 2009, which is promising. Furthermore, the market cap is so small within the EV, that better than expected deleveraging could be a trigger for considerable share price appreciation. SWOT analysis Strengths * Market leader in heavy lift, operating by far the largest fleet. * Global presence through a network of own branches. * Strategy of moving up the value chain improves visibility. * Relatively little risk to pre-calculated backlog margins. Weaknesses * A large part of the current business depends on spot contracts. * Highly leveraged balance sheet due to the Sealift acquisition. * Limited data available re historic sales and margin trends. * Quarter on quarter volatility. Opportunities * Oil & gas investments are shifting to offshore (from onshore). * Expansion across the value chain grows the scope of business. * Recent investments imply full earnings capacity as from * Return to maintenance capex should boost free cash flow. Threats * Increasing scope and complexity of projects affects risk profile. * Capacity expansion of the industry could result in oversupply. * Heavy lift shipping is not without risks re staff and equipment. * Sustainability of day rates in view of volatility in oil prices. 4 Rabo Securities Equity Research

6 Sales by business (2008E) Yacht Transport 12% Adjusted EBITDA by business (2008E) Yacht Transport 3% Heavy Lift 88% Heavy Lift 97% Backlog Sep-08 (USD 412m) Sales (EUR m) and pre-tax ROIC (%) FY-11 10% FY-08 20% % 25% 20% % % FY-10 42% FY-09 28% E 09E 10E 5% 0% Sales (m) ROIC pre-tax (%) (right) Margins 50% 40% 30% 20% 10% SRI issues Dockwise services the oil & gas industries, which are considered dirty from an environmental point of view. Dockwise services military clients. Dockwise s operations are not without risk, in view of the sinking of the Mighty Servant II (1999) and the Mighty Servant III (2006). 0% 10E 09E 08E EBITDA EBITA Net PE multiples EV multiples E 09E 08E E 09E 08E P/E P/E before goodwill EV/EBITDA EV/EBITA EV/Sales (right) 5 Rabo Securities Equity Research

7 I - Company profile Dockwise is the global leader in heavy transport services to the offshore industry, a position it has held since it was established in The company merged with Sealift in May 2007, which was effectively a reverse-take over. This added six ships to the fleet, which now comprises 16 ships, and resulted in a listing on the Oslo stock exchange. Dockwise also has a strong position in the luxury yacht segment with a fleet of 4 ships. The heavy transport business is by far the largest contributor to sales and earnings. The global leader in heavy lift, operating a fleet of Incredible HULKs In 1993, Dutch companies Van Ommeren and Heerema Group merged their subsidiaries Dock-Express Shipping and Wijsmuller Transport to form Dockwise. The new company was immediately the global leader in the heavy transport niche of the offshore industry (a position which it still holds today), owning 11 ships and managing another 4 ships. In 2006, Heerema Group decided to bring more focus to its portfolio and sold Dockwise to 3i Investments. The transaction was completed in January 2007 and was valued at more than USD 700m, according to 3i. At the time, the Dockwise fleet had grown to 15 ships. In May 2007, 3i and Bermuda-based Frontline (the owner of Sealift) announced the merger between Dockwise and Sealift. The deal was effectively a reverse take-over of Sealift by Dockwise, which added six ships to the fleet: Suezmax tankers scheduled to be converted into heavy lift ships. The deal also resulted in Dockwise becoming a listed company on the Oslo OTC market, through Sealift s listing. In October 2007, the OTC listing was replaced by a listing on the official market. In July 2007, Dockwise acquired US companies Offshore Kinematics (OKI) and Ocean Dynamics (ODL), which strengthened Dockwise s engineering capacity. In February 2009, Dockwise announced the sale of two of its smallest heavy lift ships, the Dock Express 10 and the Dock Express 12. Today, Dockwise owns the largest and most versatile fleet in the industry with 16 ships in heavy lift and 4 ships in yacht transport, all of which are semi-submersible (figure 1). This compares to Fairstar (1 ship operational + 1 ship on order), Ocean Heavy Lift (4+0), SeaMetric (0+2), and Cosco (2+2). We are not entirely sure whether SeaMetric should be considered a competitor as it is building crane/lift hybrids. Dockwise does not consider it a peer. Figure 1: Fleet composition ; *: Converted/refurbished 6 Rabo Securities Equity Research

8 Heavy lift includes various types of ships: flat deck with open stern (5 ships), converted tanker (6 ships), flat deck with tanker capacity (4 ships), and dock type (1 ship). Capacity ranges from 8,727 tons to the 76,061 tons for the Blue Marlin, the largest ship in the industry. The latter can carry the equivalent of 426 (empty) Boeing 747 s. The yacht transport ships are all of the same type, with capacities ranging from 10,763 tons to 17,600 tons. Purpose-built open-stern ships are said to be much more convenient from an operational point of view than other types of ships because (I) they provide more flexibility with respect to positioning of the cargo, (II) cargo is not limited to the size of the deck, and (III) the ballast tanks are designed specifically for this type of activity. However, from an economic point of view, a different type of ship such as a converted tanker has its merits, especially when it comes to less sophisticated jobs such as transport of a jack-up rig. Simply put, you do not use a lorry to ship a single box of chocolates, a delivery van will do. Management of the fleet (sailing, not allocation) is outsourced to Anglo Eastern Group, a Hong Kong based company that focuses on ship management and which operates more than 200 ships, including LNG, LPG, chemical and oil tankers, bulk carriers, and container vessels. Anglo Eastern has been managing the Dockwise fleet since 2004, and the initial contract period was extended from 2006 until Figure 2: Blue Marlin (Heavy Lift) Figure 3: Super Servant 3 (Yacht Transport) Servicing all professionals at sea, including the happy few Dockwise is basically a shipping/engineering company that transports heavy and extremely heavy cargoes. It operates in two niche segments, heavy lift (18 ships) and yacht transport (4 ships), which is also the divisional structure. These businesses are very different from each other, as is shown in figure 4. Heavy lift cargoes include e.g. jack-up drilling rigs, semi-submersible drilling rigs, offshore production platforms, dredging ships, cranes, barges, navy vessels, and zeppelins. Yacht transport cargoes include luxury yachts and sailing ships. Heavy lift is by far the largest contributor to sales and earnings, and should grow even more dominant in 2009 as the entire fleet should be operational by then: 16 ships compared to an average of 14 ships in 2008E. This implies growth of 2 ships y-o-y, or +14%, albeit with a much better mix. This growth is owed to gradual conversion of the six Sealift tankers, refurbishment of the Mighty Servant 3, and the sale of two smaller ships (Dock Express 10 and 12). The Mighty Servant 3 was salvaged after it sank in December The six tankers are expected to be operational by the end of 2008 and the Mighty Servant 3 is expected to be operational in the course of H1-09. Given the minor importance of yacht transport to the P&L, and presumably limited synergies with heavy lift, we wonder whether this business will indefinitely remain a core activity. Management does not appear inclined to divest it, but we do not rule out such a move in due time. 7 Rabo Securities Equity Research

9 Figure 4: Business overview (USD m) Heavy Lift Yacht Transport Sales 2008E % of group sales 88% 12% EBITDA 2008E (adjusted) % of group EBITDA 97% 3% EBITDA margin (adjusted) 51% 13% Ships (capacity) 16 (8,727-76,061 tons) 4 (10,763-17,600 tons) Offices Netherlands, Australia, China, Nigeria, S. Korea, USA France, Italy, USA Partners Agents in Argentina, Italy, Japan, Spain BBC Chartering and Logistics (140 cargo vessels) End markets Oil & Gas, Dredging, Port, Navy Wealthy individuals Market structure Concentrated Fragmented Market position Dominant leader Strong player Main competitors Cosco, Fairstar, OHL, perhaps SeaMetric s hybrids Local companies Entry barriers Medium/High Medium/High Seasonality No Q2 and Q4 are strongest Services Tailor-made transport/engineering Shuttle service, tailor-made upon request Operational focus Utilization and price maximization Utilization Input costs Fuel, steel fastening parts, insurance, ship management, engineering Fuel costs Hedged Fuel surcharge Critical mass Crucial re utilization Less crucial Service area Global Regional/Global From A to B, sometimes via C, but also back and forth between D and E Simply put, heavy lift brings its cargo from A to B. However, the course of navigation is not always straight to B. There are sometimes opportunities to pick up a second cargo at C, which needs to be delivered close to B or on the way to B (figure 5), obviously without too much delay to the original cargo. Such opportunities benefit utilization, and incremental margins should be far superior to existing margins as the majority of direct costs should already be covered. The possibility of transporting a second cargo, or even a third cargo, depends on e.g. size of the original cargo compared to the size of the ship, and the number of slots available at the competition. Figure 5: Heavy lift: from A to B, sometimes via C Figure 6: Yacht transport: back and forth between D and E 8 Rabo Securities Equity Research

10 Yacht transport operates a shuttle service for luxury yachts between various ports across the globe. These ships basically sail back and forth between D and E. The happy few can visit the company website, choose their port of departure and destination, and a schedule appears (figure 7). Popular routes are between Florida and the Caribbean and between the Mediterranean and the Caribbean. Yacht transport also provides an alternative carrier should the client require a point of departure or a destination that is not part of the regular service; strategic partner BBC Chartering and Logistics operates 140 cargo vessels, which sail around the world. Figure 7: Yacht transport (from Genoa to Florida) A limited, yet comforting track record of growth in sales and EBITDA In figure 8, we show sales and EBITDA for the period , the 9M-08 results, and our estimates and guidance for 2008E. Data prior to 2003 are not available. Our definition of adjusted EBITDA adds back nonrecurring costs for redundancies in 2005/2006, costs re the IPO and M&A in 2007, and compensation re the Mighty Servant 3 (MS3) in 2007/2008. For 9M-08, we subtract a EUR 5m gain related to an asset sale in Q3-08. Dockwise s adjusted EBITDA does not add back costs re redundancies, but it subtracts the asset gain. The MS3 sank in December 2006, shortly before Dockwise was sold to 3i. As part of the buy-out, an escrow account was created out of which Dockwise is compensated for lost revenues while the MS3 is out of service. Compensation in 2007 and 9M-08 was USD 6.5m and EUR 6.3m per quarter respectively. The adjusted margin is calculated by adding back this compensation to reported sales and reported EBITDA. Figure 8: Sales and EBITDA (USD m) NL GAAP NL GAAP IFRS Guidance M E 2008E Sales EBITDA Margin 31% 40% 43% 40% 36% 42% 42% XO in EBITDA MS3 adjustment Sales (adjusted) EBITDA (adjusted) Margin (adjusted) 31% 40% 43% 43% 45% 44% 44% 45% 9 Rabo Securities Equity Research

11 In recent years, sales growth was driven by a strong rise in implied day rates (figure 9). Day rates are based on net shipping sales per vessel (sales minus contract-related costs), divided by 320 sailing days. According to management, 320 days represents full utilization because each ship requires on average 45 days of maintenance per annum. These rates are implied, as management focuses on profit contribution per project, and not so much on day rates. The implied rate can swing significantly from time to time, depending e.g. on whether a ship carries one cargo, or more. In the end, the implied rate is an average determined by utilization and pricing. We believe it is worthwhile to emphasise that the day rates as mentioned in figure 9, are average numbers for the group as a whole. The implied rates differ significantly between the smallest and the largest ships in the heavy lift fleet. We believe type IV ships generate rates of between USD 20,000 and USD 25,000, and we believe type I and II ships generate rates of around USD 100,000. As such, the re-entry of the Mighty Servant 3 (type II) in H1-09 and the sale of the Dock Express 10 and the Dock express 12 in Q1-09 (both type IV), lowers the size of the fleet by one ship, but it significantly improves the mix by a day rate of circa USD 50,000. Fleet expansion started to contribute to sales and earnings as from 2007 and should be completed by year-end The full impact on sales and earnings should be enjoyed as from Figure 9: Implied day rates (USD m) M-08 Vessels operational (avg) A o.w. Heavy Lift o.w. Yacht Transport Sales B o.w. Heavy Lift o.w. Yacht Transport Sales per vessel C = B/A o.w. Heavy Lift o.w. Yacht Transport Contract related costs D Net shipping sales E = B-D Net shipping sales per vessel * F = E/A Implied dayrate (USD) * G = F/320 19,488 28,491 29,299 36,567 38,920 50,072 ; *: Sales per vessel and dayrates are annualised In spite of strongly rising day rates, EBITDA margins have been flattish since 2004 (figure 10). Hence, we assume the rise in rates was largely to offset higher input prices. Especially prices of oil (figure 11) and steel went up strongly, until mid These are key input factors as ships require fuel to sail, and cargo requires steel-based fastening materials to remain onboard. Prices of both commodities have come down sharply in H2-08, which could pose a threat to future day rates, depending on the supply-demand equilibrium. It could also provide an opportunity for margin expansion. We will come back on this later in this report. The sequential drop in the implied day rate in Q3-08 was because of below-average utilisation of the fleet, owed to above-average yard time related to maintenance and because of delays re several spot-related cargoes. The mix also played a role as a type I vessel was in dock for the full three months, which diluted the overall day rate. Hence, we consider it premature to conclude that the decline in the oil price in Q3-08 pushed down the implied day rate of the group. 10 Rabo Securities Equity Research

12 Figure 10: EBITDA margins and implied day rates (USD) 60% 50% 40% 30% 20% 10% 0% Source: Rabo Securities M-08 EBITDA margin (adjusted) Implied day rate (USD, right-hand scale) 60,000 50,000 40,000 30,000 20,000 10,000 0 Figure 11: Oil price (Brent) and implied ay rates (USD) Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Oil Price (Brent, USD) Implied day rate (USD, right-hand scale) 90,000 70,000 50,000 30,000 10,000 Dockwise s cost structure has not changed dramatically in the past few years (figure 12). Contract related costs include e.g. fuel (hedged in contracts), steel-based fastening materials, and subcontractors. Vessel operating costs include e.g. crew, insurance, harbour dues, canal passages, and maintenance. Throughout 2008, contract related costs have become more dominant within the overall cost structure, at the expense of vessel operating costs and SG&A costs. However, lack of more precise data prevents us from concluding whether this was because of higher costs for fuel and steel parts, because of a shift in sales mix, or a combination of the two. The sales mix can have a significant impact on the cost structure as a jack-up rig (spot cargo) requires on average hours of engineering, while a float-over of an offshore production unit (longterm cargo) can easily take up more than 20,000 hours of engineering. Meanwhile, the implied day rate of a jackup cargo can be much higher or much lower than that of an offshore module, depending on the situationspecific bargaining power of Dockwise and the client. The huge chunk of D+A in 2007 was because of amortization of the backlog (USD 34.5m, 11.9% of sales), related to the reverse take-over of Sealift. The Q3-08 profit and cost structure is excluding a non-recurring gain of EUR 4.8m, related to the sale of assets. Figure 12: Cost structure (sales = 100%) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 10.6% 10.0% 13.8% 18.6% 13.9% 11.9% 9.9% 11.9% 20.1% 14.6% 15.4% 9.3% 10.7% 13.0% 11.0% 14.0% 29.7% 32.5% 33.8% 35.2% 30.4% 40.5% 36.5% 31.3% 16.8% 15.4% 13.7% 14.7% 13.7% 17.2% 15.2% 28.6% 22.9% 27.5% 26.7% 28.3% 28.5% 19.4% 25.4% 7.4% Q1 08 Q2 08 Q3 08 9M 08 EBIT (reported) D+A Contract related Vessel operating SG&A 11 Rabo Securities Equity Research

13 II Moving up the value chain Traditionally, a large part of the business comprises spot-related cargoes, which has certain benefits and drawbacks. In our view, limited visibility is the main drawback. In 2004, management decided to move up the value chain, which we believe (I) will grow the addressable market, (II) will strongly improve midterm visibility, and (III) could benefit pricing in the spot market because at the beginning of each period, a larger part of the fleet should already be sold out, thereby limiting supply to the spot market. Recent news flow on order intake clearly shows Dockwise s strategy is paying off. Heavy lift, a market in development Dockwise is by far market leader in the so-called dry-tow part of the global heavy lift market (figure 13), a niche segment in the offshore industry that was developed in the 1970s/1980s. The business is basically transport over sea (and sometimes installation) of heavy, and extremely heavy cargoes, including drilling rigs and production units for the oil & gas industry (circa 70% of cargoes, figure 14), all kinds of ships and barges, and onshore freight such as cranes and dry docks. Recently, several new players entered the market, operating and ordering ships that resemble those of Dockwise, except for SeaMetric. The latter has ordered hybrids, which also have a crane function. We are not sure whether to consider it a competitor as it reckons with day rates of between USD 1m- USD 2m compared to the current level of around USD 100,000 for the largest heavy lift vessels. Wet-cargo is placed onboard by submerging the vessel by filling the ballast tanks, after which the cargo is pushed above the deck, after which divers position the cargo and install fastening materials, after which the vessel emerges by emptying the ballast tanks, after which the ship sails away to its destination. Dry cargo is simply lifted from the shore to the deck, after which it is fastened, after which the ships sails away. An alternative to dry-tow is obviously wet-tow, which uses tug boat to pull the cargo. The main advantage of dry-tow is speed of circa knots per hour compared to between 3-8 knots for different types of wet-tow. Day rates of various types of cargo can be up to hundreds of thousands of dollars, so dry-tow has a competitive advantage, which allows for premium rates. According to Dockwise, the competitive edge starts at a sailing distance of circa 1,000 miles (1,609 kilometres). Furthermore, it is said that insurance premiums are much higher for wet-tow, especially for jack-up rigs, presumably because of higher risk of damaging the cargo. Finally, wettow can not transport all types of cargo, including cranes, spars, onshore modules, and offshore modules Selfpropelled cargoes such as navy ships and submarines are usually transported when damaged. Dredging cargo relates mainly to smaller units that are not self-propelled, accompanied by related equipment. Figure 13: Heavy lift: companies and their ships 30 Figure 14: Heavy lift: cargoes 50% 25 40% 20 30% E 2010E Dockwise Cosco OHL Fairstar SeaMetric(hybrids) 20% 10% 0% Jack-ups Semi-subs Offshore Dredgers Cranes Barges Drydocks Submarine Navy Source: Companies, Rabo Securities Source: OHL, Rabo Securities 12 Rabo Securities Equity Research

14 Dockwise s sales split has only been disclosed as of recent. Figure 15 shows that the majority of heavy lift sales is still generated in spot-related cargoes, on average 72% since Q1-06. Management targets a mid-term sales split of 50% in spot business, 25% in float-over (long term), and 25% in onshore (long term). The latter segment is in the early stages of development, coming from a zero basis. By also servicing onshore client/cargoes, the addressable market should grow, which is obviously positive. We will come back on this at a later stage. Figure 15: Heavy lift: sales split 100% 80% 60% 40% 20% Figure 16: Heavy lift: average and targeted sales split 100% 75% 50% 25% 0% Q1 06 Q4 06 Q3 06 Q2 06 Spot cargo Q1 07 Q2 07 Q2 08 Q1 08 Q4 07 Q3 07 Long term cargo Q3 08 0% Average (Q Q3 08) Spot cargo Long term cargo: onshore Target Long term cargo: floatovers The spot business, a game of cat and mouse In our view, the spot business is a game of cat and mouse between clients and suppliers, as bargaining power can be extremely different from time to time. Because of this, implied day rates are probably much more volatile than with float-over and onshore cargoes. In figure 17, we show six examples with very different bargaining power in each situation. We leave it up to you, the reader, to decide where the power lies in each of these situations. In the spot part of the heavy lift business, game theory prevails. Some of the most obvious characteristics that determine bargaining power in any given situation are: How many cargoes are in need of transport? How many ships are available for a cargo (empty or half-loaded)? What is the location of available ships and who owns them? What is the possibility, price, and speed of alternative methods of transport? What are the opportunity costs of not moving? Is a client or a shipping company desperate for cash? A healthy dose of bluff. With respect to this cat and mouse game, size of the fleet matters. When a new cargo pops upon the radar screen, there is a larger chance that a Dockwise ship is nearby (either empty or loaded), than a competitor s ship, simply because Dockwise operates by far the largest fleet. This should allow for situations that a cargo is awarded relatively quickly, with relatively modest sailing time, which should benefit pricing, utilization and thus margins. A fleet of one or two ships, should have more difficulties in achieving similar pricing and utilization because you sometimes deliver a cargo, after which you (I) remain idle at the previous cargo s destination, waiting for a new cargo to pop up nearby, or (II) sail half the world for a new cargo, should the radar screen tell you that there will not be new cargo nearby. A small fleet also has a disadvantage in case two cargoes are booked well in advance with too much time between them to have full utilization, but too little time for a third cargo. 13 Rabo Securities Equity Research

15 Figure 17: Six scenarios with different bargaining power 14 Rabo Securities Equity Research

16 Penetrating float-over and onshore grows the long-term business Starting from a strong position in the spot-related market, management decided in 2004 to move up the value chain by also targeting float-over and onshore cargoes (figure 18). This basically comes down to further penetration of the development part of the oil & gas value chain, and entry into the downstream part. Keep in mind that both exploration and development include spot-related transport of drilling rigs as drilling rigs are used for both exploration (finding/testing new fields) and development (enhancing output of existing fields). The development part also includes long-term contracts re transport of offshore modules. Figure 18: Moving up the value chain Float-over: Traditionally, an offshore module would be transported to its designated production site by a company such as Dockwise. At the destination, a crane ship would lift the module and put it on the connectors of a structure fixed to the sea bed. A float-over removes the need for a crane ship as a semi-submersible transport ship sails (fully merged) to a position between the connectors. Then the ship submerges so that the offshore module is lowered, until it docks with the connectors (figures 19 and 20). The benefits of a float-over are clear as it removes the need for a crane ship, and thus it avoids issues on availability, size, and price of a crane ship. Availability can be an issue as there are but few large crane ships around, operated by the likes of e.g. Heerema (Dockwise s former owner), McDermott, and Saipem. Should construction of an offshore module be delayed, for whatever reason, the slot booked at the operator of a crane ship would be worth zilch. If other slots, later in time, are sold out, the client would face the risk that its incredibly expensive offshore module would remain idle. The largest crane ships in the world, Thialf (Heerema) and Saipem 7000, can lift circa 12,000 tons of cargo. Dockwise has five flat decks with open sterns, which can do float-overs of up to 35,000-40,000 tons of cargo. This is circa 3x as much as the biggest crane ship. Again, size matters. SeaMetric recently indicated that day rates of crane ships have risen in the past three years to around USD 1,200,000 (from circa USD 600,000). They also mentioned that construction of a new crane ship would cost more than EUR 1bn, with delivery in We are not sure whether these numbers still apply, or will hold, in view of the economic slowdown and the strong decline in commodity prices. Nevertheless, there was, and probably still is, an incredibly large gap between the day rates of crane ships and the largest heavy lift ships (circa USD 100,000), aside from engineering-related costs. 15 Rabo Securities Equity Research

17 Figure 19: Float-over (top view) Figure 20:Float over (rear view) Source: DVD, Rabo Securities Source: DVD, Rabo Securities Onshore: Ongoing expansion in exploration and development in commodity markets has resulted in more and more large, complex production plants at remote locations. However, an LNG liquefaction plant (to name one type of project) is not easily constructed at a remote location, and certainly not for cheap. Therefore such plants are often assembled onsite by connecting a large number of modules that have been constructed and tested elsewhere. This modular approach has many benefits re costs, complexity, and risk. However, most construction/engineering companies have limited experience with transport of heavy cargo, let alone with say 30 pieces of heavy cargo from all parts of Asia to one specific site somewhere in the Australian outback. Should completion of module number 5 be delayed, it could lose its slot at the shipping company, or the client could face stiff penalties. Losing the slot would mess up the inflow of modules at the assembly site and could delay the project at huge costs. Dockwise should easily be able to manage a large flow of modules, with or without delays, given the size of its fleet as it should be much easier for Dockwise to (re)allocate a ship should one or more modules be completed ahead of, or behind schedule. Once again, size of the fleet matters. Float-over and onshore versus spot: In general, float-over and onshore cargoes are very different from spot cargoes. They are much bigger, and they are much more valuable so they have much higher opportunity costs. Therefore, clients have to secure a ship well in advance as they absolutely must avoid having a finished unit onshore, worth up to several billions of USD, with no transport available because of the possibility of overheating in one or more spot segments. Because of this, transport (and potentially installation) is usually booked well in advance, which provides the shipping company with superb mid-term visibility compared to the spot business. This superb visibility has a side-effect, namely that the contract value is set well in advance. This is positive should market conditions be sour at the time of execution, and it is negative should market conditions be hot. Another difference is that float-over and onshore cargoes have much higher contract costs than spot cargoes. These contract costs comprise e.g. subcontractors, equipment, and components, and we assume these costs are passed on with a relatively small surcharge. Consequently, the operating margin on contract costs should be modest compared to the operating margin on transport. This dilutes the overall margin compared to a pure spot contract where the operating margins is almost entirely based on the transport margin. 16 Rabo Securities Equity Research

18 A third difference is that float-over and onshore cargoes are non-recurring. Once construction of a module has been completed, it is shipped from the onshore production site to its designated production site, where it remains operative for up to several decades. This compares to the spot market, which is driven by (I) ongoing relocation of existing assets from one side of the planet to another, and (II) first-time transport, starting at the construction yard. Decommissioning of e.g. float-over modules could be a business opportunity in the mid or long term, especially considering the age of certain assets. However, opportunity costs at the end of the life cycle should be much lower than at the start. Therefore, we believe clients are more likely to opt for cheaper solutions such as wet-tow, if possible. 17 Rabo Securities Equity Research

19 III Moving up the value chain: the Fantastic Three We believe expansion into float-over and onshore cargoes has three major benefits: (I) it grows the addressable market as these cargoes come on top of traditional cargoes, (II) it should provide much better visibility as these cargoes are booked well in advance compared to spot cargoes, (III) it should benefit utilisation as a much larger part of the fleet is already allocated at the start of each period. This should benefit margins and pricing re spot cargoes as there should be less supply available. Helpful is that the backlog s pre-calculated margins, in general, face relatively little execution risk due to the nature of the business. (I) A bigger addressable market By also targeting float-over and onshore cargoes, Dockwise has easily and cost-effectively expanded the addressable market, although this is not easily quantified (figure 21, the scale is arbitrary). The existing ships can handle the new types of cargo, so there is no need for additional investments. However, installation of a floatover cargo and project management re an onshore project, require engineering skills that go beyond those of traditional transport. According to Dockwise, it takes circa 50 hours of engineering to transport a rig, and it can take more than 20,000 hours of engineering to do a float-over. That is why Dockwise acquired OKI and ODL, two specialists in float-over engineering. OKI also markets certain components that are used for float-overs (e.g. connectors). The size of the dry-tow market is not easily quantified because several companies belong to a larger group and their numbers are lost in consolidation (to outsiders). Dockwise mentions in its presentations that it competes in the float-over, onshore, and offshore segments with conglomerates such as Saipem, Technip, Acergy, Subsea7, and McDermott. Hence, adding up the sales numbers of Dockwise, OHL, Fairstar, Cosco (part of a larger company), and SeaMetric (not yet operational) would only represent part of the addressable market. OHL s Q3-08 presentation mentions a market of circa USD 1bn in sales per annum, which should grow to USD 2bn by It was not indicated whether this growth should be achieved through more volume (cargoes), higher prices (day rates), expansion of the addressable market (float-over, onshore), or a combination of these three aspects. Dockwise s results of the past three quarters provide some insight. Average sales per heavy lift ship amounted to USD 7.3m per quarter, which is USD 29.2m per annum. There should be 16 Dockwise ships sailing in 2009 with a slightly better mix, so their combined sales potential is close to USD 500m, all else being equal. There should be 10 ships sailing under the banners of the competition. Using the same sales potential per ship, leads to combined sales of close to USD 300m for the competition. The latter is probably overstated as utilization at companies with just one or two ships should be lower than at Dockwise, because of reasons explained earlier. Nevertheless, the combined sales potential of Dockwise and its competitors amounts to circa USD 800m per annum. The OHL comments imply that large offshore conglomerates generate sales of circa USD 200m per annum, which we consider feasible. Obviously, all of these numbers reckon with flattish implied day rates in In figure 22, we show supply and demand in heavy lift transport, expressed in number of vessel days, as projected by consultancy firm Infield. Based on 320 operational days per annum, demand for circa 9,200 vessel days in 2011E requires in total 29 ships. There are currently 28 ships operational or under construction, including SeaMetric s 2 hybrids. Hence, supply and demand seem to remain in balance, which should be supportive to day rates. Although these projections suggest solid momentum, they still leave us in the dark with respect to the value of the market. Day rates have trended up strongly in recent years (figure 9), and visibility on future rates is limited. For reference, the 2006 trough of circa 4,500 days required merely 14 ships. 18 Rabo Securities Equity Research

20 Figure 21: Addressable market segments Figure 22: Projections for heavy lift transport (vessel days) 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, E 2009E 2010E 2011E Drilling rigs Other Offshore modules Supply Source: Infield Systems, OHL, Rabo Securities (II) Better visibility on future sales As explained earlier, float-over/onshore relates to cargo that is much more valuable than spot cargo. Therefore it is crucial to secure transport well in advance, in order to minimise opportunity costs. Throughout 2008, Dockwise was awarded several such contracts for execution well beyond 2008, including the following three examples: 12-Aug: USD 22m onshore, execution : Hatch-Technip ordered transport for 18 onshore modules, including engineering and associated services, from Qingdao (China) to Vavouto (New Caledonia). 20-Aug: est. USD 20m onshore, execution : Navantia ordered transport for two semi-finished helicopter carriers from Ferrol (Spain) to Melbourne (New Holland). 14-Oct: USD 84m float-over, execution : Vyborg Shipyard ordered transport and installation for two float-over cargoes of 22,000 tons each. This includes circa three months of sailing from Geoje Island (South Korea) to Murmansk (NW Russia). Installation is scheduled for Jul/Aug-10 and Feb-11 respectively. The order intake has increased significantly, partly because of the focus on long-term cargoes, as underpinned by growth in the backlog in the past two years (figure 23). The 12-months-rolling book-to-bill (B2B) has risen nicely since the beginning of 2007, albeit a bit bumpy due to timing of contract wins. The jump in Q3-08 was due to a record intake of USD 194m, which was almost twice the sales level of that quarter. However, we believe the underlying progress is even better than the reported data suggest because backlog growth was largely driven by long-term cargoes, while sales growth was largely driven by spot cargoes (figure 15). Figure 24 shows the split of the backlog re timing of execution. For the sake of simplicity, we assume that: (I) spot contracts are executed within 12 months after having been awarded, and (II) float-over, onshore, and the largest, most complex offshore contracts are executed more than 12 months after having been awarded. This makes it still difficult to precisely determine the underlying trend, because time is not absolute. We will explain. The backlog at the end of Q4-07 included USD 60m in contracts for execution in 2009, so all of that should be long-term contracts (>12 months). The backlog at the end of Q1-08 included USD 73m in contracts to be executed in 2009, so a sequential rise of USD 13m. This USD 13m could be spot for Q1-09 (<12 months), longterm for Q2/Q3/Q4 (>12 months), or a combination of the two. The Q2-08 and Q3-08 backlogs face a similar situation with respect to contracts for Hence, year-end backlogs provide somewhat more insight than interim backlogs re the split between spot and long term contracts. Unfortunately we only have one year-end backlog to work with, the Q4-07 backlog of USD 233m, which included USD 140m in contracts for 2008, USD 60m for 2009, and USD 33m for This implies that at least 40% of the backlog was long-term ((60+33)/233), and perhaps more as part of the 2008 execution could relate to long-term contracts awarded prior to Q Rabo Securities Equity Research

21 Figure 23: Backlog (USD m) and B2B Figure 24: Backlog composition (USD m) % 100% 80% 60% 40% 20% 0% Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Backlog B2B (12-months rolling) (right-hand scale) Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 For execution in The lack of more detailed information prevents us from precisely determining the exact split between spot and long-term backlog at any given moment. Nevertheless, a general trend can be identified, but only by comparing y-o-y trends, not q-o-q trends (figure 25). The Q1-08 backlog clearly showed a rising importance of long-term contracts, which made up for 52% of the total backlog, versus 25% in Q1-07. The Q2-08 backlog showed 61% versus 44% a year earlier, and the Q3-08 backlog showed 80% versus 82% a year-earlier. The latter made no progress y-o-y because the current part of the Q3-07 backlog was so low, that the long-term part was unnaturally inflated to 82%. In that respect, the 80% of Q3-08 is of better quality than the 82% of Q3-07. Figure 25: Backlog trends (USD m) Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Average Q Q3 08 Backlog o.w. execution in o.w o.w o.w o.w and > Backlog current FY As % of backlog 74% 56% 18% 60% 47% 39% 20% 42% Backlog >current FY As % of backlog 25% 44% 82% 40% 52% 61% 80% 58% In the past 12 months, the average long-term part of the backlog was 58%, which should be a minimum as part of the current backlog could be long-term contracts awarded more than 12 months before execution. This 58% is well above the average sales contribution of long-term cargoes of the past 12 months, which was 31% (figure 15, period Q Q3-08), so the underlying trend is much better than the reported B2B of the group suggests. There is also another way to show the strong underlying progress of the focus on long-term cargoes. This is simply to consider the 12-months rolling B2B of long-term contracts, which is calculated by dividing the long term backlog data from figure 25, by the reported 12-months rolling sales from long-term contracts. Figure 26 clearly shows that the long-term part of the business had a visibility of three years (304%) at the end of Q3-08, well above the 102% of the group. Again, any comparison should be made y-o-y, not q-o-q. 20 Rabo Securities Equity Research

22 Figure 26: LT backlog (USD m) and LT B2B Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Backlog > current FY B2B (12-months rolling, right-hand scale) 350% 300% 250% 200% 150% 100% 50% 0% Figure 27: Weighted duration of the backlog (months) Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Weighted duration (months) (III) Improved utilisation, benefiting margins and spot pricing The name of the game is utilisation, which is obviously tricky when dealing with only spot contracts. In figure 28, we show utilization of the fleet in Q2-08 and Q3-08. This again shows that the majority of the current business is still spot-related (dark blue and the majority of light blue). Orange is long-term cargo, grey refers to ships under construction/maintenance, and white in Q3-08 reflects idle time. The latter was already communicated in Q2-08, as management had received signals that several rig jobs were facing delays. Figure 28: Utilisation Q2-08 and Q Rabo Securities Equity Research