In order to implement the company’s corporate strategy and achieve the long-term strategic targets, Prosafe has developed a risk management approach that can be separated into four risk categories:
Each risk category is evaluated in two phases:
STRATIGIC RISK IDENTIFICATION
Prosafe aims to create shareholder value by allocating capital and resources to the commercial opportunities that yield the best return in relation to the risks involved within each of its specific strategic areas.
Prosafe’s position in the value chain
Prosafe is a leading owner and operator within the high end segment of the accommodation market, where it faces competition from semi-submersibles, jack-ups, monohulls and barges. Historically, the bulk of the company’s activities have been focused towards the production and maintenance phase of the life cycle of oil and gas fields, although currently and in the latter years the bulk of the activities have been driven by hook-up of new fields. Notwithstanding this, it is ultimately the balance between supply and demand that will be the most important factor affecting Prosafe’s financial position.
The global market for semi-submersible accommodation vessels is a niche market, and a significant increase in the number of available accommodation vessels will affect utilisation rates and/or day rates negatively, potentially adversely impacting Prosafe’s financial position.
In recent years the supply side has grown significantly. In this perspective Prosafe has both played a role to renew its fleet, embark on consolidation and also scrapping of several older vessels. Competition is anticipated to remain high on a global scale as a consequence of supply growth which is only partly compensated to date by consolidation and scrapping.
Demand for offshore accommodation services has risen in line over time with an increased pace in the development of new oil discoveries and extension of the production life of existing fields. Demand for Prosafe’s services has become global, and comes from areas such as the US and Mexican Gulf, Africa, Brazil, Asia, Russia and Australia, in addition to the traditional North Sea market. The key markets however remain the North Sea, Brazil and expectedly Mexico.
Generally, the demand for Prosafe’s services could be affected negatively by oil companies’ earnings. Changes in the oil price affect oil companies’ cash flows and thus their willingness to invest in exploration and production. If the oil price drops significantly, oil companies typically reduce spending, which in turn may lead to lower demand for accommodation vessels.
Furthermore, in the long-term the demand will depend on the oil companies’ replacement ratio. If oil companies fail to replace reserves, ultimately leading to lower production volumes, demand for accommodation vessels could be reduced.
Although Prosafe’s customer base is fairly well diversified, certain customers may, to a varying degree over time, make up substantial parts of the contract backlog. In line with industry practice, a contract normally contains early cancellation provisions for the customer in specific circumstances. Subject to termination not being due to a breach or negligence on Prosafe’s part, the effect on financial results in such cases will normally be wholly or partly offset by a financial settlement in Prosafe’s favour.
Demand and supply in the market in which Prosafe operates is subject to cyclical movements in both the global economy and in regional economies. These movements could be driven by a number of factors such as political processes, changing trading patterns, changes in productivity, technological shifts, monetary imbalances, etc.
STRATEGIC RISK MANAGEMENT
Prosafe’s strategic focus is to ensure a best possible composition of its fleet and location of the same across the global market in order to achieve geographical diversification and closeness to markets and clients for the purpose of efficient fleet utilization. A combination of short- and long-term contracts is a general goal. Fleet renewal and scrapping of older vessels are key elements in the strategy. In addition, Prosafe has a history of playing an active role in industry consolidation.
OPERATIONAL RISK IDENTIFICATION
For most of Prosafe’s contracts, the day rate for its vessels is subject to gangway connection/uptime. Consequently, any operating failure leading to down time on the gangway connection could affect Prosafe’s financial position. Such downtime could be caused by human errors, breakdown of equipment, weather conditions or an otherwise difficult operating environment.
Prosafe will from time to time undertake larger projects related to new builds or upgrades of existing vessels. Such projects carry risks of cost overruns and delayed completion that could have an adverse effect on Prosafe’s financial position.
Given the nature of the business any operating failure or loss of asset integrity may cause serious accidents that could lead to critical damages and, ultimately, a total loss of the asset. This could have an adverse effect on Prosafe’s financial position.
OPERATIONAL RISK MANAGEMENT
Insurable operational risk
Prosafe’s operations involve risk of injury to personnel, loss or damage to vessels, property, equipment and accidental discharges/emissions to the natural environment.
Prosafe aims to cover operational risk as fully as possible through insurance policies taken out with top tier international insurance companies, to the extent that such cover is available and reasonably priced.
Prosafe’s insurance policies cover loss or damage to hull and machinery and loss of hire in respect of certain charter agreements.
Prosafe’s assets are insured based on the requirements set out in the credit facilities agreements and taking into consideration applicable industry standards and regulations.
Marine liability insurance is taken out through a Protection & Indemnity club which insures mobile offshore units and follows applicable industry standards. This provides cover for third party liability, personal injury to crew, oil spill, wreck removal and other pollution and environmental risks.
Prosafe also effects war risk insurance to cover physical damage and liability arising from war and terrorist actions.
Prosafe employees’ insurances are taken out in accordance with industry standards. Liability insurances include general third party liability for onshore activities, directors and officers insurance, special contingency insurances and professional liability insurance, if required.
Non-insurable operational risk
Prosafe works with customers, suppliers and employees, making continuous improvements to its routines and procedures, to ensure that the services provided represent the best available in the industry.
Prosafe carries out a particular assessment of four risk factors when planning value enhancing investments such as upgrades and/or refurbishment programmes:
Technical risk analysis involves an assessment of three critical factors. Firstly, a thorough market analysis is conducted to provide guidance in terms of future demand for certain technical specifications. Secondly, the yard’s ability to deliver in line with these specifications is evaluated. Thirdly, the project’s fit with the overall business plan and strategic direction of the company is established.
Review of any construction risk includes taking into account the possibility of cost overruns and delays. Continuous improvement of systems and work processes is vital in order to adequately manage this type of risk. In addition the company focuses on securing continuity in the organisation and key positions and maintaining relations with sub-contractors and equipment suppliers.
Credit assessment of yards, sub-contractors and equipment suppliers is undertaken when carrying out Prosafe’s project evaluations and risk analysis. The company attempts, as far as commercially possible, to reduce credit risk via parent company or bank guarantees.
COMPLIANCE AND LEGAL RISK IDENTIFICATION
From time to time, Prosafe may become involved in contractual and other disputes and legal proceedings where the outcome is uncertain. Such proceedings may be expensive and time consuming and, depending on the outcome, may have a negative impact on Prosafe’s financial position.
Prosafe is involved in an industry that is highly regulated by different international and national Government bodies. Non-compliance with relevant regulations could lead to prosecutions, fines and/or suspended operations, which in turn could cause financial losses. Furthermore, changes in regulations could affect the operation of Prosafe’s vessels and could adversely impact its commercial and strategic position, in some cases necessitating substantial investments.
COMPLIANCE AND LEGAL RISK MANAGEMENT
Prosafe utilises internal and external legal counsel to deal with legal or litigious matters on a case by case basis.
The company monitors rules and regulations in force and any changes which may arise in order to prepare for any new rules and regulations and ensure compliance in the course of carrying out its business.
FINANCIAL RISK IDENTIFICATION
Interest rate risk
Prosafe’s fleet is partly financed by interest-bearing debt. This means that increases in interest rates could have an adverse impact on Prosafe’s financial position.
Prosafe is exposed to several currencies. The bulk of revenues are in USD and the vessels are valued and financed in USD. Accounts are therefore compiled in USD.
Operating expenses are mainly denominated in USD, GBP, NOK, SGD and BRL, but depending on the country of operation and nationality of the crew, operating expenses can also be in other currencies, such as EUR and SEK.
Capital expenditure relating to general maintenance will typically be denominated in GBP and NOK. Value enhancing investments, such as upgrades and/or refurbishment programmes, depending on the origin of equipment and the location of the yard, will usually be in USD and EUR.
Fluctuations in these currencies as against the USD could have an adverse impact on Prosafe’s financial position.
As Prosafe is partly financed by interest-bearing debt it is subject to liquidity risk. All its loans have a defined maturity date and there will always be a risk that debt cannot be refinanced. This could be as a result of specific factors, such as excessive leverage, falling asset values or low earnings/cash flow, or it could arise from macro economic factors and the general development in the global credit markets. Failure to refinance debt may have an adverse impact on Prosafe’s financial position.
Prosafe’s clients are mostly national oil companies, super majors, majors and larger independent oil companies. If a client should default on any obligation, it could have an adverse effect on Prosafe’s financial position.
Prosafe’s financial counterparties are recognised banks and financial institutions of good standing. However, if a financial counterparty should default on any obligation it could have an adverse effect on Prosafe’s financial position.
FINANCIAL RISK MANAGEMENT
Interest rate risk
Interest on debt is in principle floating, but subsequently hedged to reduce the variability of cash flows in the interest payments through the use of interest rate swap agreements. Prosafe evaluates the hedging profile in relation to the repayment schedule of its loans, the company’s portfolio of contracts, cash flow and cash in hand. The proportion hedged will normally be between 75 and 100 per cent for all loan terms.
Net cash flow from operations is typically currency-hedged using forward contracts within a time horizon of up to 9 - 12 months. Cash flow from capital investments denominated in currencies other than USD, are hedged against the USD irrespective of time horizon.
Debt and interest expenses in currencies other than USD are currency-hedged on a continuous basis against the USD, so that this effectively functions as USD financing. The hedging takes the form of liquidity reserves and financial instruments.
Prosafe makes active use of a system for planning and forecasting the development of its cash flow and liquidity position and development.
Prosafe continuously monitors both the credit quality of existing and potential clients, and the credit quality of existing and potential financial counterparties.