www.kcadeutag.com KCA Deutag is a leading international drilling and engineering company working onshore and offshore with a focus on safety, quality and operational performance Second Quarter 2014 Investor Presentation
www.kcadeutag.com
KCA Deutag is a leading international drilling and engineering
company working onshore and offshore with a focus on safety,
quality and operational performance
Second Quarter 2014
Investor Presentation
Disclaimer
1
The distribution of this presentation in certain jurisdictions may be restricted by law. Persons into whose possession this presentation comes are required to inform themselves about and to observe any such restrictions.
This presentation contains forward-looking statements concerning KCA Deutag. These forward-looking statements are based on management’s current expectations, estimates and projections. They are subject to a number of assumptions and involve known and unknown risks, uncertainties and other factors that may cause actual results and developments to differ materially from any future results and developments expressed or implied by such forward-looking statements. KCA DEUTAG has no obligation to periodically update or release any revisions to the forward-looking statements contained in this presentation to reflect events or circumstances after the date of this presentation.
2
Agenda
1 Key Highlights
2 Commercial Developments
3 Business Overview
4 Group Results
5 Summary
Q2 Key highlights
KCA Deutag is a leading international drilling and engineering company working onshore and offshore with a focus on safety, quality and operational performance
1Group revenue and EBITDA of $540.9m (Q2 2013: $547.5m) and $89.0m (Q1 2013: $62.6m) respectively, driving improved LTM EBITDA of $350.4m
2Improved operational and financial performance from Land Drilling, RDS, Platform Services and MODUs
3 Strong quarter for new contract wins across the Group
4Contract backlog of $8.9bn (as at 1 August 2014) across a blue chip customer base
5Significant year-on-year reduction in Net debt/LTM EBITDA leverage – from 5.0x at Q2 2013 to 3.6x by Q2 2014
3
Integrated Land Drilling Offshore Drilling Services & Design
$187m LTM EBITDA (54% of total)¹ $160m LTM EBITDA (46% of total)¹
Land Drilling Bentec Platform Services Rig Design Services (RDS)
• Leading international premium drilling rig owner and operator
• Design and manufacture of high-end premium land rigs and components
• Leading global platform service operator outside North America
• Rig design engineering from concept to commission
• Operations: Russia, Africa, Middle East, Europe and SE Asia
• Facilities: Germany, Russia, Oman
• Operations: UK North Sea, Norway, Azerbaijan, Russia, SE Asia and Africa
• Offices: Aberdeen, Baku, Bergen, Houston, London
Market-leading international drilling & engineering company
4
Design &
Engineering
Design &
ManufactureOwn & OperateOwn & Operate ManageManage
• Rigs: High end fleet of 52 drilling rigs, 4 workover rigs
• 94% of new rigs since 2007 have been built by Bentec
• Facilities: Capacity for 12-16 rigs and 50 top drives p.a.
• Staff: c.3,230 managing drilling operations on 39 platforms
• Approx. 60% ofplatforms designed or refurbished by RDS
• Staff: c.880 engineers and support staff
¹ LTM EBITDA pre-exceptional items, excluding MODUs and prior to allocation of central overheads. EBITDA by segment for 2013 has been re-presented to reallocate support costs which were previously shown as central overheads (such as HR, Supply Chain and IT costs) to the operational business segments. 2014 figures are presented on the same basis.
5
KCA Deutag’s integrated offering - from concept to production
• RDS’s offering was supplemented by a team of drilling operations personnel from Platform Services in 2011
- Rig Manager, Toolpusher and Maintenance Supervisor were all part of the FEED
- The Driller assumed his permanent role in Canada during the last stages of Detailed Design
• Drilling operations contract was awarded to Platform Services in 2014 and has two phases:
- Phase 1 (3-4 years) – drilling operations input into construction and commissioning
- Phase 2 (minimum of 8 years) – drilling operations
CLIENT CONCEPT FEEDDETAILED
DESIGNCONSTRUCTION
SUPPORTCOMMISSIONING AND START-UP
ExxonMobil ���� ���� ���� ���� ����
• RDS’s involvement on Hebron project:
Europe (inc
North Sea)22%
Russia19%
Africa19%
Caspian 12%
Middle East 10%
SE Asia9%
Other9%
Houston
Ben Loyaljack-up rig
Baku
London
Stavanger
Bad Bentheim
Tyumen
Nizwa
Ben Rinnesjack-up rig
St. Johns
Bergen
Dubai
Land Drilling Platform Services RDS offices MODUs BentecRegional offices
Continued strong market position and balanced portfolio of assets across highly attractive international markets
Aberdeen (HQ)
1LTM EBITDA excludes results from the Ben Avon jack-up which was disposed of in March 2013 and is stated before normalisation adjustments and excluding central overheads of $53m.Map excludes work over land rigs, defined as being below 900HP.
PRESENCE IN KEY AREAS
North Sea /Norway25 Plat.
Europe & Caspian8 Rigs
Caspian7 Plat.
Russia15 Rigs
Middle East
12 Rigs
Angola3 Plat.
Africa16 Rigs
RussiaSakhalin3 Plat.
Brunei 1 Rig
Myanmar 1 Plat.
126
55 5040
15
0
30
60
90
120
150
Europe NorthAfrica
MiddleEast
North Sea Russia
Ye
ars
LTM Q2 2014 EBITDA split by region
6
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
TR
IR p
er
200,0
00 m
an
ho
urs
Total Recordable Incident Rate Improvement
TRIR (average)
7
Health, safety and environmental performance
Jun-14
KCAD TRIR at end of Q2 2014 was 0.471 injuries per 200,000 man hours worked
IADC industry average 0.812 for 2013
1 Total Recordable Incident Rate per 200,000 man hours. This is a rolling 12 month average.2 KCAD Total Recordable Incident Rate is directly comparable with IADC’s Total Recordables (RCRD) statistic. IADC figures are annual and are not released until after year end, therefore no 2014 information is available.Note: IADC stands for International Association of Drilling Contractors.
• Sustained progress made on improving TRIR performance
• Several milestones reached during the quarter regarding LTI-free periods of up to 10 years
Significant new contracts – Land, Brunei Shell Petroleum (BSP)
8
Contract natureContract for the construction and operation of a new build land rig in Brunei, with design and fabrication of the rig to be undertaken by Bentec
Contract length & timeframes
Drilling expected to commence late 2015
Customer BSP
“This new rig for BSP is very high profile within Brunei. Given the desire for best in class drilling efficiency and safety, we are extremely excited to be partnering with BSP on this project and continuing to deliver world-class performance. This is a very significant land drilling contract for KCA Deutag and I am especially proud of the many employees and functional teams that contributed to its award. Drilling is expected to commence in late 2015.”
Andy Hendry, President of KCA Deutag’s Land division
Significant new contracts – Land, Russia
9
Contract natureContract for the construction and operation of a new build land rig in Russia, with design and fabrication of the rig to be undertaken by Bentec
Contract length & timeframes
Drilling expected to commence in H1 2015
Customer Top ten Russian oil producer
“This contract win is particularly pleasing for us. It not only expands our operations in Russia but further cements our position as a leading global premium land drilling contractor.”
Andy Hendry, President of KCA Deutag’s Land division
10
Contract natureContract to carry out front-end engineering design (FEED) work on Statoil’s Johan Sverdrup development in the Norwegian North Sea
Customer Subcontracted by Aker Solutions, for Statoil
Contract value $10m
“We look forward to delivering a safe, efficient and cost effective solution for Statoil’s Johan Sverdrup development, whilst building a long term relationship with both Statoil and Aker Solutions. This will be the fourth major Statoil project we are currently working on from our London office. We have developed a strong relationship with Statoil through the high quality of Greenfield projects delivered in London and our strong focus on project execution from our offices in Norway.”
Simon Drew, President of RDS
Significant new contracts – RDS, Aker Solutions / Statoil
Significant new contracts – RDS, Wood Group Mustang / Statoil
11
Contract natureContract to carry out pre-FEED work on Statoil’s proposed Snorre C Tension Leg Platform (TLP) in the North Sea
Contract length & timeframes
Team of 15 - 20 engineering and management personnel at RDS will work on the Snorre C drilling facility design for the next five months
Customer Wood Group Mustang
“We are extremely proud to be selected by Wood Group Mustang in the early stages of this key development. This Project builds on our workload of Statoil Projects and strengthens our portfolio of TLP rig designs. We look forward to applying our experience and collaborating closely with Wood Group Mustang and their customers and partners to meet the goals of this phase of the Snorre development.”
Simon Drew, President of RDS
12
Contract natureProvision of the Ben Rinnes jack-up rig in various locations offshore Angola, for drilling and completion services
Contract length & timeframes
Two years with two-year extension options
Customer Sonangol
Contract value $170m
“We are extremely proud to partner with Angola’s national oil company. This award is a reflection of the quality and strength of our operations across the globe, and our approach to working with our customers to understand their needs and provide them with drilling solutions for the future. Angola is the second largest oil producer in Africa and it continues to be a major hub of activity for KCA Deutag. We have worked hard to build a strong presence within the region and this contract will only serve to enhance our operations even further.”
Rune Lorentzen, President of KCA Deutag’s Offshore division
Significant new contracts – MODUs, Sonangol
13
Healthy backlog providing high level earnings visibility for the future
$1,072 $895$1,885
$3,852$54 $127
$4,445
$4,626
0
2,000
4,000
6,000
8,000
10,000
May to Dec 2014 2015 2016 and thereafter Total backlog$m
Contract Option
Total contract backlog as at 1 August 2014
Contract backlog by BU as at 1 August 2014
$1,975m
$269m
$6,250m
$109m
$298m
Land Drilling
Bentec
Platforms
RDS
MODUs
$762 $1,115$2,223
$4,099
$6$120
$4,675
$4,801
0
2,000
4,000
6,000
8,000
10,000
2014 2015 2016 and thereafter Total backlog$m
Contract Option
$768m $1,235m $6,898m $8,900m
Total contract backlog as at 1 May 2014
Contract backlog by BU as at 1 May 2014
$1,635m
$273m
$6,370m
$144m
$55m
Land Drilling
Bentec
Platforms
RDS
MODUs
$8,478m$1,126m $1,022m $6,330m
NB: Backlog figures exclude revenue generated in the year to date.
Q2 2014
Q21
2013Variance
2014 YTD
20131
YTDVariance
$m $m $m % $m $m $m %
Revenue 188.9 168.4 20.5 12.1 356.9 319.0 37.9 11.9
EBITDA pre support costs allocation1 48.4 39.2 9.2 23.3 86.9 69.5 17.4 25.0
Support costs allocation (2.8) (2.6) (0.2) 7.7 (5.6) (5.0) (0.6) 12.0
EBITDA post support costs allocation1
45.6 36.6 9.0 24.5 81.3 64.5 16.8 26.0
Margin % 24.1 21.8 22.8 20.2
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• Robust Q2 2014 performance with utilisation of 80%
• Largest EBITDA improvement came from Russia, driven by increased CDS activities and recommencement of operations for a rig which had been redeployed during Q1
• In Europe/Kazakhstan, EBITDA improvements versus Q1 2014 and Q2 2013 were driven by improved fleet utilisation
• Africa saw EBITDA improvements versus Q2 2013 with two new rigs delivered in Algeria
• Decrease in Middle East EBITDA due to rig redeployment costs
Financial Performance to 30 June 2014
Land Drilling
1 EBITDA by segment for 2013 has been re-presented to reallocate support costs which were previously shown as central overheads (such as HR, Supply Chain and IT costs) to the operational business segments. 2014 figures are presented on the same basis.
Q2 2014
Q21
2013Variance
2014 YTD
20131
YTDVariance
$m $m $m % $m $m $m %
Revenue 63.7 77.9 (14.2) (18.2) 90.0 118.8 (28.8) (24.2)
EBITDA pre support costs allocation1 6.9 9.4 (2.5) (26.6) 7.7 12.7 (5.0) (39.4)
Support costs allocation (0.7) (0.7) (0.0) (0.0) (1.4) (1.5) 0.1 6.7
EBITDA post support costs allocation1
6.2 8.7 (2.5) (28.7) 6.3 11.2 (4.9) (43.8)
Margin % 9.7 11.2 7.0 9.4
Bentec
15
• Q2 2014 saw a reduction in revenue and EBITDA compared to the same period in 2013, however there was improvement versus the low level of activity in Q1
• Variances continue to be attributable to the manufacturing completion status of current rig orders and timing of component sales
• Increases in component sales and after sales services were achieved during Q2
• Order backlog remains strong, which will support higher activity in H2 versus H1
• Fulfilment of seven rig order for customer in Algeria remains on schedule
• Top drive order intake continues to progress well
Financial Performance to 30 June 2014
1 EBITDA by segment for 2013 has been re-presented to reallocate support costs which were previously shown as central overheads (such as HR, Supply Chain and IT costs) to the operational business segments. 2014 figures are presented on the same basis.
Platform Services
16
Financial Performance to 30 June 2014
1 EBITDA by segment for 2013 has been re-presented to reallocate support costs which were previously shown as central overheads (such as HR, Supply Chain and IT costs) to the operational business segments. 2014 figures are presented on the same basis.
Q2 2014
Q21
2013Variance
2014 YTD
20131
YTDVariance
$m $m $m % $m $m $m %
Revenue 208.2 185.5 22.7 12.2 396.8 355.0 41.8 11.8
EBITDA pre support costs allocation1 25.7 19.8 5.9 29.8 50.8 39.5 11.3 28.6
Support costs allocation (2.0) (1.8) (0.2) 11.1 (3.9) (3.4) (0.5) 14.7
EBITDA post support costs allocation1
23.7 18.0 5.7 31.7 46.9 36.1 10.8 29.9
Margin % 11.4 9.7 11.8 10.2
• New contract awards during 2013 in Angola, the Far East and Canada contributed to strong EBITDA growth versus Q2 2013
• Small increase in North Sea EBITDA compared to both Q1 2014 and Q2 2013, driven by operations with Statoil in Norway
• Activity levels in Azerbaijan and Sakhalin remain in line with both Q1 2014 and Q2 2013, although Sakhalin achieved improved EBITDA due to favourable exchange rate movements reducing local costs
• During Q2, pre operations work began on the Hebron platform drilling operations and maintenance contract
RDS
17
• []
Financial Performance to 30 June 2014
• Continued strong performance from the RDS business, albeit EBITDA growth versus Q2 2013 is relatively flat
• As expected, small reduction in EBITDA versus Q1 2014 as the Hebron detailed design project neared completion
• Contracts to carry out FEED work on Statoil’s Johan Sverdrup development and pre-FEED work for Wood Group Mustang on Statoil’s Snorre platform add to existing greenfield contract backlog
1 EBITDA by segment for 2013 has been re-presented to reallocate support costs which were previously shown as central overheads (such as HR, Supply Chain and IT costs) to the operational business segments. 2014 figures are presented on the same basis.
Q2 2014
Q21
2013Variance
2014 YTD
20131
YTDVariance
$m $m $m % $m $m $m %
Revenue 82.8 85.0 (2.2) (2.6) 178.8 166.4 12.4 7.5
EBITDA pre support costs allocation1 15.1 14.8 0.3 2.0 32.8 25.6 7.2 28.1
Support costs allocation (0.7) (0.6) (0.1) 16.7 (1.4) (1.2) (0.2) 16.7
EBITDA post support costs allocation1
14.4 14.2 0.2 1.4 31.4 24.4 7.0 28.7
Margin % 17.4 16.7 17.6 14.7
MODUs
18
• Reduction in EBITDA in comparison with previous quarter as the Glen Tanarbarge came off contract towards the end of Q1 2014
• Awarded a new contract for Ben Rinnes jack-up in Angola – rig was thus redeployed during the quarter, leading to lower EBITDA in Q2
• Ben Loyal remains on contract in Mexico and continues to perform well
• Significant overall improvement in EBITDA versus Q2 2013 largely due to losses incurred on the Glen Esk in 2013, which is now stacked
• All three self erect tender barges are now stacked but new SPAs have recently been signed for their disposal during Q3
Financial Performance to 30 June 2014
1EBITDA by segment for 2013 has been re-presented to reallocate support costs which were previously shown as central overheads (such as HR, Supply Chain and IT costs) to the operational business segments. 2014 figures are presented on the same basis.2Post reallocation of support costs.
Q2 2014
Q21
2013Variance
2014 YTD
2013 YTD
Variance
$m $m $m % $m $m $m %
Revenue 35.6 39.5 (3.9) (9.8) 76.3 78.7 (2.4) (3.1)
EBITDA pre support costs allocation1 5.3 (4.8) 10.1 (209.5) 17.9 (2.2) 20.1 (903.4)
Support costs allocation (0.5) (0.5) 0.0 0.0 (1.0) (0.9) (0.1) 11.1
EBITDApost support costs allocation2
4.8 (5.3) 10.1 (189.9) 16.9 (3.1) 20.0 (640.3)
Margin % 13.5 (13.5) 22.1 (4.0)
Group ResultsFinancial Performance to 30 June 2014
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Revenue and EBITDA ($m) Q2 2014
Q2 2013
2014 YTD
2013YTD
Revenue from business units 579 557 1,099 1,040
Consolidation adjustments (38) (9) (44) (18)
Total revenue 541 548 1,055 1,022
EBITDA from business units 94 73 182 133
Corporate costs/other (5) (10) (12) (14)
Total EBITDA 89 63 170 119
Cash Flow and Working CapitalFinancial Performance to 30 June 2014
20
Working Capital
9
(60)
1Denotes the effect of foreign exchange rate changes on cash and bank overdrafts.*Deltas denote working capital movements from Q1 2014 and Q1 2013 respectively.
Free Cash Flow
9
• YTD operating cash flow position remains strong, driven by overall improvement in EBITDA versus 2013
• Cash flow from investing activities is higher QoQ and YoY due to:
- Increased capital expenditure for new builds
- Higher interest payments
- Disposal proceeds from the sale of the Ben Avon in Q1 2013
• Increase in working capital in Q2 2014:
• Increased inventory / WIP for Bentec due to ongoing construction of seven rigs for a customer in Algeria
• Higher receivables given relatively lower position in Q1, which benefitted from collections from rigs shipped by Bentec in Q4 2013 and advance payments from customers
• Partially offset by increase in trade payables, albeit this increase was lower than in the equivalent period in 2013
(30)(20)
(60.0)
(50.0)
(40.0)
(30.0)
(20.0)
(10.0)
-
10.0Q2 2014 Delta* Q2 2013 Delta*
Cash
Im
pact
of
Delt
a (
$m
)
Working Capital Delta
Working Capital Delta
Q2 2014
Q2 2013
2014 YTD
2013 YTD
Cash flow from operating activities 42 34 124 (13)
Capital expenditure (61) (33) (83) (73)
Proceeds from sale of Fixed Assets 1 (1) 4 51
Net interest (50) (35) (54) (46)
Other (3) 0 (1) 2
Cash flow from investing activities (113) (69) (134) (66)
Equity injection 0 19 0 59
Foreign exchange1 (5) (1) (6) 2
Net Cash flow before debt drawdown/(repayment)
(76) (17) (16) (18)
Drawdown/(repayment) of debt and debt issuance costs
(81) 43 (83) 31
Net cash flow (157) 26 (99) 13
21
Disciplined Growth
350
>400
c.50-55
$200
$250
$300
$350
$400
Q2 2014 LTM EBITDA from New Rigs Pro Forma with New Rigs
EB
ITD
A (
$m
)
2014 2015 2016
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Rig 1
Rig 2
Rig 3
Rig 4
Rig 5
Rig 6
Rig Client CountryCost($m)
Contract length
Rig 1 BP Khazzan Oman c.34 5yrs + 2x1yr options
Rig 2 BP Khazzan Oman c.34 5yrs + 2x1yr options
Rig 3 BP Khazzan Oman c.34 5yrs + 2x1yr options
Rig 4 Lukoil Russia c.27 3yrs + 2x1yr options
Rig 5 Shell Brunei Brunei c.35 3yrs + 3x1yr options
Rig 6 Undisclosed Russia c.27 3yrs
New build land rigs scheduleNew build contracts
Significant uplift in EBITDA from six new rig contracts is anticipated
Pre-award Under construction Operational
• Growth capex to target strict return criteria, with robust investment appraisal process implemented
• Active pursuit of long-term contracts with blue chip clients
• Focus on countries with existing operations, allowing the Group to benefit from operational synergies
• Targeting up front contributions from clients in order to optimise cash flow profile of new projects
• EBITDA profile of projects provides excellent scope for further deleveraging
1Excludes profits/losses from the Ben Avon, which was sold.
1
1,260 1,296 1,230
1,169 1,265
253 273 304 325 350
5.0x4.8x
4.0x
3.6x 3.6x
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
-
200
400
600
800
1,000
1,200
1,400
Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014
Net
Lev
era
ge
Net
Deb
t an
d L
TM
EB
ITD
A (
$m
)
Net Debt / LTM EBITDA Evolution
Net Debt LTM EBITDA Net Debt / LTM EBITDA
22
Capital StructureNet leverage as at 30 June 2014
Amount Outstanding
Coupon Maturity Facility Rating1
Recovery Rating
Net Leverage2
Cash 30.4
Revolver ($250m) 22.0 L+400 May-19 B3/B 3/3 0.1x
Senior Secured Term Loan 375.0 L(100)+525 May-20 B3/B 3/3 1.1x
Total Bank Debt 397.0 1.1x
UK Finance Senior Secured Notes 375.0 7.250% May-21 B3/B 3/3 1.1x
Globe Luxembourg Senior Secured Notes 500.0 9.625% May-18 B3/B 3/3 1.4x
Total Institutional Debt 875.0 2.5x
Finance lease & other debt 23.5 - Aug-183 - - 0.1x
Net Debt 1,265.1 3.6x
1All facilities have ratings outlooks of positive / stable.2Based on Q2 2014 LTM EBITDA of $350m; all LTM EBITDA figures exclude profits/losses from the Ben Avon, which was sold.3Applies to finance lease only.
Closing remarks
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• Continued strong performance in Q2 2014 provides an excellent foundation for H2 and beyond
• Strong quarter for important new contract wins, with more in the pipeline
• Excellent backlog of $8.9bn underpins future earnings
• Geopolitical environment in some of our key markets remains challenging
• Actions continue to optimise the business portfolio and increase business efficiency in 2014
• Growth opportunities are only being pursued where they provide robust capex returns driving increased cash generation based upon long term contracts
• All of this is underpinned by a stable and experienced management team focused on further delivery of results
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