On March 8, 2017, McDermott International, Inc.
(McDermott), announced that it has entered into a memorandum of understanding (the MOU) with Saudi Arabian Oil Company (Aramco), which contemplates a long-term lease of land to McDermott at the new maritime
complex being developed by Aramco at Ras Al Khair in the Kingdom of Saudi Arabia (the KSA). McDermott plans to develop a new, technologically advanced fabrication yard, with increased automation, and marine base on that leased property.
The MOU contemplates that McDermott will relocate its Middle East regional headquarters, which include project management, general administration, engineering and procurement operations and other functions, to a location to be determined within the
KSA, within two years of entering into the lease agreement. The MOU provides for an exclusivity period extending to June 1, 2018 for the negotiation and finalization of mutually acceptable definitive documentation for the lease and related
arrangements contemplated by the MOU.
McDermott views the contemplated arrangements as a significant opportunity to strengthen its
long-term strategic relationship with Aramco, the worlds largest oil and gas exploration and development company and McDermotts largest customer. In addition, McDermott believes the new facilities will be beneficial to other customers in
the Middle East and other regions. McDermott views the arrangements contemplated by the MOU as an opportunity for a long-term investment in McDermotts business, through the modernization of its facilities in the Middle East region, and intends
to use those facilities to pursue profitable opportunities throughout the value chain for engineering, procurement, construction and installation (EPCI) services to customers in both offshore and subsea markets, primarily in the KSA,
Bahrain, Kuwait, Qatar, Oman, the United Arab Emirates and, to the extent commercially reasonable, the Arabian Gulf, the Red Sea, the Caspian Sea and in certain markets in the Eastern Mediterranean Sea and offshore India and East Africa.
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The MOU contemplates the transition of the operations at McDermotts yard in Jebel Ali,
U.A.E. to the new maritime yard over a period of time, and, based on the current schedule, extending to the
mid-2020s,
assuming completion of several milestone achievements. McDermott views the eventual move
of its Middle East regional facilities to the KSA as an evolution of its long history in the region. McDermott believes that this move will also be a key component to its continuing success in the Middle East by demonstrating McDermotts
support of Aramcos
In-Kingdom
Total Value Add (IKTVA) program, which is intended to expand
KSA-based
business operations to help drive KSA domestic
value creation and maximize long-term economic growth, diversification, job creation and workforce development, to support a rapidly changing Saudi economy, as well as to support the KSAs Vision 2030. Aramcos IKTVA program
aims to achieve 70% localization of all spending on goods and services, and to enable 30% export of Saudi energy sector products by 2021.
The MOU contemplates that McDermott will agree to adhere to all applicable KSA content requirements and that McDermott will also target to
achieve by 2030 at the new fabrication yard and marine base and its regional headquarters a minimum combined average of 40% of its workforce comprised of KSA nationals, which would equate to approximately 5,000 KSA nationals, based on currently
assumed activity levels and business volumes, although Aramco may require, in the definitive documentation, the 40% combined average Saudisation commitment to be increased to up to 60%, provided that an appropriate number of qualified KSA nationals
are available in the market and such increase is cost effective for McDermott. Subject to the requirements of applicable law, qualified KSA nationals will be given preference by McDermott over qualified
non-KSA
nationals, if such qualified KSA nationals are available at commercially reasonable and commercially sustainable cost when compared to such
non-KSA
nationals.
The new facilities are expected to include advanced automation, an optimized layout, nearby port access,
state-of-the-art
facilities and infrastructure that will increase fabrication capacity and efficiency for McDermott. Subject to
the execution and delivery of mutually acceptable definitive lease and other documentation, the completion by Aramco of the construction of Phase I infrastructure and completion of other milestone achievements, the MOU contemplates that the new
facilities will become initially operational as early as 2019, with a
ramp-up
in
man-hour
capacity to 8 million
man-hours
within six months thereafter and, following further development, to 12 million
man-hours
and, eventually, 16 million
man-hours.
The MOU contemplates the
complete shutdown and withdrawal of McDermotts operations at its Jebel Ali yard shortly after reaching the 12 million
man-hour
capacity threshold at the new facilities. The Jebel Ali yard currently
has a capacity of 8 million
man-hours.
McDermott will be responsible for providing all
necessary funds to satisfy and implement all of its commitments and obligations contemplated by the MOU, including to construct certain Phase II infrastructure (the infrastructure for the development to increase capacity to 16 million
man-hours)
and all of the above-ground facilities at the
new fabrication yard and marine base. McDermott currently estimates that such funding requirements will need to be satisfied over a number of years,
although significant capital expenditures are not expected to be incurred before 2018. The MOU does not contemplate any financing condition to the closing under the definitive lease and other documentation. McDermott expects to consider financing
alternatives for the capital expenditure requirements contemplated by the MOU at an appropriate time.
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The MOU provides that, within 120 days of its signing, the long-term agreement dated
June 10, 2015 between McDermott and Aramco
(LTA-II)
will be amended to provide that in the event that, following entry into the definitive lease and other documentation, McDermott fails to
meet: (1) its Saudisation commitment in full during any invoice period, McDermott will pay a monetary penalty to Aramco; and (2) its annual Saudisation Commitments for three consecutive years, or fails to comply in any material respect
with its other obligations contemplated by the MOU for reasons that are solely attributable to McDermott, Aramco shall have the right to exclude McDermott from all bidding processes for offshore EPCI work for Aramco.
The MOU also provides that, in the event that McDermott withdraws from the proposed transaction at any point, or fails to comply in any
material respect with its obligations set forth in the MOU to such an extent that it would reasonably be regarded as having withdrawn from the transaction in practice, McDermott will pay Aramco a break fee of $7.5 million.
The closing of the transactions contemplated by the MOU is expected to occur no later than June 1, 2018. The closing is subject to
various conditions, including the negotiation, execution and delivery of mutually acceptable definitive lease and other documentation. McDermott can provide no assurance that the parties will agree to the terms of the definitive documentation
contemplated by the MOU. If the parties fail to agree to such definitive documentation, then McDermotts relationship with, and ability to obtain future project awards from, Aramco could be adversely affected.
On March 8, 2017, McDermott issued a press release announcing its entry into the MOU with Aramco. A copy of that press release is
attached to this Current Report on Form
8-K
as Exhibit 99.1.
FORWARD-LOOKING STATEMENTS
In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, McDermott cautions that statements in
this report which are forward-looking, and provide other than historical information, involve risks, contingencies and uncertainties that may impact McDermotts actual results of operations. These forward-looking statements include, among other
things, statements about: the details regarding the transactions contemplated by the MOU, including the timing of the closing of those transactions; the expected benefits to be derived from those transactions; the timing and results of the
development of the new fabrication yard and marine base at Ras Al Khair and the relocation of McDermotts Middle East regional headquarters to the KSA; the intention to use the new, modernized facilities to pursue profitable opportunities
throughout the value chain for EPCI services to customers in both offshore and subsea markets in specified regions; and the anticipated funding requirements to satisfy and implement McDermotts commitments and obligations contemplated by the
MOU. Although we believe that the expectations reflected in those forward-looking statements are reasonable, we can give no assurance that those expectations will prove to have been correct. Those statements are made by using various underlying
assumptions and are subject to numerous risks, contingencies and uncertainties, including, among others: our inability to agree with Aramco and other third parties on the contractual arrangements referred to in this report, the effects of
competition, actions of third parties and changes in conditions and other factors affecting our
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industry. If one or more of these risks materialize, or if underlying assumptions prove incorrect, actual results may vary materially from those expected. For a more complete discussion of these
and other risk factors, please see McDermotts annual and quarterly filings with the Securities and Exchange Commission, including its annual report on Form
10-K
for the year ended December 31, 2016.
This report reflects managements views as of the date hereof. Except to the extent required by applicable law, McDermott undertakes no obligation to update or revise any forward-looking statement.