Medserv is expecting 2020 to be a challenging year

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A decade of speculation about the potential of the east Mediterranean in natural oil and gas resources was recently brought to an end following the recent gas finds in the said region, prompting revived interest in drilling activity by the large International Oil Companies in the Mediterranean.

The finds have been concentrated in the waters between Egypt and Cyprus and drilling concessions that the likes of ENI, ExxonMobil and Total have in that area put the Medserv Group in an optimal position to attract Integrated Logistics Support Services contracts in the region, having worked, directly and indirectly, with these significant IOCs on other drilling projects and/or tenders. The fundamental challenge for this industry remains the intrinsic volatility within the sector. IOCs need time to address the swings of an over- or under-supplied market and develop a resilient strategy to mitigate the risks related thereto. This uncertainty leads to caution threading by the oil and gas companies who in recent years have curbed their investment for a while, assessing the right opportunity that is indicative of stabilisation of the industry dynamics.

Key developments 2019 and outlook for 2020

The Group continues to seek ways of strategically diversifying its geographic markets and client base, positioning itself for growth in various new significant oil and gas markets. The tendering processes that it is participating in are giving the Medserv Group the visibility with the larger IOCs and have led to the Group being listed on the top 5 vendor lists of large IOCs. Such aspect is important for Medserv, because it would be in a position of being invited to tender for future exploratory and drilling projects.

Malta base

During FY2019, the Malta base continued to provide shore base services for the development of offshore Libya projects. The Bahr Essalam Phase II project was completed in August 2019, which extends the field production from 995 million standard cubic feet of gas per day to 1.1 billion. Medserv began to act as the logistics base for the development of two new gas offshore structures. This project, together with the increase in the upcoming drilling activity in the Mediterranean basin, resulted in a new potential product offering being presented to the Malta facility.

Also, despite the ongoing political and hostile environment currently ensuing in Libya, management is confident that the company will remain the shore base for all oil and gas operations offshore Libya. This is because the company’s base in Malta is seen as a reliable and safe haven for the storage and mobilisation of oil field equipment employed by companies engaged in offshore Libya projects.

It is also worth noting that the offshore oilfields are far from the clashes that are taking place in Libya. During FY2019, the Malta base was also involved in a number of engineering and maintenance projects which supported the offshore Libyan drilling campaigns carried out in the second half of 2019. Management also indicated that the scope for additional works in Libya may increase, as in FY2018 ENI NA purchased from BP Libya concession rights for drilling offshore Libya.

Cyprus base

Medserv Cyprus returned to active mode in November 2018 when ExxonMobil in partnership with Qatar Petroleum began drilling the Delphyne-1 well, the first of two wells in Block 10. In January 2019, drilling on the first well was completed and the operation to drill the second well, the Glaucus-1, in Block 10 began immediately after and was completed in March 2019. This drilling led to a major natural gas discovery of approximately between five to eight trillion cubic feet of gas.

Due to the end of the first phase of drilling of the ExxonMobil campaign, Medserv Cyprus went back into non-active mode as from beginning of April 2019. During this phase, Medserv Cyprus continued to provide a number of services to the IOC, including the storage of their equipment at the Limassol base.

Apart from this, throughout the non-active period in 2019, Medserv Cyprus also provided several other services to ENI Cyprus holding a significant number of concessions in the region. On 1 July 2019, Medserv Cyprus was awarded a contract by Total E&P Cyprus BV to provide shore base logistics services from its facilities in the port of Limassol for drilling activities taking place offshore Cyprus.

The contract, which came into force on 4 June 2019, is for a period of one year with options to extend. In view of the COVID-19 pandemic in Cyprus in the beginning of 2020, IOCs have taken a decision to delay their drilling campaigns by a year and drilling projects which were planned to take place during 2020 have been extended to be revived in 2021.

Libya

The Group maintained the office in Tripoli active during 2019. The Libyan branch continues to provide support to the Malta base in relation to the active and planned projects taking place in the Libyan territory, providing ancillary services to the IOCs through its presence and know-how in the country.

Middle East

The Group’s operations in the Middle East are essentially conducted through METS entities which provide Oil Country Tubular Goods services from the four bases located in Basra (in South Iraq), Sharjah (United Arab Emirates) and the two bases in Oman – Sohar and Duqm.

During 2019, METS has remained consistent with the prior year’s performance, with some improvements registered in Oman and Iraq due to the improvement in the oil market as prices started recovering. Meanwhile Oman remains the key profit generating unit in the OCTG business. From the Duqm base, METS Oman services the contract with Sumitomo for supply chain management of OCTG to Petroleum Development Oman. The latter is a joint-venture between the government of Oman and Shell.

The contract, awarded in 2017 and the largest of its kind ever awarded to METS, is for an initial period of five years with a five-year extension option and, in comparison with the previous contract that METS had with Sumitomo, includes the provision of new offerings such as inspection and rig ready/rig return services. In FY2019, Medserv purchased the remaining 10% that was not held by it in METS Iraq.

The Group reported an improved positive turnaround from this subsidiary in FY2019 on the back of improved market conditions and political stability in the region as well as leaner cost structures.

Suriname

This shore base was a success story for the Group as for the first time, it combined the cross-selling of OCTG and ILSS services. This base was awarded a 15-month €30m contract in November 2018 by Staatsolie Maatschappij Suriname N.V., a state-owned oil company, for the purpose of drilling nine wells near-shore. The project started on 1 April 2019 and was concluded by the end of December of the same year, three months ahead of schedule.

The Group continues to pursue its potential growth opportunities to increase both its client base within Suriname as well as increase its footprint in the region. The base is currently mothballed as the Group intends to remain in the region. In fact, the large finds in Guyana, Trinidad and Tobago, as well as future activity planned in Suriname makes this region an exciting area for exploration in the oil and gas industry.

Egypt

Following the discovery of Zohr5 in Egyptian territories back in 2015 by ENI, the Medserv Group set up Medserv Egypt in 2016 after the Group’s board of directors determined Egypt to be a lucrative region to be in, in view of the potential business. In 2017, Medserv Egypt secured a contract with an ENI Group company for a period of three years, with the option to extend.

Initially, the Group was procuring equipment from third parties. It then purchased its own equipment in order to manage margins better towards the end of the said year. FY2019 was indeed the first full year when Medserv Egypt was using its own equipment, therefore recognising significant improvement in its financial performance when compared to FY2018, also in view of the improved margins relating to labour contracts in place with the IOC, despite the increased rate of interest applicable on the loan taken in Egypt which was increased by a significant 10% during the year.

Following the successful execution of this important contract, the Group is well positioned to secure services of similar scope with other operators in Egypt. In fact, drilling and project development in Egypt remains ongoing and is expected to be maintained at current levels.

COVID-19 and significant updates in 2020

The COVID-19 pandemic resulted in the creation of significant uncertainties within the oil and gas industry, which consequently necessitated the Group to take quick and tough decisions. Overall, Medserv’s objective for the year is to preserve liquidity and ensure that it continues to register positive EBITDA. In this respect, immediate cost containment measures have been put in place across all of the Group’s operations. These included restructuring to the new norm and postponing any capital expenditure plans. Such measures ensure that Medserv will have sufficient funds to meets its obligations as they arise and fall due through the course of the year.

In fact, based on the company’s mitigation plans put into immediate effect, the company has confirmed that it has sufficient resources and funds to maintain all its payment obligations as they arise and fall due throughout the course of 2020.

Furthermore, the Group is also expected to benefit from the varying schemes adopted by the respective governments to mitigate the significant economic and financial repercussions from the COVID-19 pandemic. As international oil companies are cutting back on capital expenditure, and customers demanding discounts, the Group’s budgeted earnings for the 2020 financial year will be impacted particularly in the ILSS segment.

To begin with, given the impact of the significant ILSS contract in Suriname which was terminated in December 2019, the company’s performance in 2020 is not comparable with that recorded in 2019. The lost revenue from Suriname was originally forecasted to be recovered from new drilling projects that were scheduled to commence in Cyprus in Q2 2020. However, the postponement of offshore drilling in Cyprus, coupled with the suspension of other similar drilling projects due to the coronavirus pandemic, has resulted in Medserv revising its budgeted targets downwards. The suspension of service was mainly due to the inability of providing a safe working environment, consequent to travel bans and closure of ports imposed by governments.

Once travel bans are lifted, these long-term energy projects for which Medserv is already contracted to service will resume as their cost of commercialising is low, apart from being located close to the market or are needed for national consumption.

In the case of Suriname, Medserv has resized its setup in the country with a view of maintaining a presence in the region where large finds in neighbouring Guyana, Trinidad and Tobago, as well as future activity planned in Suriname itself, make the region an exciting area for exploration in the oil and gas industry.

On the other hand, the earnings from the OCTG segment of the company which is driven by onshore drilling activity in the Middle East is expected to be minimally impacted by the pandemic and the decline in oil prices. Demand for supply chain management services is expected to remain strong as national oil companies within this region did not suspend any onshore drilling and continued to confirm their commitment to approved projects as well as to increase their production capabilities.

Overall, Medserv is expecting 2020 to be a challenging year as offshore exploratory drilling and development in the company’s operating markets have been suspended and are projected to resume in Q2 2021 which would thus lead to the EBITDA in 2021 to pave the way to return to the same level as 2019.

Nonetheless, Medserv still enjoys a strong business pipeline across its core markets, being North Africa, Eastern Mediterranean and the Middle East, which will allow the company to implement its financial plan to establish a sustainable long-term capital structure (including reducing indebtedness) and position itself for long-term growth.

Additionally, Medserv is awaiting adjudication of several tenders including ILSS services to an international oil company operating offshore Egypt and Supply Chain Management for OCTG contracts in the United Arab Emirates. Beyond existing markets, Medserv has also plans to penetrate new geographies in Africa.

Meanwhile, with respect to the sourcing of a strategic investor, the two major shareholders will continue to seek a new investor that will be ready to support the continued global growth of Medserv.