NKT Flexibles Highly Engineered Subsea Solutions
Agenda Global Energy Outlook NKT Flexibles at a glance Products & Solutions Financial Review New flexible pipe plant in Brazil 2
Global Energy Outlook
Oil and gas a primary future energy source 4
Growth driven by non-oecd countries 5
Long term demand for oil and gas 6
Conventional Petroleum remains dominant 7
Oil price forecasts Source: Bloomberg, BofAML Global Commodity Research (February 2010) Source: Short-Term Energy Outlook, August 2011 8
Market Dynamics Support Healthy Growth A Few Facts about the Global Flexible Pipe Market The flexible pipe market, which h forms part of the global l SURF market, is estimated at ~1,200km 1200k per annum measured din theoretical length of standard 8 pipe In value terms, this corresponds to approx. DKK 8.0bn (USD ~1.5bn) per annum Brazil is the single-largest market with Petrobras accounting for ~50% of global consumption Other important markets are North Sea, West Africa and the Far East including India and Australia Long-term Demand Drivers The investment input that drives the SURF market is strongly gy dependent on the anticipations of the future oil price Traditionally, the number of viable projects depends very much on the expected oil price A majority of future SURF projects are planned with break-even oil prices of some USD 30-50 per bbl. While the short term oil price is difficult to predict, the longer-term outlook appear positive Increasing world demand for energy driven by non-oecd countries and general economic recovery in Western Economies General consensus in the oil industry that we are in the midst of the Peak Oil supply period If sustained, the current oil price of USD +100 per bbl. should support a flow of new projects for the coming years 9
NKT Flexibles at a glance
NKT Flexibles I/S NKT Flexibles Headquarters in Brøndby, Denmark. NKT Flexibles I/S was established in 1999 and has today some 650 devoted employees. Rio office. The plant is situated in Kalundborg, Denmark. 11
Introduction to NKT Flexibles Introduction Since 1968 NKT Flexibles has supplied flexible pipe systems to the global market Today NKT Flexibles offers total riser and flowline system design, engineering, procurement, manufacture, testing, documentation and delivery The Company is the third largest player in the market for flexible pipe systems estimated at DKK 8bn (USD 1.5bn) annually with a global market share of app. 15% The production facility in Kalundborg, Denmark is well- established and has a yearly capacity of close to 175 km of pipes depending on size and design The HQ and the main R&D facility is located in Brøndby, DK NKT Flexibles also has an R&D facility in Aalborg, DK and a sales representation in Rio de Janeiro, Brazil (Houston & Perth in progress) Total employee base of app. 650 primarily based in Denmark Legal Structure and Ownership NKT Holding A/S Subsea 7 100% 100% SubSeaFlex Holding A/S Danco AS 51% 49% Pipes product mix Jumpers 3% Risers 17% NKT Flexibles I/S In May 2011, NKT Flexibles won a DKK 9.7bn (USD 1.9bn) four-year framework agreement with Petrobras covering the Static supply of flexible pipes during 2012-2015 Subsea 7 Flowlines 10% 80% Customer mix Others 40% Petrobras 50% 12
Stand-alone Organisation Operating Independently NKT Flexibles Organisation NKT Flexibles is run as a stand alone company with its own management team, production and R&D facilities Separate IT and reporting structure No overlapping functions or employees with NKT Holding or other companies in NKT Holding or Subsea 7 Group Projects are run by one of NKT Flexibles four project units which have a combined capacity of up to approx. 40 simultaneous projects Board of directors Thomas Hofman-Bang, CoB (CEO - NKT Holding) Stephen G. Wisely (EVP Commercial - Subsea 7) Søren Isaksen (CTO - NKT Holding) Jan W. van der Graaf (VP Strategy - Subsea 7) HR 14 employees Sales 18 employees R&D 65 employees CFO Keld Ringgaard 13 employees Organisational Structure Legal 4 employees Risk Assessment 1 employees CEO Michael C. Hjorth HSEQ 31 employees Plant 340 employees Projects 45 employees Corporate governance COO Reidar Kleven LEAN 4 employees Engineering i 93 employees Purchase 22 employees NKT Flexibles was spun-off from NKT Cables in 1999 and has since then operated as a JV A shareholder agreement governs the relationship between NKT Holding and Subsea 7 vis-à-vis NKT Flexibles From a shareholder perspective the JV is governed at the board of directors level where both NKT Holding and Subsea 7 participates 13
Knowledge and Services NKT Flexibles Integrity Management and Services is based on more than four decades of expertise working with design, development and production of flexible pipe solutions Within this field NKT Flexibles deliver a variety of consultancy services as listed below Engineering g Services Pre Installation Services Post Installation Services FEED studies Flow assurance studies Upheaval buckling analysis Input to Design Competitions Delivery of software monitoring and analysis systems Preparation of input for Client specs Re-evaluation of flexible pipe service life Assessment effects of change in operational parameters Evaluation of data collected from monitoring systems Prepare, review and assessment of regular integrity reports Flow rate test to verify venting system Outer sheath leak test to demonstrate intact outer sheath sealing mechanism Annulus vacuum test to confirm no outer sheath damage and to estimate volume Samples of polymer/carcass coupons for referencing Mounting of fiber-optic monitoring system for fatigue life assessment Mounting of fiber optic monitoring system for temperature measurement Mounting of annulus gas monitoring systems Flow rate test to verify the venting system Offshore annulus vacuum test Calibration of fiber-optic monitoring systems Retrofitting of gas analysis equipment on any flexibles including umbilical's Ad-hoc repair work 14
State of The Art and Flexible Production Facility Kalundborg Site Key Facts Located at the harbour of Kalundborg (~100km west of Copenhagen) Employs around 370 people Manufacturing facilities occupy a total site of 150,000 m² Capacity expansion / technology improvement program completed end 2010: Total Capex expenditure of DKK 300m Increased capacity from 120km to 175km of pp pipes p.a. (increase of +40%) Completed within budget Production capacity can be increased by add. 20-25% at modest cost Factory equipped with dual production lines allowing the simultaneous manufacture of both long continuous lengths and shorter reel based products Own quayside with water depths ranging from 7 m to 10 m allowing virtually any installation vessel or heavy lifter access to handle all sizes and lengths of flexible pipe 15
01999 NKT Flexibles Markets for Flexible Pipes Offshore Oil & Gas Reference Projects Project characteristics 3 3 3 1 2 1 NKT Flexibles has completed +200 projects worldwide since 2000 Current average project size is approximately DKK 55m, on par with recent years This represents a mix of a few large projects and a wide range of medium and small project sizes 1 2 2 Average size of projects NKT expected to be shared #2 after 3 establishment of 68 Brazilian facility 3 68 51 56 56 47 49 x Main markets Water & Chemical Oil & Gas NKTF regional market positions 26 37 23 10 13 15 17 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011B 16
Customer Base Reflecting Global Market Structure NKT Flexibles is a project-oriented company whose business is based on bidding for customer tenders Directly to the global offshore oil and gas industry Through partnership with Subsea 7 Petrobras, Brazil s largest oil company, is the largest customer accounting for approx. 50% of revenues The current frame agreement will expire by end- 2011 Has been replaced by a new larger frame agreement to 2015 entered into earlier this year The share of revenue generated through Subsea 7 has gradually decreased over the years In the beginning of the JV, Subsea 7 (formally Acergy) accounted for as much as 60% of revenues By comparison for the period 2009 2011B the average share of revenue from Subsea 7 is approx. 10% Today, NKT Flexibles is considered a fully independent solutions provider in the market Average Customer Mix 2009-2011E Selected others: Others 40% Subsea 7 10% Petrobras 50% Deepwater capex by operator 2010-20 (USDbn) Petrobras Total BP Statoil Shell ExxonMobil Chevron ConocoPhilips Current NKT Flexibles customers 0 20 40 60 80 100 17
Petrobras - a dominant source of future demand Comments Petrobras represents a unique anchor customer: Unmatched investment profile going forward Shown strong sign of confidence in NKT Flexibles offering Provides access to decisive Brazilian market Attractive downside demand protection in coming years Investment profile expected to drive demand going forward Lever for deep water technology development Petrobras production ( 000 boe/day) Petrobras Capex 2011-2015 (USDbn) 250 200 13.2 13.4 45.4% Pre salt 150 70.6 54.6% Post salt 100 9.8 50 117.7 17% 18% Exploration 0 Development Brazil E&P Intl. E&P RTM Infrastructure G&P Other 65% E&P equipment and services demand estimates 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2,535 435 2,100 3,688 618 3,070 6030 6,030 1,120 4,910 2011 2015 2020 Oil production Gas production Critical resources Current situation (Dec/10) Delivery Plan (to be contracted) Accumulated value By 2013 By 2015 By 2020 Drilling rigs water depth above 2km 15 39 37 65 Pre-salt Supply and special vessel 287 423 479 568 543 1,148 Production platforms SS & FPSO 44 54 61 94 Others (Jacket and TLWP) 78 80 81 83 Source: Petrobras 18
New DKK 9.7bn Petrobras Frame Agreement On 30 May 2011 NKT Flexibles signed a DKK 9.7bn four year frame agreement with Petrobras ( FA-II ) FAII covering supply of flexible pipes during 2012 2015 Covers pipes at water depths of 1,500m to 2,000m Includes up to 694km of flexible pipe structures with a total potential value of DKK 9.7bn Minimum i obligation of 12.5% of the total t value per annum corresponding to 86km of pipes and DKK 1.2bn in value per annum The agreement marks a significant expansion of the existing three-year frame agreement to 2011 ( FA-I), which has a total value of up to DKK 1.4bn and will be fully utilized end-2011 FA-II has an assumed EBITDA margin that is supportive of the target 20-25% EBITDA margin by 2015 An input price inflation indexation mechanism is built into the agreement which should serve to protect the margins As part of FA-II, NKT Flexibles will establish a new dedicated flexible pipes plant in Brazil expected to come into operation by mid-2013 In the period 2012 first half 2013 flexible pipes related to the agreement will be manufactured at the plant in Kalundborg which h will ensure high h capacity utilization at the plant 19
Competitor Overview Competitive Landscape Competitor Overview The flexible pipes market is split between 3 players Key competitive advantages are related to: R&D and innovation capabilities Local presence in the important Brazilian market Factories in France, Brazil, Malaysia Focus on large/complex all-in-one solutions Main geographic focus: Global Product offering: 2 19 Quality Listed on Euronext Paris Partnering strategy NKT Flexibles is strong in RoW and will compete for 2nd Factories in the UK and Brazil position when the new factory in Brazil is ready Market Shares Based on Capacity (km) Focus on projects with standard products Main geographic focus: Brazil & Australia Product offering: 2 16 2010 2010PF Acquired by General Electric in Dec 2010 12% 36% 52% 5% Technip 26% 41% Wellstream NKT Flexibles 28% Prysmian Building a factory in Brazil Focus on production of smaller pipes Main geographic focus: Brazil Listed on Milan Stock Exchange 20
Products and Solutions
Product portfolio Dynamic Risers Static Flowlines Static Jumpers : 2½ ID to 16 ID / -45C to +130C / 0 to 690 bar / 2,000m WD / up to ~2,500m long : 2½ ID to 16 ID / -45C to +130C / 0 to 690 bar / 2,000m WD / up to ~15,000m long : 2½ ID to 16 ID / -45C to +130C / 0 to 690 bar / 2,000m WD / up to ~500m long FPSO Risers Jumpers Flow Lines 22
Pipe Design for Every API 17J Application GAS, OIL, WATER, CHEMICALS, 2½ to 16 ID down to 2000m water depth depending on size The main design is divided into three families: Family 1 Smooth Bore smooth bore (liner), pressure + tensile armour, outer sheath Family 2 Rough Bore carcass, liner, special tensile armour, outer sheath Family 3 Rough Bore Reinforced carcass, liner, pressure + tensile armour, outer sheath Each family may include special purpose layers such as anti wear and insulation layers. FAMILY 1 FAMILY 2 FAMILY 3 23
Engineering Capacity More than 190 Engineers +90 in Project Engineering i (Pipe + System + Structural + End fitting) +60 in Research & Development +20 in Project Management and Sales +20 in Manufacturing Operations 24
Project Management and HSEQ IPMA Certified Project Managers Certification is performed according to procedures developed and validated by the International Project Management Association (IPMA). 15 Project Managers 30 Project Assistants & Document Controllers Divided into 4 Project Management Units (PMU) each dedicated to certain Clients or regions +20 HSEQ Personnel 25
Intense Focus on Safety and High Quality Health, Safety, Environment and Quality (HSE&Q) Explicit HSE&Q policy implemented 20 HSE&Q personnel Policy in full compliance with the Danish Occupational Health & Safety Act and the Danish Working Environment Act NKT Flexibles in close cooperation with clients regarding HSE&Q improvements, e.g.: Statoil Kollega Program Be a professional campaign partners include: Quality Assurance Robust quality system in accordance with the requirements of ISD 9001:2000, ISO 14001, OHSAS 18001, API Q1 Monogram License NKT Flexibles participated in the development of API specification and we use this specification as design code for all flexible pipes Quality system focused on entire value chain including: Contract review Project management Design & Engineering review Procurement Manufacturing Testing As-built documentation Aim to maintain a dynamic quality system ensures continuous improvement in all parts of the operation 26
Temperature and Fatigue Monitoring Detection/Monitoring of: Outer Sheath Breach Polymer Overheating Temperature During Shut-Down Accumulated Fatigue Damage Tensile Wire Break PETROBRAS, Monitored Jumper - Tensile Wire Break Detection ti - Outer Sheath Breach Detection STATOIL, Visund Future - Accumulated Fatigue Damage 27
Engineering Services Extended Service Life FEEDs Reassesment studies: - Fatigue Life Studies - Polymer Coupon Analysis - Flow Assurance Studies - Temperature Studies - Change of Service STATOIL, Frame Agreement Engineering Services including FEED s GDF Norway, Frame Agreement Engineering and Offshore Services 28
Product Development Innovative technical solutions form the platform for NKT Flexibles product portfolio Development in R&D Costs 2006 2011E R&D spending comprise approx. 5% of revenues with current activities targeted towards areas such as: Extremely high temperature applications (>130C) Product improvement through deep immersion performance (DIP) test Ultra deep water applications at +2,500m Improved condition monitoring through real-time sensing of pressure and gas composition Lateral buckling (tensile wire instability) testing Qualification of PVDF grade for commercial use 2.0% 3.0% 2.6% 38 37 1.7% 3.9% 50 4.9% 76 NKT Flexibles has highly modern R&D facilities at the headquarters in Copenhagen and has more than 60 FTE s working with R&D related activities 18 22 Innovation is supported by an active patent strategy 2006A 2007A 2008A 2009A 2010PF 2011E 29
R&D pipeline R&D, Innovation Growth Maturity Stagnation K-armour FA II Project Conventional Riser System Concepts Innovati ion Culture Demand IPUT FLEXTREME Monitor Jumper Fibre Reinforced Technology ID12 HPHT Super Critical CO 2 Pipe Integrity Management Service Shallow Water Systems Lean Duplex Carcass IR-cured XLPE applications Un-plasticized PVDF Strip-armoured Flowlines Time Profit 30
Free Hanging Catenery Concepts Water Depth 500 m 1,000 m 1,500 m 2,000 m 2,500 m 3,000 m Conventional flexible pipe technology New flexible pipe technology API Family III Pipes IPUT API Fam III Ig free hanging g catenery mark FLE EXTREM ME 3,500 m 31
Ultra Deepwater Proof-of-Concept program for 2250 meter water depth completed successfully ID6 / ID8 free hanging catenary system Optimized sections Novel structures Carcass profile Wet insulation Supported pressure armor 200 m 900 m Top Jumper Top Section Mid Section 1800 m Bottom Section Water depth 2250 m 32
Financial Review
Track Record of High Double-Digit Growth 2000-05: 18% CAGR 2005-10: 26% CAGR 2010-15: 22% CAGR 63.5% 58.0% 54.0% 53.9% 55.7% 3,527 47.0% 48.0% 44.0% 47.6% 46.4% -6% -7.2% -1.8% 215 266 223 305-17.2% 197 10.8% 491 33.1% 21.4% 23.2% 23.5% 15.6% 15.3% 1,546 1,399 1,255 1,313 1,279 884 27.8% 2000A 2001A 2002A 2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010PF 2011E 2015F Revenue Gross margin % EBITDA % Phase I: Beginning (99-05) Initial penetration into the off-shore sector Revenue driven by Acergy orders Improving profitability Phase II: Growth (06-08) Large order inflow directly from oil companies in order to secure supply of critical equipment High prices and capacity utilisation drives profitability Phase III: Slowdown (09-11) Oil companies investment and new projects impacted by financial crisis Low capacity utilisation and eroding margins Phase IV: Return to growth New projects expected as oil prices and drilling activity remain high Improved profitability from better market conditions and capacity utilisation * Note: 2010 and 2011 revenue, gross margin and EBITDA has been adjusted with DKK 77m and DKK 70m respectively to reflect the price adjustment mechanism in the Petrobras FA-I agreement. 34
Backlog development Other FA-II 4,850 1,305 1,241 1,068 1,231 1,088 1,001 2006 2007 2008 2009 2010 Current General pipeline pp Pre-backlog expected to grow due to improving market activity reflecting a continued solid oil price Expect more flowline work in North Sea associated with tieback projects Expect increased demand for flexible riser systems due to influx of new FPSO / FPU projects globally FA-II Material part of work for 2012 secured with the award of FA-II FA-II a significant element in ensuring visibility of future activity from 2012-2015 The contract stipulates that Petrobras shall on an annual basis award call-off order(s) amounting to 86km of products representing around 12.5% of the overall FA-II contract value 35
NKT Flexibles Strategy 2008 2011YTD Achievements New DKK 9.7bn four year framework agreement (FA-II) signed with Petrobas (7x larger than the previous agreement FA-I ) Development and commercialization of 6 and 8 flexible pipes for 2,000 metres depth Expansion of annual production capacity at Kalundborg factory from 125 km to 175 km Key Industry Drivers Development in oil prices Exploitation of deep water reservoirs Use of floating and subsea developments Replacement of existing offshore installations 2011 2015 Strategic Goals 1. Bi Bring company to a new level lwith special focus on capitalising on the Petrobras agreement in Brazil 2. Ensure annual capacity load of +150km/year at the Kalundborg factory 3. Develop the overall market position through human capital, escalating technologies and sustainable processes 4. Commercialize solutions for +2,500m depths Vision By excellent performance to become the preferred supplier of high h quality flexible pipe systems based on best-in-class technology Financial Goals Realized 2010 Goal 2015 Revenue (DKK) 1.2bn ~3.5bn EBITDA margin 23.5%* ~25% * Note: 2010 revenue, gross margin and EBITDA has been adjusted with DKK 77m to reflect the price adjustment mechanism in the Petrobras FA-I agreement. 36
New flexible pipe plant in Brazil from end Q2 2013
1. New Plant in Brazil on schedule Establish plant for commercial production by end Q2 2013 Pre-requisite requisite for FA-II number one priority Recent ramp-up of Kalundborg provides useful experience The new facility will more than double current capacity Capacity to produce 225km standardized 6 pipe Corresponds to 25% - 30% of the capacity available in Brazil based on current capacities Designed for optimum flow of Petrobras type standardized flexible pipe in the 2.5-12 ID range The initial investment costs will amount to approx. DKK 1.1bn of which approx. DKK 700 will fall in 2012 In addition there will be a working capital tie-up of DKK 400 600m in the first 2 years of operation With the facility assumed approx. 75% utilized from 2014 onwards annual EBITDA of DKK +550m is targeted Change in WC Capex 1 EBITDA Key Figures for the Brazil Business Case 568 575 125-17 -117 696 196 182 50 37 50 70-10 -248-365 2011E 2012E 2013E 2014E 2015E Note 1: Capex includes R&D expenditure
Brazilian site for new flexible pipe plant Perfectly located in front of Brazils main offshore oil & gas development areas 39
On Schedule with site for new flexible pipe plant LLX Terminal Sul offshore facility which will become part of the Port Acu industrial condominium in São João da Barra. 40
On Schedule with Factory lay-out 41
On Schedule with Machinery and Equipment The technical, legal and commercial clarifications for all main process lines have been completed by end of July 2011. LOI s and/or PO s for the following main equipment have been issued: 2 @ Carcass lines July 2011 2 @ Extruder lines July 2011 1 @ Pressure Armouring line (similar to the new in KAL) July 2011 1 @ Tensile Armouring line (similar to the new in KAL) May 2011 6 @ Rewind Lines July 2011 1 @ Insulation Tape Wrapper July 2011 2 @ Jumbos (Load capacity 400 T / 11.4 m reels, hub drive) June 2011 29 @ Powered Under Rollers July 2011 all of which confirm delivery within NKT s perceived project schedule. All other main equipment will be specified and ordered d within Q2 2012 Annual theoretical capacity of ~225km 6 ID flexible pipe and prepared for IPUT type products 42
2. Capacity Load of >150 km/year at Kalundborg FA-II work will provide significant visibility to Kalundborg backlog for 2012 with some 86km of flexible pipe to be executed for the Brazilian market with transition of production to Brazil plant planned for end of Q2 2013 Continued focus on selected niches is to ensure near-full capacity load at the Kalundborg factory beyond 2012: 1. Mutually beneficial partnering type arrangements Key focus is to evolve around strong existing relationships with strategic major clients such as Statoil, ONGC and a range of key independent d oil companies Strong historical link to Subsea 7 Strong position with FPSO contractors 2. Improved competitiveness through technology and cost base Selection and maturing of incremental technology improvements to create new safe havens over time, e.g. XLPE/PEX, etc. Strong day-to-day focus on operational efficiency to spur a continued lowering of production unit costs 3. Added d services Focus on utilization and commercialization of internal know-how and/or resources Creation of new market opportunities inside existing core area as well as outside the current frame 4. Aggressive market positioning Focused effort on aggressive positioning for selected larger strategically important projects Increased production capacity allows to some extent for a trade of margin for volume Based on a full factory corresponding to a ~75% utilization factor the factory has estimated annual revenue potential of approx. DKK 1.9bn from 2014 onwards based on current price and margin levels 43
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