TIDMLAM
RNS Number : 6266G
Lamprell plc
31 May 2017
THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION AS DEFINED IN
ARTICLE 7 OF THE MARKET ABUSE REGULATION NO. 596/2014 AND IS
DISCLOSED IN ACCORDANCE WITH THE COMPANY'S OBLIGATIONS UNDER
ARTICLE 17 OF THOSE REGULATIONS
31 May 2017
LAMPRELL PLC
("Lamprell" and with its subsidiaries the "Group")
Proposed joint venture relating to the Maritime Yard within the
King Salman International Complex for Maritime Industries &
Services
Further to the announcements of 26 January 2016 and 1 June 2016,
Lamprell (ticker: LAM), a leading provider of diversified
fabrication, engineering and contracting services to the global
energy industries, is pleased to announce that it has, through a
wholly owned subsidiary, entered into a conditional agreement with
Saudi Aramco Development Company (a wholly-owned subsidiary of
Saudi Arabian Oil Company, the national oil company of the Kingdom
of Saudi Arabia) ("Saudi Aramco"), the National Shipping Company of
Saudi Arabia ("Bahri") and Hyundai Heavy Industries Co. Ltd.
("HHI") pursuant to which the parties thereto have agreed to
participate in a joint venture ("JVCo") with respect to the
establishment, development and operation of a maritime yard for the
construction, maintenance and repair of offshore drilling rigs and
vessels (the "Maritime Yard") which is to form part of the complex
known as "The King Salman International Complex for Maritime
Industries & Services" in the eastern province of the Kingdom
of Saudi Arabia, (the "Transaction").
Highlights
-- Provides a critical point of entry to the Saudi market with
exposure to Saudi Aramco, the world's largest oil company
-- Enables Lamprell to diversify its global reach and to broaden
its sector and product expertise
-- Strengthens Lamprell's position as a leading fabricator in the region
-- Increases access to revenue-generating opportunities and production efficiencies:
o JVCo is expected to subcontract some of the rig component
fabrication work to Lamprell's UAE yards during the construction
phase of the Maritime Yard
-- Opportunity to pre-qualify with Saudi Aramco to bid from its
existing UAE facilities for a significant pipeline of non-rig Saudi
work under the Long-Term Agreement and General Bid Slate
programmes
-- The Company has received written confirmation from Lamprell
Holdings Limited (which holds 33.12 per cent. of Lamprell's
existing issued share capital as at 30 May 2017) of its intention
to vote in favour of the Transaction at the General Meeting
Project Overview
-- When fully constructed, the Directors expect that the
Maritime Yard will be the largest in the Arabian Gulf in terms of
production capacity and scale. The Directors expect the Maritime
Yard to be partially operational by 2019 and fully operational by
2022.
-- The area of the Maritime Yard is expected to be approximately
4.3 square kilometres extending along the coast of Ras Al-Khair. It
will comprise four main production zones (being zones A-D).
o The JV Partners or their specified affiliates will enter into
a call-off services agreement and a secondment agreement under
which, inter alia, they will agree to provide certain services to
JVCo pursuant to agreed statements of work.
-- Through the provision of personnel and expertise the Group
will provide certain services and technical support at the Maritime
Yard. Lamprell will be the technical partner for Zones A and D,
being the zones that will provide maintenance, repair and overhaul
("MRO") services for jackup drilling rigs and commercial vessels,
and the construction of jackup drilling rigs, respectively.
-- HHI will be the technical partner for Zones B and C, being
the zones that will construct and undertake MRO services for
offshore support vessels and that will construct commercial
vessels, respectively.
-- Saudi Aramco's parent company, Saudi Arabian Oil Company,
will enter into a master offtake agreement with JVCo under which it
will agree to purchase, or procure the purchase, from JVCo of a
minimum of 20 jackup drilling rigs (equating to two rigs per year
for 10 years based on the prevailing and competitive market
prices), as well as offshore support vessels and MRO services for
jackup drilling rigs and offshore support vessels operating on
Saudi Arabian Oil Company's offshore assets, subject to certain
conditions.
-- Bahri will enter an offtake agreement with JVCo under which
Bahri will agree to purchase from JVCo not less than 75 per cent.
of its commercial vessel requirements over ten years, being a
minimum of 52 commercial vessels (including a significant number of
VLCCs), and MRO services for such vessels based on the prevailing
and competitive market prices, subject to certain conditions.
-- JVCo will be run by a nine-member board of managers and,
subject to the terms of the Shareholder's Agreement, Lamprell will
be entitled to appoint two of the nine members.
Financial Overview
-- Lamprell to invest up to a maximum of US$ 140 million over
the course of the construction of the Maritime Yard from existing
financial resources and future cash flows and will hold 20 per
cent. of JVCo's issued share capital (subject to the terms of the
Shareholder's Agreement).
-- Saudi Aramco to invest up to a maximum of US$ 350.7 million,
Bahri to invest up to a maximum US$ 139.3 million and HHI to invest
up to a maximum US$ 70.0 million, they will hold 50.1 per cent.,
19.9 per cent and 10.0 per cent. of JVCo's issued share capital,
respectively (subject to the terms of the Shareholder's
Agreement).
-- The aggregate cost of constructing the Maritime Yard is
expected to be approximately US$ 5.2 billion, of which
approximately US$ 3.5 billion will be funded by the Government of
the Kingdom of Saudi Arabia to establish, prepare and construct the
site and shared infrastructure. The remaining cost of up to US$ 1.7
billion, relating to the specific requirements of each zone, will
be funded by JVCo.
-- Saudi Industrial Development Fund ("SIDF") has provided
commitment letters pursuant to which it has agreed in principle to
enter into a SAR3.75 billion (approximately US$ 1 billion) debt
facility agreement with JVCo for the purpose of funding JVCo's
financial requirements primarily in respect of the establishment
and development of the Maritime Yard but also for the ongoing
operation of the Maritime Yard.
Strategic Highlights
-- The investment is consistent with Lamprell's strategy of
broadening its client base and addressable markets, and developing
strategic partnerships; The Directors expect Lamprell's investment
in JVCo to generate an equity rate of return in excess of
Lamprell's weighted average cost of capital.
-- The investment in JVCo is expected by the Directors to:
o provide access to the attractive Saudi market and to Saudi
Aramco as a strategic partner;
o strengthen Lamprell's position in the new-build jackup
drilling rig sector, enabling it to expand into complementary areas
(such as MRO services for vessels);
o enable Lamprell to generate revenue, and benefit from
efficiencies resulting from the rig building and other activities
and services to be performed at the Maritime Yard:
-- JVCo is expected to subcontract out some of the rig component
fabrication work of the first two jackup drilling rigs under the
Saudi Arabian Oil Company master offtake agreement to Lamprell
whilst the Maritime Yard is being constructed; and
-- Lamprell will seek to commit to subcontract certain of the
work to be undertaken by its UAE yards to JVCo with the aim of
benefiting from the Maritime Yard's expected efficiencies in scale,
purchasing power and productivity.
-- As part of the selection of Lamprell as the preferred
technical partner for Zones A and D and through Saudi Aramco's
working with the Company as part of the due diligence and project
assessment, Lamprell is also in the process of seeking to
pre-qualify with Saudi Aramco to enable the Company to bid from its
existing UAE facilities for a significant pipeline of non-rig Saudi
work under Saudi Aramco's Long-Term Agreement and General Bid Slate
programmes.
The Transaction is conditional, inter alia, on the approval of
Lamprell's shareholders ("Shareholders"). It is expected that the
Company will post a circular to Shareholders today with details of
the Transaction and giving notice of the General Meeting to be held
at 7th Floor, Jumeirah Emirates Tower, Sheikh Zayed Road, Dubai,
United Arab Emirates at 10.00 a.m. (UAE time) on 26 June 2017 (the
"Circular"). The Circular will be made available at
www.Lamprell.com.
Christopher McDonald, Chief Executive, Lamprell, commented:
"We are excited to announce this transformational transaction
which will not only make Lamprell a participant in potentially one
of the largest yards in the Arabian Gulf but also provide access to
the most important market in the industry and one of the largest
players in the sector. The transaction will enable growth in scale
beyond Lamprell's capability as a stand-alone entity and will allow
the Company to strengthen its competitive position through
efficiencies, diversification and broader reach.
Participation in the Maritime Yard also secures access to one of
a limited number of companies globally that we believe will be
receiving orders for and building new jackup drilling rigs in the
near-to-medium term with significant component parts of the first
two jackup drilling rigs expected to be subcontracted to
Lamprell.
The transaction is aligned with the Board's long-term vision of
broadening the Company's client base and addressable markets and
developing strategic partnerships, and we look forward to working
with our JV Partners to establish the Maritime Yard."
Webcast and conference call
A webcast and conference call for analysts and investors will be
held at 11.00 a.m. this morning. Please contact Investor Relations
for details at nerikssen@lamprell.com.
A replay facility will be made available later today on the
Company's website: www.lamprell.com.
This summary should be read in conjunction with the full text of
this announcement.
Investec Bank plc is acting as financial adviser and sponsor to
Lamprell on the Transaction.
Enquiries:
Lamprell plc
Christopher McDonald, Chief
Executive Officer +971 (0) 4 803 9308
Tony Wright, Chief Financial
Officer +971 (0) 4 803 9308
Natalia Erikssen, Investor
Relations +44 (0) 7885 522989
Investec Bank plc +44 (0) 207 595 5970
Chris Sim
George Price
Jonathan Wynn
Tulchan Communications, London +44 (0) 207 353 4200
Martin Robinson
Martin Pengelley
Certain statements contained in this announcement, constitute
"forward-looking statements". In some cases, these forward-looking
statements can be identified by the use of forward-looking
terminology, including the terms "believes", "estimates", "plans",
"prepares", "anticipates", "expects", "intends", "may", "will" or
"should" or, in each case, their negative or other variations or
comparable terminology. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements of the Group
or JVCo, or industry results, to be materially different from any
future results, performance or achievements expressed or implied by
such forward-looking statements. Such forward-looking statements
are based on numerous assumptions regarding the Group's and/or
JVCo's present and future business strategies and the environment
in which the Group and/or JVCo will operate in the future. Such
risks, uncertainties and other factors will include those set out
more fully in the Circular and include, among others: general
economic and business conditions, industry trends, competition,
changes in government regulation, economic downturn and the Group's
ability to implement its expansion plans or JVCo's ability to
implement its business plan. These forward-looking statements speak
only as at the date of this announcement. Except as required by the
FCA, the Listing Rules, Regulation (EU) No. 596/2014 of the
European Parliament and the Council of 16 April 2014 on market
abuse, applicable law or relevant regulation, the Group expressly
disclaims any obligation or undertaking to release publicly any
updates or revisions to any forward-looking statements contained in
this announcement to reflect any change in the Company's
expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based.
Investec Bank plc, which is authorised in the United Kingdom by the
Prudential Regulation Authority ("PRA") and regulated in the United
Kingdom by the Financial Conduct Authority ("FCA") and the PRA, is
acting exclusively for the Company as sponsor, financial adviser
and broker in connection with the Transaction and no one else in
connection with the Transaction and will not be responsible to
anyone other than the Company for providing the protections
afforded to its clients or for providing advice in connection with
the Transaction or any matters or arrangements referred to or
contained in this announcement. This announcement is the sole
responsibility of the Company. Investec Bank plc, accepts no
responsibility or liability whatsoever for the contents of this
announcement, and makes no representation or warranty, express or
implied, in relation to the contents of this announcement including
its accuracy, completeness or verification or for any other
statement made or purported to be made in connection with the
Company or the Transaction, and nothing in this announcement is or
shall be relied upon as a promise or representation in this
respect, whether as to the past or future. Investec Bank plc,
accordingly, to the fullest extent permitted by law, disclaims all
and any responsibility or liability whether arising in tort,
contract or otherwise which it might otherwise have in respect of
this announcement or any such statement.
Proposed joint venture relating to the Maritime Yard within the
King Salman International Complex for Maritime Industries &
Services
1. Introduction
The Lamprell board of directors announce today that the
Company's wholly-owned subsidiary, Maritime Offshore Limited
("Maritime Offshore"), has entered into an agreement with Saudi
Aramco Development Company (a wholly-owned subsidiary of Saudi
Arabian Oil Company, the national oil company of the Kingdom of
Saudi Arabia) ("Saudi Aramco"), the National Shipping Company of
Saudi Arabia ("Bahri") and Hyundai Heavy Industries Co. Ltd.
("HHI") pursuant to which the parties thereto (the "JV Partners")
have agreed to participate in a joint venture with respect to the
establishment, development and operation of a maritime yard for the
construction, maintenance and repair of offshore drilling rigs and
vessels (the "Maritime Yard") which is to form part of the complex
known as "The King Salman International Complex for Maritime
Industries & Services" (the "Complex"). It is intended that a
new limited liability company will be established under the laws of
the Kingdom ("JVCo") by the JV Partners to operate, maintain and
manage the Maritime Yard.
Due to (i) the size of the Group's significant financial
commitment to the proposed joint venture in relation to the size of
Lamprell; and (ii) the nature of certain terms of the Transaction
(including certain exit provisions under which the Group could be
required to sell its interest in the proposed joint venture in
circumstances in which the Company may not have sole discretion),
the Transaction is classified under the listing rules made by the
FCA under section 73A of FSMA (the "Listing Rules") as a class 1
transaction and accordingly requires the approval of Shareholders.
The General Meeting will be convened for the purpose of approving
the Transaction and will be held at 7th Floor, Jumeirah Emirates
Tower, Sheikh Zayed Road, Dubai, United Arab Emirates at 10.00 a.m.
(UAE time) on 26 June 2017.
The Board considers the Transaction to be in the best interests
of Shareholders as a whole and unanimously recommends that
Shareholders vote in favour of the ordinary resolution to approve
the Transaction (the "Resolution") at the General Meeting, as those
Directors holding Ordinary Shares intend to do (or procure to be
done) in respect of the Ordinary Shares in which they have a
beneficial interest.
2. Background to and reasons for the Transaction
2.1 Background to the Transaction
The King Salman International Complex for Maritime Industries
& Services is a commercial maritime project located in Ras
al-Khair in the eastern province of the Kingdom. The Complex is
intended to help drive the Kingdom's economic diversity and growth,
and localise energy sector industries through the creation of a
number of projects that will provide the cornerstone for the growth
and development of supply chains. It also is intended to position
the Kingdom as a technological centre with world class expertise in
the field of marine engineering and construction in the region in
furtherance of the Kingdom's "Vision2030" strategy.
The Government of the Kingdom has supported this strategic
national project by agreeing to fund the infrastructure for the
Complex and by commissioning Saudi Aramco to lead the
implementation of the project in line with the Government's vision
for the Complex. Saudi Aramco's studies for the establishment of a
giant maritime industries complex began in early 2013 and involved
discussions with various potential partners in relation to
different aspects of the Complex.
The "anchor project" within the Complex will be the Maritime
Yard. It is proposed that the Maritime Yard will be established by
the JV Partners, led by Saudi Aramco and operated, managed and
maintained by JVCo, providing construction, maintenance and repair
of offshore drilling rigs and vessels (as well as potentially other
business streams in the longer term).
As the Maritime Yard will include areas dedicated to the
construction of jackup drilling rigs and the provision of
maintenance, repair and overhaul ("MRO") services for jackup
drilling rigs, Saudi Aramco required a partner with the necessary
expertise and experience in the new build jackup drilling rig
sector. In November 2015, Saudi Aramco initiated discussions with
Lamprell as a potential partner specifically in relation to the
development and operation of this rig fabrication area and on 25
January 2016, Lamprell signed a memorandum of understanding with
Saudi Aramco, Bahri and HHI in connection with the proposed joint
participation by the parties in the Maritime Yard.
Following a period of initial due diligence and assessment of
the project by Saudi Aramco, Bahri, HHI and Lamprell, the JV
Partners entered into a joint development agreement on 31 May 2016.
Since the signing of the joint development agreement and given the
complexity of the proposed project, the JV Partners have conducted
extensive analysis of the strategic and financial viability of the
project and have undertaken significant preparatory steps towards
the establishment of the proposed joint venture. The JV Partners
have incurred certain costs in connection with these preparatory
steps, which costs will be set off against, and thereby reduce,
their respective investment commitments to JVCo.
On 29 November 2016, the King of Saudi Arabia, Custodian of the
Two Holy Mosques, King Salman bin Abdulaziz Al Saud inaugurated the
Complex, which was named in his honour as the "King Salman
International Complex for Maritime Industries & Services". The
proposed Maritime Yard remains the "anchor project" within the
Complex and negotiations between the JV Partners in relation to the
Maritime Yard concluded on 31 May 2017 with the entry by them into
the Shareholders' Agreement pursuant to which Lamprell (through
Maritime Offshore) and the other JV Partners have committed
(subject to Shareholder approval and fulfilment of certain other
conditions precedent) to participation in the joint venture with
respect to the establishment, development and operation of JVCo and
the Maritime Yard.
2.2 Reasons for the Transaction
Over recent years, one of the principal elements of Lamprell's
strategy has been to focus on its existing offering, namely new
build jackup drilling rigs, offshore platforms, module
construction, and oil and gas contracting services which includes
the refurbishment and conversion of jackup drilling rigs and land
rig services. Subsequent to its capital raising in 2014, the
Company has undertaken a comprehensive yard investment programme
upgrading and modernising equipment and work areas, warehouses,
workflows and processes, and adding major fabrication systems.
These enhancements were part of an overall capital investment
programme under which Lamprell has successfully implemented a
series of cost saving measures and productivity improvements
designed to ensure that its yards remain amongst the most
competitive in the world. The Directors believe that the success of
these programmes has been an important factor in ensuring that
Lamprell's position and reputation has been maintained and has also
been beneficial to the conversion of a significant proportion of
its bid pipeline, with Lamprell winning six new build jackup
drilling rig orders in the year ended 31 December 2014 as well as a
number of other smaller awards. These included significant awards
from a subsidiary of Shelf Drilling Ltd., and from Ensco
Intercontinental GmbH, Petrofac Emirates L.L.C. and the National
Drilling Company of Abu Dhabi. The Directors believe that the
successful delivery of rigs under these orders has also served to
enhance Lamprell's reputation for its expertise and track record in
the new build jackup drilling rig market.
As part of Lamprell's focus on its existing offering, it has
made considerable efforts towards diversifying its bid pipeline
portfolio and broadening its client base and addressable markets.
In September 2016, Lamprell entered into a US$85 million contract
with Jacktel AS, a wholly-owned subsidiary of Master Marine AS, for
the fabrication of the extended legs and new suction caissons as
part of the upgrade of a mobile operating unit to be used as an
accommodation service vessel operating offshore of Norway. In
November 2016, Lamprell entered into a US$225 million contract with
ScottishPower Renewables for the fabrication of multiple jackets
and piles for the East Anglia One Offshore Wind Farm offshore of
the United Kingdom. These were both new client wins for the
Group.
Therefore, the Board believes that the Transaction is firmly
aligned with Lamprell's overall strategy and core strengths and
will benefit Lamprell by (i) providing access to the attractive
Saudi market and to Saudi Aramco as a strategic partner; (ii)
strengthening its position in the new build jackup drilling
rig-building sector and enabling it to expand into complementary
areas (such as MRO services, for vessels); and (iii) enabling it to
generate revenue and benefit from efficiencies resulting from the
rig building and other activities and services to be performed at
the Maritime Yard.
(a) Access to the Saudi market and Saudi Aramco
The Transaction will provide the Company with a critical entry
point into the Saudi market which, despite its long-standing
regional presence in the Middle East, Lamprell has not accessed to
a material extent to date. It will also significantly increase the
Company's exposure to Saudi Aramco, the world's largest oil
company, which has not been a material customer of the Group to
date.
Saudi Arabia is one of the world's largest oil and gas producers
and holder of approximately 18 per cent. of the world's proven
petroleum reserves as at 31 December 2015 (source: OPEC Annual
Statistical Bulletin 2016). While other markets have seen and are
expected to continue to experience significant cuts or limited
growth in capital expenditure in the sector, oil and gas activity
and spending in Saudi Arabia has remained and is expected to remain
relatively strong based upon the latest available data (source:
Wood Mackenzie Ltd 2017).
Saudi Aramco, as the national oil company of the Kingdom, is
expected to play a key role in supporting the continued strength of
the Saudi energy market and has stated that it expects to spend
more than US$300 billion over the next decade, targeting 70 per
cent. local content by 2021, including spending on infrastructure
and projects to maintain oil capacity. The Directors believe as a
result of this drive for localisation, under the proposed
"In-Kingdom Total Value Add" programme (a programme designed to
drive domestic value creation and maximize long-term economic
growth) there is potential for positive pricing dynamics if a
substantial proportion of products are produced in Saudi Arabia
using the supply chain within the Kingdom. Further, in December
2016, Saudi Aramco announced joint ventures with each of Nabors
Industries Ltd. and Rowan Companies plc to create two new national
businesses focused on onshore and offshore drilling, respectively.
Saudi Aramco has stated that these joint ventures will invest US$6
billion to US$7 billion to purchase onshore rigs and offshore
jackup rigs, manufactured in Saudi Arabia by its manufacturing
joint ventures (including JVCo). The Directors believe that the
jackup drilling rig count will remain stable in Saudi Arabia for
the foreseeable future, with the Kingdom requiring an average of
40-45 jackup drilling rigs per year during the period to 2025.
Currently there are 44 jackup drilling rigs operating in the
Kingdom, with two owned directly by Saudi Aramco (source: IHS
Petrodata March 2017).
Therefore, through its participation in JVCo, Lamprell expects
to benefit from Saudi Aramco's plans to invest in the new build
jackup drilling rig market. This expectation is underpinned by a
master offtake agreement in the first instance, pursuant to which
Saudi Aramco's parent company, Saudi Arabian Oil Company, will
agree to purchase, or procure the purchase, from JVCo of a minimum
of 20 jackup drilling rigs, subject to certain conditions and as
further described below.
As part of the selection of Lamprell as the preferred technical
partner for the areas of the Maritime Yard dedicated to the
construction of jackup drilling rigs and provision of MRO services
for jackup drilling rigs, and through Saudi Aramco's work with the
Company as part of the due diligence and project assessment,
Lamprell is also in the process of seeking to pre-qualify with
Saudi Aramco to enable the Company to bid from its existing UAE
facilities for a significant pipeline of non-rig Saudi work under
Saudi Aramco's Long-Term Agreement ("LTA") and General Bid Slate
programmes.
Under the LTA programme, contractors enter into long-term
agreements with Saudi Aramco to bid for offshore oil and gas
producing platforms, tie-in platforms, pipelines, power cables, and
all the related facilities required under the current master plan
for Saudi Aramco's offshore fields. LTA contracts usually have a
fixed duration with the option to be extended. Currently, there are
only five companies that have entered into agreements under the LTA
programme. The General Bid Slate is a panel of registered
contractors who can be technically and commercially pre-qualified
for specific scopes of work. Upon successful pre-qualification,
those contractors can be considered in future contracting
opportunities for that specific scope of work. Work under the LTA
programme amounted to over US$4 billion in 2016.
While no assurance can be given that Lamprell will be successful
in pre-qualifying and pre-qualification does not assure Lamprell of
any additional work from the LTA or General Bid Slate programmes,
the Directors believe that if the Company was to pre-qualify that
it could be competitive in such bids based on its deep technical
expertise and extensive commercial knowledge from working in the
Middle East for more than 40 years and its prior experience of
constructing platforms, jackets and similar modules. Accordingly,
the Directors believe that by becoming a strategic partner to Saudi
Aramco, Lamprell would be able to gain access to and the
opportunity to win new business in the short- and medium-term for
its UAE yards. It is also consistent with Lamprell's strategic
objective of growing its broader engineering, procurement and
construction capabilities in the offshore platform sector.
(b) Strengthening its position in the new build jackup drilling
rig sector and expansion into complementary areas
Lamprell will play an active role in the ramp up of the Maritime
Yard as the technical partner responsible for providing expertise
in managing and operating the areas of the Maritime Yard dedicated
to the construction of jackup drilling rigs and provision of MRO
services for jackup drilling rigs, as well as supporting JVCo's
marketing activities, including through the introduction to
potential clients.
As a condition under the Shareholders' Agreement, Lamprell
Energy Limited (and the other JV Partners) will enter into a
secondment agreement under which JVCo may request employees from
the Group (and from the other JV Partners) be seconded to JVCo,
subject to the availability of suitably qualified employees. Group
secondees will be fully integrated into JVCo and the Maritime Yard
and able to receive training from both the Group and JVCo to enable
them to contribute more effectively. Secondees will be appointed
for an initial one-year term, which may be renewed annually by JVCo
for at least four years, or for such other term as the Group and
JVCo may agree. JVCo will sponsor all non-Saudi national secondees
and bear the costs of obtaining and maintaining required work
permits, residency permits and/or visas for potential secondees and
their dependents. JVCo will pay to the Group agreed rates for the
provision of services by Group secondees, such rates to be
dependent on the category of employee and which are expected to
cover the remuneration payable by the Group to those secondees
(which are not already paid by JVCo to the secondees). JVCo may
also be required by law to pay specified employment costs and
benefits to non-Saudi national secondees. The Group otherwise
remains responsible for payment of all remuneration to its seconded
employees. The costs for which Lamprell will be responsible under
the secondment agreement are not expected to be material. JVCo will
also be able to subcontract a proportion of work to, and second its
Saudi national workers to gain the necessary skills by working in,
the Company's existing facilities in the United Arab Emirates. The
Directors believe that this will be beneficial for JVCo because it
will be able to generate revenue through this subcontracted work
which, while the Maritime Yard's operations are ramping up, might
not otherwise be able to be done at the Maritime Yard, and its
employees will get direct and relevant training and experience
working at fully operational yards.
As a result of the Transaction, and through participation in
JVCo, the Directors believe that Lamprell will have exposure to a
globally significant yard, with the Maritime Yard expected by
Lamprell to be one of very few yards in the MENA region producing
new rigs in the near-to-medium term. In the longer term, the
Directors expect the Maritime Yard to focus on the Saudi and Middle
Eastern markets, whilst Lamprell's yards in the United Arab
Emirates will continue to focus on the wider international market
as well as Middle Eastern markets. The Directors believe that this
potential for increased activity across multiple markets should
enable Lamprell to further expand its expertise in new build jackup
drilling rig building which, in turn, should mean that Lamprell is
well-placed to maintain its position as a leader in the new build
jackup drilling rig sector, particularly in light of increasingly
competitive market dynamics, and to bolster its reputation as a
partner of choice.
(c) Revenue generation and production efficiencies
Ultimately, the Directors believe that the Transaction will
enable Lamprell to extract value from its participation in JVCo
through increased access to revenue generating opportunities and
production efficiencies.
Since the collapse of energy prices in 2014, Lamprell has been
operating against the backdrop of a challenging market environment
with capital expenditure reductions across the oil and gas sector
resulting in project delays and cancellations. In addition, as of
March 2017, IHS Petrodata reported a negative outlook for the
jackup drilling rig market with utilisation rates of 58 per cent.
globally and 67 per cent. in the Middle East in March 2017. Some
market analysts have predicted that the oil and gas sector will not
begin to recover until late 2018. As a result, the new build jackup
drilling rig market has been and continues to be particularly weak,
caused by, amongst other things, excess supply and substantial
reductions in global spending in offshore oil and gas projects.
This has resulted in a very limited number of new orders globally
since 2014. There were three new build jackup drilling rig orders
in 2015 (of which Lamprell was awarded one) and, in 2016, there
were no new orders reported. A recovery in the jackup drilling rig
market, which will be subject to a variety of factors including
supply and utilisation levels, should eventually lead to a recovery
in the market for new build jackup drilling rigs. However, the
placement of orders for new jackup drilling rigs is expected to lag
any recovery in the market by several years.
It is a condition under the Shareholders' Agreement that Saudi
Aramco's parent company, Saudi Arabian Oil Company enter into a
master offtake agreement pursuant to which it will agree to
purchase, or procure the purchase, from JVCo of a minimum of 20
jackup drilling rigs (equating to two rigs per year for 10 years),
as well as offshore support vessels and MRO services for the jackup
drilling rigs and offshore support vessels operating on Saudi
Arabian Oil Company's offshore assets, subject to certain
conditions. The purchase price of each rig will be based on the
prevailing and competitive market prices and calculated in
accordance with best industry practice estimating processes.
Against an uncertain and challenging market backdrop, Lamprell
expects that JVCo will be one of a more limited number of companies
globally that will be receiving orders for and building new jackup
drilling rigs in the near-to-medium term, with the first orders
from Saudi Arabian Oil Company (or its nominated party) expected in
2018 (ahead of any expected recovery of the overall market for new
build jackup drilling rigs).
While its operations ramp up, JVCo is expected to subcontract
out some of the rig component fabrication work that cannot yet be
completed at the Maritime Yard. The Directors anticipate that if
the Transaction is approved at the General Meeting and the
Shareholders' Agreement becomes unconditional, Lamprell will be
awarded interim subcontracted work from JVCo comprising significant
component parts of the first two jackup drilling rigs to be
constructed at the Maritime Yard. The Directors believe that this
would be mutually-beneficial for the Maritime Yard and for Lamprell
in that the JVCo would develop its own operational capabilities
sooner and Lamprell would generate subcontract project
revenues.
In addition, under the terms of the Shareholders' Agreement,
Lamprell will seek to commit to subcontract certain of the work to
be undertaken by its UAE yards to JVCo. The Directors believe that
subcontracting work to the Maritime Yard will enable Lamprell to
benefit from the Maritime Yard's expected efficiencies in scale,
purchasing power and productivity, while also helping to accelerate
development of the Maritime Yard, improve productivity there and
ultimately improve both Lamprell's and JVCo's prospects for revenue
generation, particularly in the early years of the Maritime
Yard.
3. Information on the Complex, the Maritime Yard and the joint venture
3.1 The Complex
The Complex is to be located in Ras Al-Khair which is located
approximately 90 kilometres to the north of the Jubail Industrial
City on the Kingdom's east coast. Ras Al-Khair's location gives it
a strategic and logistical advantage because of its proximity to
oil and gas production and shipping facilities in the Eastern
Province of the Kingdom.
As set out above, the Complex is intended to help drive the
Kingdom's economic diversity and growth, and localise energy sector
industries and is also intended to position the Kingdom as a
technological centre with world class expertise in the field of
marine engineering and construction in the region. The Complex is
planned to be the base for a number of different maritime
industrial and service businesses.
Saudi Aramco has indicated that the Ras Al-Khair area may in the
future include an institute for maritime studies, research and
development, with specialised curricula focusing on professions
associated with the maritime industry. Saudi Aramco has also
indicated that plans are in place to build a new institute
specialising in the development and training of young Saudis to
work at the site, and develop the maritime industry in general.
These plans are outside of the scope of JVCo.
3.2 The Maritime Yard
The Maritime Yard is the anchor project within the Complex. It
will be designed to be able to meet the construction needs of
offshore oil and gas rigs, offshore support vessels, very large
crude carriers ("VLCCs"), and a variety of maritime equipment and
commercial vessels, in addition to the provision of MRO services
for all these products. Ultimately, it is expected to become a
platform for integrated industries through the establishment of
major development projects, and to help attract domestic and
foreign investments, as well as new business projects.
When fully constructed, the Directors expect that the Maritime
Yard will be the largest maritime yard in the Arabian Gulf in terms
of production capacity and scale. The Directors currently expect
that the Maritime Yard will become partially operational in 2019
and fully operational by 2022.
(a) The Zones
The area of the Maritime Yard is expected to be approximately
4.3 square kilometres, extending along the coast of Ras Al-Khair.
It will comprise four main production zones (collectively, the
"Zones") as described below.
-- The first zone ("Zone A") will be dedicated to providing MRO
services for jackup drilling rigs and commercial vessels. It is
expected to have an area of 1.0 square kilometre comprising dry
docks, wharves, finger piers and a ship lift. Zone A is expected to
have the capacity by 2030 to service 15 rigs and 116 vessels
annually. Partial construction of Zone A is expected to complete by
July 2021 and final construction is expected to complete by
September 2022.
-- The second zone ("Zone B") will be dedicated to the
construction of, and providing MRO services for, offshore support
vessels. It will have an area of 0.49 square kilometres and contain
one wharf. Zone B is expected to have the capacity by 2030 to
construct 47 new offshore support vessels and service approximately
116 offshore support vessels annually. Partial construction of Zone
B is expected to complete by September 2021 and final construction
is expected to complete by March 2022.
-- The third zone ("Zone C") will be dedicated to the
construction of commercial vessels. It is expected to have an area
of 1.83 square kilometres comprising dry docks, quay walls, wharves
and finger piers. Zone C is expected to have the capacity by 2030
to construct 18 commercial vessels of different types annually.
Partial construction of Zone C is expected to complete by January
2020 and final construction is expected to complete by October
2020.
-- The fourth zone ("Zone D") will be dedicated to the
construction of jackup drilling rigs. It is expected to have an
area of 1.0 square kilometre and contain one wharf. Zone D is
expected to have the capacity by 2030 to construct four jackup
drilling rigs annually. Partial construction of Zone D is expected
to complete by May 2019 and final construction is expected to
complete by April 2020.
(b) Land and infrastructure
The land at Ras al-Khair on which the Maritime Yard will be
located is being developed by Saudi Aramco. It is a condition under
the Shareholders' Agreement that an agreement for lease be entered
into between Saudi Aramco and JVCo, pursuant to which Saudi Aramco
will be responsible for the works at the Maritime Yard to be funded
by the Government. This includes dredging the harbour basin and
part of the approach channel, part of which will be used to reclaim
land for the Maritime Yard, building the marine structures,
workshops (other than blasting and painting chambers), warehouses,
offices and living quarters, and establishing utility and road
access.
JVCo will be responsible for the works at the Maritime Yard
relating to the specific requirements of the Zones. This includes
building the blasting and painting chambers, engineering and
procurement of process equipment, and equipment installation,
utility tie-ins, testing and commissioning. The Directors expect
that these works will be carried out by appropriately qualified
construction contractors.
The aggregate cost of constructing the Maritime Yard is expected
to be up to approximately US$5.2 billion, approximately US$3.5
billion of which will be funded by the Government to establish,
prepare and construct the site and shared infrastructure. The
remaining cost will be funded by JVCo.
Subject to Saudi Aramco completing its works at the Maritime
Yard and being granted the necessary rights by the Government to
act as landlord to JVCo, the land and shared infrastructure of the
Maritime Yard will be leased by Saudi Aramco to JVCo. The lease
will have an initial 50-year term at a total cost of US$38.5
million per annum in respect of the lease of the infrastructure and
US$458,933 per annum in respect of the lease of the land, and will
be renewable for a further 50 years, subject to agreement of the
terms of such renewal. The lease will commence only once all four
Zones have been handed over to JVCo following issuance of sectional
taking over certificates for each Zone, which is expected to occur
on a staggered basis with the final handover not expected to occur
until 2022 (although the handover dates are not fixed and remain
subject to the award of engineering, procurement and construction
packages by Saudi Aramco as landlord in respect of the works to be
undertaken to construct the yard). Until such handover occurs,
subject to the status of Saudi Aramco's own works on the site,
Saudi Aramco receiving necessary consents and certain other
conditions, if requested by JVCo, Saudi Aramco will use reasonable
endeavours to grant JVCo access to the various Zones to undertake
the work necessary towards preparation for the Zones becoming
operational. The additional conditions to early access to the Zones
include there being no additional cost to Saudi Aramco, that such
access does not materially affect the ability of Saudi Aramco to
complete its own works and that such access would not breach
relevant health and safety laws.
Saudi Aramco will be responsible for all initial capital
infrastructure works at the Maritime Yard, as well as replacement
of the major works (e.g. dredging, quay walls and wharfs) once they
have reached the end of their operational lives. JVCo will be
responsible for the ongoing repair and maintenance of the capital
infrastructure works. Certain of the infrastructure, such as the
access road, yard basin, channel and breakwaters, may be made
accessible by other tenants of the Complex under the terms of
separate agreements entered into between such other tenants and
JVCo.
3.3 JVCo
Pursuant to the terms of the Shareholders' Agreement, the JV
Partners have agreed to establish JVCo as a limited liability
company under the laws of the Kingdom to operate, maintain and
manage the Maritime Yard. The Shareholders' Agreement has an
initial term of 60 years, and shall automatically renew for a term
of 40 years and may be renewed for further periods thereafter,
unless any JV Partner provides written notice of its intention not
to renew at least 24 months prior to the end of the initial term or
renewed period. The non-renewing JV Partner shall transfer all of
its interest in JVCo to those JV Partners wishing to renew the
term. If no JV Partners wish to renew the term, they shall use
commercially reasonable efforts to sell JVCo or its business or,
failing which, to resolve to dissolve JVCo upon expiry of the
relevant term.
The JV Partners will capitalise JVCo through shareholdings
and/or subordinated shareholder loans to JVCo. Following
satisfaction of the initial capital contributions to be made by
each of the JV Partners under the Shareholders' Agreement, JVCo
will have an initial share capital of the Saudi Riyals equivalent
of US$100 million, comprised of 100,000 shares of the Saudi Riyals
equivalent of US$1,000 each. The JV Partners have agreed to make an
aggregate maximum financial commitment (including the provision of
any subordinated shareholder loans) of US$700 million, with each JV
Partner subject to its own aggregate maximum commitment amount.
It is a condition under the Shareholders' Agreement that the
relevant JV Partners enter into certain other commercial agreements
in connection with operation of the Maritime Yard, including the
following:
-- a master offtake agreement between Saudi Aramco's parent
company, Saudi Arabian Oil Company, and JVCo under which Saudi
Arabian Oil Company will agree to purchase, or procure the
purchase, from JVCo of a minimum of 20 jackup drilling rigs
(equating to two rigs per year for 10 years) as well as offshore
support vessels and MRO services for the jackup drilling rigs and
offshore support vessels operating on Saudi Arabian Oil Company 's
offshore assets, subject to certain conditions;
-- an offtake agreement between Bahri and JVCo under which Bahri
will agree to purchase from JVCo not less than 75 per cent. of its
commercial vessel requirements over ten years, being a minimum of
52 commercial vessels (including a significant number of VLCCs),
and MRO services for such vessels, subject to certain conditions;
and
-- a call-off services agreement and a secondment agreement each
between JVCo, Saudi Aramco, Bahri, HHI and Lamprell Energy Limited
under which, inter alia, the Group will provide certain services
and technical support at the Maritime Yard, including through the
provision of personnel and expertise.
Based on the financial model for JVCo compiled in conjunction
with the JV Partners, the Directors expect work from Saudi Arabian
Oil Company and Bahri, inclusive of the above offtake agreements,
to account for approximately 45 per cent. of the Maritime Yard's
revenue in the period from 2018 to 2030.
3.4 Financing
Saudi Industrial Development Fund ("SIDF") has provided four
commitment letters dated 21 November 2016 to Saudi Aramco (on
behalf of JVCo, when established) pursuant to which it has
conditionally agreed to enter into a 20-year facility agreement to
provide a SAR3.75 billion (approximately US$1 billion) term loan
(the "SIDF Facility Agreement") to JVCo for the purpose of funding
JVCo's financial requirements primarily in respect of the
establishment and development of the Maritime Yard but also for the
ongoing operation of the Maritime Yard.
Subject to the passing of the Resolution at the General Meeting,
the Company's aggregate maximum financial commitment (including the
provision of any subordinated shareholder loans) under the
Shareholders' Agreement will be US$140 million, to be phased as the
construction of the operating elements of the Maritime Yard
progresses, which is expected to take place during the period up
until 2022.
4. Information on the JV Partners
4.1 Saudi Aramco and Saudi Arabian Oil Company
Saudi Aramco Development Company is a wholly-owned subsidiary of
Saudi Arabian Oil Company, the national oil company of the
Kingdom.
Saudi Arabian Oil Company is a fully integrated, global
petroleum and chemicals enterprise. Over the past 80 years, Saudi
Arabian Oil Company has become a world leader in hydrocarbons
exploration, production, refining, distribution and marketing. It
manages proven conventional crude oil and condensate reserves of
261.1 billion barrels with average daily crude production of 10.2
million barrels per day and stewardship of natural gas reserves of
297.6 trillion standard cubic feet (source: Saudi Aramco Annual
Review 2015). Headquartered in Dhahran, Saudi Arabia, with offices
and operations throughout the Kingdom, Saudi Arabian Oil Company
employed more than 65,000 workers worldwide as of the year ended 31
December 2015.
Saudi Aramco is leading the global partnership for the
establishment of the Maritime Yard. Under the terms of the
Shareholders' Agreement, following the making in full of its
financial commitment to the joint venture, Saudi Aramco will hold a
number of shares representing 50.1 per cent. of JVCo's total issued
share capital. Subject to certain exceptions arising from minority
right protections in the Shareholders' Agreement, Saudi Aramco will
have a controlling vote on JVCo's governing board of managers and
as a shareholder of JVCo.
It is a condition under the Shareholders' Agreement that Saudi
Aramco enters into various other commercial agreements, including
the agreement for lease of the land on which the Maritime Yard is
to be located and that Saudi Aramco's parent company, Saudi Arabian
Oil Company, enters into a master offtake agreement pursuant to
which it will agree to purchase, or procure the purchase, from JVCo
of a minimum of 20 jackup drilling rigs (equating to two rigs per
year for 10 years), as well as offshore support vessels and MRO
services for the jackup drilling rigs and offshore support vessels
operating on Saudi Arabian Oil Company 's offshore assets, subject
to certain conditions.
4.2 Bahri
The National Shipping Company of Saudi Arabia was established in
1978 and is one of the largest providers of maritime services
globally. Bahri and its subsidiaries purchase, charter and operate
vessels for the transportation of crude oil, chemicals, dry bulk
and general cargo.
Bahri owns and operates a fleet of double hull VLCCs, chemical
carriers, dry bulkers and multipurpose Ro-Ro vessels. Bahri
presently owns approximately 36 VLCCs, including one VLCC
designated as a floating storage unit, 4 multipurpose Ro-Ro vessels
and 1 Aframax, 26 chemical carriers, 5 product tankers, 5 dry-bulk
tankers and 6 general cargo ships. It has an operational fleet
deadweight of approximately 1.39 million tons. Bahri has entered
into an agreement with Hyundai Samho Heavy Industries to build 10
VLCCs which are expected to be delivered during 2017 and 2018.
Bahri is 22 per cent. owned by the Public Investment Fund of the
Government of the Kingdom and 20 per cent. owned by Saudi Aramco.
Its shares are admitted to trading on the Saudi Stock Exchange
(Tadawul).
Under the terms of the Shareholders' Agreement, following the
making in full of its financial commitment to the joint venture,
Bahri will hold a number of shares representing 19.9 per cent. of
JVCo's total issued share capital.
In addition, it is a condition under the Shareholders' Agreement
that Bahri enters into an offtake agreement under which it will
agree to purchase from JVCo not less than 75 per cent. of its
commercial vessel requirements over ten years, being a minimum of
52 commercial vessels (including a significant number of VLCCs),
and MRO services for such vessels, subject to certain
conditions.
As one of the world's largest shipping companies, Bahri is
expected to play an important role in the localisation of the
maritime transport industry and services in the Kingdom, leveraging
its decades-long experience and the size and diversity of its
operations.
4.3 HHI
Hyundai Heavy Industries Co., Ltd. was established in 1972,
having grown into one of the world's leading heavy industries
companies and the world's largest shipbuilding company.
Headquartered in Ulsan, South Korea, HHI has seven business
divisions, including shipbuilding, offshore & engineering,
industrial plant & engineering, engine & machinery, electro
& electric systems, construction equipment and green energy.
HHI has delivered more than 1,971 ships to 298 shipowners in 52
countries since 1972. HHI employed over 25,000 people as of the
year ended 31 December 2015.
Under the terms of the Shareholders' Agreement, following the
making in full of its financial commitment to the joint venture,
HHI will hold a number of shares representing 10.0 per cent. of
JVCo's total issued share capital.
HHI, like Lamprell, is one of the technical JV Partners and it
is a condition under the Shareholders' Agreement that HHI enters
into a call-off services agreement and a secondment agreement with
JVCo and the other JV Partners under which, inter alia, it will
provide certain services and technical support at the Maritime
Yard, including through the provision of personnel and expertise.
HHI will be the technical JV Partner in respect of Zones B and
C.
4.4 Lamprell
Under the terms of the Shareholders' Agreement, following the
making in full of its financial commitment (being a maximum
commitment of US$140 million) to the joint venture, Lamprell,
through its wholly owned subsidiary Maritime Offshore, will hold a
number of shares representing 20.0 per cent. of JVCo's total issued
share capital.
Lamprell is one of the two technical JV Partners and it is a
condition under the Shareholders' Agreement that Lamprell Energy
Limited enters into a call-off services agreement and a secondment
agreement with JVCo and the other JV Partners under which, inter
alia, the Group will provide certain services and technical support
at the Maritime Yard, including through the provision of personnel
and expertise. Lamprell will be the technical JV Partner in respect
of Zones A and D.
Lamprell will provide a guarantee, through its wholly-owned
subsidiary Lamprell Energy Limited, of the obligations,
commitments, undertakings, representations, warranties, indemnities
and covenants of Maritime Offshore under the Shareholders'
Agreement (capped at its aggregate maximum commitment of US$140
million until such time as Maritime Offshore becomes an obligor
under the Group's existing facilities).
5. Summary of the principal terms of the Transaction
On 31 May 2017, Maritime Offshore, Saudi Aramco, Bahri and HHI
entered into the Shareholders' Agreement in relation to the
proposed joint venture between the JV Partners with respect to the
establishment, development and operation of the Maritime Yard. The
Shareholders' Agreement sets out the rights and obligations of each
of the parties thereto in relation to the formation and governance
of JVCo, a special purpose vehicle to be established as a limited
liability company under the laws of the Kingdom by the JV Partners.
It is intended that JVCo will develop, operate, maintain and manage
the Maritime Yard.
Under the terms of the Shareholders' Agreement, the Company has
conditionally agreed, inter alia:
-- to invest an aggregate maximum of US$140 million for a 20.0
per cent. ownership interest in JVCo;
-- certain exit provisions under which (i) it is limited from
transferring, assigning or otherwise disposing of its ownership
interest in JVCo prior to the later of (x) expiry of an initial
10-year period; and (y) all Zones in the Maritime Yard having
achieved operational independence (being, in respect of each Zone,
when it has completed a new-build project for a non-JV Partner
customer); and (ii) it may be required to sell all of its ownership
interest in JVCo in the event of a change of control;
-- exclusivity provisions under which it is subject to (i)
certain non-compete obligations; and (ii) requirements to seek to
subcontract certain work to JVCo from its UAE yards;
-- that Lamprell Energy Limited will enter into a call-off
services agreement and a secondment agreement under which the Group
will provide certain services and technical support at the Maritime
Yard, including through the provision of personnel and expertise;
and
-- that Lamprell Energy Limited will provide a guarantee of the
obligations, commitments, undertakings, representations,
warranties, indemnities and covenants of Maritime Offshore under
the Shareholders' Agreement (capped at its aggregate maximum
commitment of US$140 million until such time as Maritime Offshore
becomes an obligor under the Group's existing facilities).
Due to (i) the size of the Group's significant financial
commitment to the proposed joint venture in relation to the size of
Lamprell; and (ii) the nature of certain terms of the Transaction
(including certain exit provisions under which the Group could be
required to sell its interest in the proposed joint venture in
circumstances in which the Company may not have sole discretion),
the Transaction is classified under the Listing Rules as a class 1
transaction and accordingly requires the approval of
Shareholders.
Completion of the Transaction is conditional upon, inter alia,
approval of the Resolution by Shareholders at the General Meeting
and the satisfaction or waiver of the other conditions precedent
within one-year from the date of the Shareholders' Agreement.
If the Resolution is not passed, the Shareholders' Agreement
will terminate and the JV Partners will not proceed with the
Transaction. If the Resolution is passed, but the other conditions
under the Shareholders' Agreement are not satisfied or (where
applicable) waived, the Transaction will be incapable of
completing. In either case, the Company will not be obligated to
fulfil any of its commitments under the Shareholders' Agreement
(including its financial commitments. However, the Company will
remain liable for its share of costs incurred under the terms of
the memorandum of understanding and the joint development agreement
entered into by the JV Partners in 2016. Lamprell's share of such
costs will be pro rata to its equity interest in JVCo and, as at 31
December 2016, was approximately US$2.2 million.
6. Financial effects of the Transaction
6.1 Lamprell's financial commitment
The Company's financial commitment to JVCo is expected to be met
out of the Company's existing cash resources and cash flows
generated through trading activities and will be phased over the
contruction period.
As described above, subject to the passing of the Resolution at
the General Meeting, the Company has committed to invest an
aggregate maximum of US$140 million (which amount is subject to
set-off for costs already incurred, as described below) in JVCo,
such investment to be phased as the construction of the operating
elements of the Maritime Yard progresses, which is expected to take
place during the period up until 2022. Based on Lamprell's current
expectations of JVCo's financial requirements, its investment in
the financial year ending 31 December 2017 is expected to be fixed
at US$20 million, net of historic costs (which as at 31 December
2016 were approximately US$2.2 million), with the largest forecast
contributions to JVCo of approximately US$38 million and
approximately US$32 million expected in 2018 and 2019,
respectively, but these amounts could vary depending upon JVCo's
cash requirements and the associated capital contribution profile
agreed by the JV Partners. If any other JV Partner defaults on its
obligation to make further capital contributions up to its
respective maximum, Lamprell and the other non-defaulting JV
Partners would be required to cover the shortfall in capital
contributions in proportion to their respective ownership interests
up to their respective maximums. Lamprell will not be obligated to
invest (by way of equity contribution and/or subordinated
shareholder loans) more than its aggregate maximum commitment of
US$140 million. However, in certain limited circumstances outside
of Lamprell's control, Lamprell may be requested to make further
capital injections in excess of this maximum commitment.
Although Lamprell has the financial resources to repay its
existing facilities, it has obtained waivers from its lenders in
relation to certain of its financial covenants to provide
additional financial flexibility.
Based on the financial model for JVCo compiled in conjunction
with the JV Partners, the Directors expect Lamprell's investment in
JVCo to yield an equity internal rate of return in excess of its
weighted average cost of capital.
The Company has already incurred costs in connection with the
memorandum of understanding and the joint development agreement in
2016. Under the terms of the joint development agreement, costs
incurred by the JV Partners will be transferred to JVCo (subject to
the Shareholders' Agreement becoming unconditional). Therefore, the
Company's aggregate financial commitment to JVCo will be reduced by
the amount of costs incurred by the Company in connection with the
joint venture prior to the date of entry into the Shareholders'
Agreement.
If the Shareholders do not approve the Resolution, the
Shareholders' Agreement will terminate and the JV Partners will not
proceed with the Transaction. If the Resolution is passed, but the
other conditions under the Shareholders' Agreement are not
satisfied or (where applicable) waived, the Transaction will be
incapable of completing. In either case, the Company will not be
obligated to fulfil any of its commitments thereunder (including
its financial commitments). However, the Company will remain liable
for its share of costs incurred under the terms of the memorandum
of understanding and the joint development agreement entered into
by the JV Partners in 2016. Lamprell's share of such costs will be
pro rata to its equity interest in JVCo and, as at 31 December
2016, was approximately US$2.2 million.
6.2 Expected profit/loss and dividends
The Company will recognise its proportionate share of JVCo's
profit and/or loss in the Group's financial statements. Based on
the financial model for JVCo compiled in conjunction with the JV
Partners, the Directors expect JVCo's first profitable year to be
2020, with approximately US$101 million of cumulative losses to be
recorded by JVCo before then and the largest JVCo losses expected
in 2019. Subject to JVCo having sufficient retained earnings, the
Directors expect Lamprell will receive dividends from JVCo no
earlier than Lamprell's financial year ending 31 December 2022. The
proposed terms and conditions of the SIDF Facility Agreement
include a restriction on payment of dividends by JVCo in excess of
the lower of (i) 25 per cent. of JVCo's paid in capital; and (ii)
the amount to be repaid under the SIDF Facility Agreement in the
relevant fiscal year. Therefore, any step change in dividend
payments is expected to occur following repayment of the amounts
borrowed under the SIDF Facility Agreement.
The Directors' expectations regarding JVCo's ability to generate
profit and distribute dividends are subject to change and may
depend on a variety of factors outside of its control, in
particular the fulfillment of the obligations of Saudi Arabian Oil
Company and Bahri to purchase rigs and vessels produced by JVCo
under their respective offtake agreements.
6.3 Accounting treatment
The Company will not consolidate JVCo in the Group's financial
statements but will account for it using the equity method of
accounting. Therefore, the Company will recognise its share of
JVCo's earnings, losses and/or changes in capital in the Group's
financial statements.
In addition, the Company's investment in joint ventures will
increase on the Company's balance sheet to reflect the subscription
of shares of JVCo and any provision of subordinated shareholder
loans. There will also be a corresponding decrease in cash as the
Company makes its contributions to JVCo.
6.4 Exclusivity provisions
Under the terms of the Shareholders' Agreement, Lamprell has
agreed that for a period starting on the date of the Shareholders'
Agreement and ending:
(i) on the earlier of (x) the date it or any of its affiliates
ceases to hold any shares in JVCo and (y) termination or expiry of
the Shareholders' Agreement; and
(ii) for a further three year period following the relevant date
in (i) above in relation to any existing yard and for a further
period of one year following the relevant date in (i) above in
relation to any new yard,
neither it nor its affiliates will, without the consent of the
other JV Partners:
(iii) construct, control, own or operate or otherwise be
directly or indirectly interested in (whether as trustee,
principal, agent, shareholder, unit holder or similar capacity) any
yard conducting any business similar to or competitive with the
business activities of JVCo or its subsidiaries, namely the
construction, maintenance and repair of offshore drilling rigs,
offshore supply vessels and/or commercial vessels, within the MENA
region (subject to certain caveats and excluding the United Arab
Emirates); or
(iv) solicit or persuade any person, corporation or entity which
is a customer or client of JVCo or a member of its group, or who
was previously a customer or client thereof within the prior 18
months, to cease conducting business with JVCo or a member of its
group.
Lamprell may control or operate (but not engage in any of the
other acts set out in (iii) above) projects involving the
manufacture and/or MRO of offshore drilling rigs only, provided
that its involvement in any and all such projects shall conclude
prior to the commercial operation date of Zone A or Zone D,
whichever is earlier.
This exclusivity covenant is subject to certain de minimis
thresholds and does not apply to on-going activities of the Group
commenced prior to the entry into the Shareholders' Agreement and
disclosed in writing to the other JV Partners.
6.1 Technical shareholder support
Under the terms of the Shareholders' Agreement, Lamprell as a
technical partner also has agreed, until Zone A and Zone D have
achieved operational independence (being, in respect of each Zone,
when it has completed a new-build project for a non-JV Partner
customer), to use good faith efforts to support JVCo to enable it
to independently conduct marketing activities in relation to the
relevant Zones which efforts shall include, at the request of
JVCo:
-- supporting efforts to obtain relevant certifications;
-- providing on-the-job training for JVCo's marketing personnel;
-- introducing the Maritime Yard and JVCo to its existing and
potential clients and to seek to have any solicitation of interest
or invitation to bid for work directly related to Zone A and Zone D
from such clients extended to JVCo;
-- supporting JVCo to qualify and/or pre-qualify with its
existing and potential clients to participate in bids and
submissions for work directly related to Zone A and Zone D; and
-- actively include the commercial representatives of the
Maritime Yard and JVCo in their respective marketing activities, to
a practicable and reasonable extent, in relation to its own
business to the extent they relate directly to offshore rigs,
offshore vessels and commercial maritime vessels.
In addition, Lamprell as a technical partner has agreed that,
until Zone A and Zone D have achieved operational independence
(being, in respect of each Zone, when it has completed a new-build
project for a non-JV Partner customer), it will use good faith
efforts to include JVCo in any bid proposal for and, subject to
feasibility, will seek to subcontract work to JVCo with respect
to:
-- any MRO work on any offshore drilling rig, offshore support
vessel or commercial vessel located in or transiting through the
Arabian Gulf (other than offshore drilling rigs currently, and only
for so long as they are, used for drilling in UAE waters), the
Arabian Sea, Gulf of Aden or Red Sea, provided that the aggregate
contract value of such work is in excess of US$3 million (subject
to indexation); and
-- any new-build construction of offshore drilling rigs,
offshore support vessels or commercial vessels which are ordered by
an entity residing in, or which Lamprell knows or should reasonably
have known are destined for use by an entity in, the MENA region
(excluding the United Arab Emirates).
The Directors believe that work subcontracted by Lamprell to
JVCo will ultimately be able to be done more cost efficiently at
the Maritime Yard than in Lamprell's yards given potential
economies of scale and purchasing power and, therefore, would have
an overall positive effect on the Group's financial performance as
a result of improved margins and competitiveness. However, in the
event the Maritime Yard is not more efficient than Lamprell's
yards, in order to maintain margins at its UAE yards, Lamprell may
be required to pass through JVCo's additional costs to its
customers or accept lower margins in order for its pricing to
remain competitive and to ultimately win the work.
7. Current trading and future prospects
Set out below is the text extracted from the Company's
announcement on 24 March 2017 containing its current trading and
outlook.
-- The Group has restructured its overhead to remain competitive
in lower price environment; tight cost control measures will be a
high priority in 2017 as the Group looks to maintain its lower cost
base.
-- The Group is well-positioned to respond to an improvement in
its core energy markets, with a strong balance sheet, a sustained
robust cash position and its core competencies retained.
-- The Group is working to bring the Maritime Yard opportunity
to a successful conclusion.
-- A further jackup rig was delivered to the National Drilling
Company of Abu Dhabi post-period end and the remaining two will be
delivered in first half of the financial year ending 31 December
2017 with both projects progressing as planned.
-- There are two new major projects scheduled to ramp up in the
second quarter of the financial year ending 31 December 2017.
-- 14 rigs are currently stacked in Lamprell's facilities on
behalf of clients offering potential refurbishment works in the
event of redeployment of the rigs.
-- As previously announced, revenues for the financial year
ending 31 December 2017 currently expected to be in the lower half
of the US$400-500 million range in the absence of large project
deliveries in the second half of the financial year.
As announced by the Company, the two remaining jackup rigs due
to be delivered to National Drilling Company in the first half of
the financial year ending 31 December 2017 were delivered in
February 2017 and April 2017.
8. General Meeting
A notice convening an extraordinary general meeting of the
Company to be held at 7th Floor, Jumeirah Emirates Tower, Sheikh
Zayed Road, Dubai, United Arab Emirates at 10.00 a.m. (UAE time) on
26 June 2017 and setting out the details of the Resolution will be
included in a circular expected to be posted to Shareholders today.
The purpose of the General Meeting is to seek Shareholders'
approval for the Transaction.
9. Voting intentions
The Company has received written confirmation from Lamprell
Holdings Limited (which holds 33.12 per cent. of Lamprell's
existing issued share capital as at 30 May 2017) of its intention
to vote in favour of the Transaction at the General Meeting.
10. Recommendation
The Board considers the Transaction to be in the best interests
of Shareholders as a whole.
Accordingly, the Board unanimously recommends that Shareholders
vote in favour of the Resolution, as each of John W. Kennedy and
Antony Wright intend to do in respect of their own beneficial
holdings, amounting to an aggregate of 1,641,393 Ordinary Shares
(representing approximately 0.5 per cent. of Lamprell's existing
issued share capital as at 30 May 2017, being the latest
practicable date prior to this announcement).
Definitions
The following definitions apply throughout this announcement,
unless the context otherwise requires:
"Bahri" the National Shipping
Company of Saudi Arabia;
"Board" or "Directors" the directors of the
Company;
"Board of Managers" the board of managers
of JVCo;
"Company" or "Lamprell" Lamprell plc;
"Complex" the King Salman International
Complex for Maritime
Industries & Services;
"Facilities Agreement" the facilities agreement
dated 11 August 2014,
as amended on 30 September
2016, among the Company,
as borrower and guarantor,
and certain other members
of the Group and a syndicate
of banks under which
such banks made available
certain debt and bonding
facilities of an aggregate
amount of US$600 million;
"FCA" the UK Financial Conduct
Authority (or its successor
bodies);
"FSMA" the Financial Services
and Markets Act 2000,
as amended;
"General Meeting" the extraordinary general
meeting of the Company
to be held at 7th Floor,
Jumeirah Emirates Tower,
Sheikh Zayed Road, Dubai,
United Arab Emirates
at 10.00 a.m. (UAE time)
on 26 June 2017 (or any
adjournment of it);
"Government" the Government of the
Kingdom of Saudi Arabia;
"Group" the Company and its subsidiary
undertakings from time
to time;
"HHI " Hyundai Heavy Industries
Co. Ltd.;
"JVCo" the special purpose vehicle
to be established by
the JV Partners as a
limited liability company
under the laws of the
Kingdom pursuant to the
terms of the Shareholders'
Agreement;
"JV Partners" Maritime Offshore, Saudi
Aramco, Bahri and HHI;
"Kingdom" the Kingdom of Saudi
Arabia;
"Listing Rules" the listing rules made
by the FCA under section
73A of FSMA;
"Maritime Offshore" Maritime Offshore Limited,
a wholly owned subsidiary
of Lamprell;
"Maritime Yard" the maritime yard proposed
to be operated, maintained
and managed by JVCo which
is to form part of the
Complex;
"MENA " the Middle East and North
Africa region, comprising
Algeria, Bahrain, Djibouti,
Egypt, Iran, Iraq, Jordan,
Kuwait, Lebanon, Libya,
Morocco, Oman, Qatar,
Saudi Arabia, Syria,
Tunisia, West Bank, Gaza,
Yemen, Eritrea, Kenya,
Sudan, Somalia, Tanzania,
Pakistan, Turkey, and
the United Arab Emirates;
"MRO" maintenance, repair and
overhaul;
"Ordinary Shares" ordinary shares of 5
pence each in the capital
of the Company;
"Resolution" the ordinary resolution
to be proposed at the
General Meeting with
any permitted amendments
thereto;
"SAR" Saudi Riyals, the lawful
currency of the Kingdom;
"Saudi Aramco" Saudi Aramco Development
Company
"Shareholders' Agreement" the shareholders' agreement
entered into by Maritime
Offshore, Saudi Aramco,
Bahri and HHI dated 31
May 2017 with respect
to the establishment,
development and operation
of the Maritime Yard;
"Shareholder" a registered holder of
Ordinary Shares;
"SIDF" Saudi Industrial Development
Fund;
"SIDF Facility Agreement" the SAR3.75 billion (approximately
US$1 billion) facility
agreement conditionally
agreed to be entered
into by SIDF with JVCo;
"Transaction" the proposed joint venture
between the JV Partners
with respect to the establishment,
development and operation
of the Maritime Yard
described in this announcement;
"UAE" or "United Arab the federation of the
Emirates" United Arab Emirates,
comprising the Emirates
of Abu Dhabi, Ajman,
Fujairah, Dubai, Ras
Al-Khaimah, Sharjah and
Umm Al-Quwain;
"UK" or "United Kingdom" the United Kingdom of
Great Britain and Northern
Ireland;
"US$" US dollars, the lawful
currency of the United
States of America
"VLCC" Very Large Crude Carrier;
"Zone A" the first zone of the
Maritime Yard;
"Zone B" the second zone of the
Maritime Yard;
"Zone C" the third zone of the
Maritime Yard
"Zone D" the fourth zone of the
Maritime Yard; and
"Zones" the four main production
zones of the Maritime
Yard, being Zone A, Zone
B, Zone C and Zone D;
This information is provided by RNS
The company news service from the London Stock Exchange
END
JVELFFSLEDIIVID
(END) Dow Jones Newswires
May 31, 2017 02:00 ET (06:00 GMT)
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