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Floating Production Storage Unit FPSO Primer

What is an FPSO? An FPSO is a floating production, storage and offloading unit. They compromise an important offshore oilfield infrastructure-like equipment.

Types of Floating Storage Units

  1. Floating Storage Production and Offloading (FPSO)
  2. Floating Storage Regasification Unit (FRSU)
  3. Floating Liquefied Natural Gas (FLNG)
  4. Floating Storage Offloading (FSO)
  5. Non-FPSO Mobile Offshore Production Unit (MOPU)

Major FSU FPSO Maritime Companies

As with many other pieces of key equipment such as railcars or aircraft, an offshore oil producer needs to make a decision as to whether to own or lease their FPSO.

If the oil company contracts to purchase the FSU from a builder, this is a turnkey sale.

If they are leasing, they may choose to have someone else operate it (time charter), which may be the lessor or another third party. Offshore marine vessels are trending towards being leased because this reduces the capex and cash requirement of the E&P firms (thereby increasing return on capital employed, but also making returns more torquey).

Usually, they will have a contract for tender and companies will bid for the deal (a tender can also be framed in several option packages so do A, B or C) with proposed contract terms (length of contract, extension option, dayrate/daily charge, schedule for delivery of FSU or firm deadline for delivery, local content requirement, meeting specification criteria such as x amount of bbl/oil per day and x amount of mmcf/natural gas per day). In turn, these companies will have to work with project finance banks to have financing secured as a pre-condition/condition precedent. Most FPSOs owned by the lessors are accordingly project finance vehicles that will have non-recourse debt to the property.

As it follows, most FPSO owners are either offshore oil and gas producers (national oil companies/NOCs or supermajors) or leasing companies (who may lease primarily FPSOs or a variety of offshore marine oilfield vehicles) – whether dedicated marine firms (with an engineering component) or financial institutions.

  • Petrobras (Brazil NOC – NYSE: PBR)
  • BW Offshore
  • SBM Offshore (SBMO – Amsterdam Exchange)
  • CNOOC (China)
  • Modec (Japan)
  • Teekay (Canada domiciled)
  • Bumi Armada (Malaysia)
  • Total
  • ExxonMobil
  • Bluewater
  • Chevron

At any time, maritime professionals will be tracking how many FPSOs are currently commissioned/in operation, being ordered/constructed, available or maintenance. They will also look at supply demand balance in order to see whether more FPSOs will be ordered, recommissioned or repurposed, or sent to the scrapyard.

FPSOs are built by major shipbuilders or are redeployed. Redeployed FPSOs have to be reconfigured for the field that they are being contracted to, but this is more maintenance capex than anything else.

FPSOs can also be repurposed from old oil tankers – whether Very Large Crude Carriers/VLCCs (for megaprojects) or smaller boats (Aframax/Panamax) for smaller projects. Total newbuilds or purpose-built FPSOs are the most expensive and are usually for the largest projects.

Valuing Offshore Oilfield Services Companies

Although seemingly complicated, valuing an offshore oilfield services company (not an oil and gas producer) is actually simple.

You can separate the projects into the currently operating, the wins and the potential wins.

For projects where an FPSO or FSRU is already leased out, just discount the cash flows for the current contract and put a risked probability for a contract extension if any is disclosed.

Of course, nothing is perfect and while there is insurance, there also has to be adjustments to the cash flows to factor in downtime (fleet utilization) and the default risks of counterparties. If a lessee is a major oil company, the counterparty risk is low. If it is a smaller oil and gas company and the oil price tanks, this is a normal counterparty credit risk exercise.

For projects where they have won a contract and it is in their official backlog, discount the future cash flows and apply a risk adjustment for the construction and execution.

If there are a known number of FPSO tenders that will be made available as an oil and gas company looks to lease or buy an FPSO for a future project, have a stream of cash flows where a winning bid would make sense for the E&P company and the contractor (where it meets an acceptable rate of return) and discount that further by a probability of winning.

Then apply all of the normal corporate adjustments (reduce debt add cash) to get to a net asset value. Idle assets will have redeployment options, saleable values or at the very least can be salvaged at the scrapyard for minimal cash flow.

This is a theoretical DCF approach, but they can also be valued on traditional metrics such as price to earnings. EV/EBITDA may be less meaningful due to the preponderance of project debt involved.

Major FPSO Demand and Supply Centres

FPSOs are primarily for deepwater and ultra deepwater oil and gas exploration and production. Major regions include Brazil, West Africa, Southeast Asia, the Gulf of Mexico (GOM), East Africa and China.

China is becoming an increasingly relevant player in the FPSO market. As with several other immature industries, Chinese oilfield services and maritime service companies started with building for domestic companies before moving up the learning curve to develop for the global market.

Chinese shipyards are some of the top FPSO builders in the world, winning a plurality of contract awards. COSCO and other Chinese builders are able to benefit from low labor costs compared to Japanese and Korean shipbuilders and also complete bespoke designs versus more factory like production desired at the Japanese and Korean shipyards.

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Matt
ex investment banking associate
https://www.linkedin.com/in/matt-walker-ssh/

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