Aker Solutions to Match Rivals’ Subsea Margins After Split

Source: Aker Solutions
An Aker Solutions subsea manifold.

Aker Solutions ASA (AKSO), the offshore engineering firm controlled by billionaire Kjell Inge Roekke, plans to boost margins at its subsea unit by as much as two-thirds within two to five years after splitting the company.

Spinning off its subsea and engineering units into a leaner company and choosing safer projects will allow the new Aker Solutions to increase margins to the same level as its biggest competitors, said Chief Executive Officer Luis Araujo. That will require it to improve the margin on earnings before interest and tax at its subsea unit by 68 percent from the second quarter if it’s to match the 14.6 percent reported by FMC Technologies Inc. (FTI)

“We have less focus on the top line now, and more focus on the bottom line,” Araujo said in an Aug. 18 interview at his office at Fornebu, near Oslo. “Our goal is to get in line with peers in subsea.”

Aker Solutions said in April that its subsea, umbilicals, engineering, and maintenance, modifications and operations units will be spun off into a company that will keep the Aker Solutions name, while the other, called Akastor ASA, will include drilling, oilfield services and process systems.

The company split to cut costs and focus on its flagship subsea division as it seeks to improve returns that have lagged competitors including FMC and Cameron International Corp. (CAM)

‘Welcome Surprise’

Oil service companies are facing a slowdown in investments from energy producers, including Statoil ASA (STL), the biggest customer of Aker Solutions, who have struggled with stagnant crude prices and rising costs.

Cameron’s drilling and productions systems unit reported an Ebit margin of 12.3 percent in the second quarter, compared with 8.7 percent for Aker Solutions’ subsea unit.

“I’m not shocked that they’re aiming at peer margins, but if they can do it within two to three years, the market will find it a welcome surprise,” RS Platou Markets AS analyst Turner Holm said in an e-mail. The main drivers for improving subsea margins will be greater scale, a better priced backlog and a maturing of the installed base which will generate higher margin lifecycle services, he wrote.

Aker Solutions will seek synergies offered by a smaller corporate division, business units more in tune with each other and a narrower geographical presence, at the same time as it focuses on less risky projects and reduces costs through more standardized products, Araujo said.

Record Backlog

“We have the highest backlog in the history of this company, so we are really in a position of strength for this demerger,” he said. The company had an order backlog of 54 billion kroner ($8.7 billion) at the end of the second quarter.

Aker Solutions Chairman Oeyvind Eriksen brought in Araujo, 55, a Brazilian national who led the company’s unit in his home country since 2011, to head the new company. The units held by the new Aker Solutions, due to be listed in Oslo on Sept. 29, made up almost two thirds of total sales in the second quarter.

Shareholders, who for each existing stock will get one share in the new Aker Solutions and one in Akastor, should see an improvement in their value in “about two years,” Araujo said. Aker Solutions is currently trading at a price-earnings ratio of 13.6, compared with FMC’s 18.7 and Cameron’s 15, according to data compiled by Bloomberg.

Aker Solutions will maintain its policy of distributing 30 percent to 50 percent of profit to shareholders via dividends or buybacks, said Araujo. Shares in Aker Solutions gained 0.6 percent to 93.6 kroner as of 1:06 p.m. in Oslo.

Growth Slowdown

Spending by oil companies on offshore projects globally will grow 1.3 percent this year after jumping 16 percent a year on average from 2010 to 2013, Oslo-based DNB Markets said in a report last week. Aker Solutions expects investments to stay at the same level next year before growing in 2016, Araujo said.

Aker Solutions has seen a “significant slowdown” in the maintenance, modifications and operations segment, he said. The unit’s margin is expected to “go back to normal” after the company adjusts the size of its workforce, he said.

Aker Solutions is moving 100 MMO engineers to its subsea unit and will offer as many as 350 others the opportunity to join an internal recruitment agency to find them jobs within or outside the company.

“If the market goes further down, then we’ll have to make further adjustments,” the CEO said. “We see a lot of signs of a slowdown in the market, but we also see a lot of projects in the pipeline. So there’s more risk of sleeping than actually disappearing.”

Subsea Equipment

Investments in subsea equipment, which accounts for more than half the new company’s sales and more than 70 percent of its order backlog, are expected to be shielded from the spending slowdown, growing 14 percent a year on average from 2013 to 2019, Araujo said.

An alliance announced earlier this year with Houston-based Baker Hughes Inc. (BHI) for subsea production solutions is exploring “a few” projects, he said. “Maybe we can announce something next year.”

While Aker Solutions may consider acquisitions, particularly to complete its subsea-factory business, its ambition is to grow organically, Araujo said. Norway will remain the company’s main market while it’s also seeking to increase sales in Brazil and West Africa, which accounts for a third of its subsea backlog.

To contact the reporter on this story: Mikael Holter in Oslo at mholter2@bloomberg.net

To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net Alastair Reed

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