COLUMN | Quick updates: Wood woes, Saipem shock, Chevron cuts and Cyprus success [Offshore Accounts]

Last week we looked at how Donald Trump has suspended enforcement of the Foreign Corrupt Practises Act, taking an axe to this anti-corruption legislation by executive order.

As Elon Musk cavorted about the stage brandishing a chainsaw at the Conservative Political Action Conference last Thursday, unfortunately others have been chopping and cutting in the offshore space.

Wood Group woes

Just under a year ago, we contrasted the floundering of failing oilfield services group Petrofac with its UK-listed peer the Wood Group. We noted the following whilst Petrofac was burdened with excessive debt and urgently needed to restructure:

"The Wood Group has been able to demonstrate a turnaround of the type that Petrofac needs to perform. Its latest investor presentation from January [2024] shows that it is now working almost completely on cost-plus, reimbursable contracts and that lump sum turnkey projects are now only one per cent of its revenue.

"Unlike Petrofac, the Wood Group fixed its balance sheet by selling its Built Environment Consulting business in September 2022… The Wood Group now has a market capitalisation in excess of US$1.2 billion – eight times higher than Petrofac's…"

That hasn’t aged well at all. Well, we were right about Petrofac’s imminent demise – as we reported, in December last year, Petrofac gave notice that it had entered into a lock-up agreement with the majority of its secured debtholders, a restructuring to deliver at least US$325 million of new funding to the troubled company, its shareholders would be heavily diluted, and at the same time, its chairman announced his resignation.

Wood you believe it?

Unfortunately, the turnaround at Wood proved to be remarkably short-lived.

When we wrote that piece last year, the shares were valued at 150 pence (US$1.90). On Friday, they closed at 26 pence (US$0.33), an all-time low, after the company announced a catastrophic trading update.

CEO Ken Gilmartin admitted that the firm’s cash flow would be negative this year, losing between US$150 million and US$200 million, after having stated previously that it would be positive. Hmm...

Instead, positive cash flow is now only expected in 2026.

"This is a difficult announcement amid our transformation," said Mr Gilmartin. "While we have made progress, I am disappointed in our financial performance."

Disappointed would be an understatement. The Wood Group now has a market capitalisation of just US$211 million, down 97 per cent from its peak, and it expects to have around US$1.1 billion of debt on its balance sheet this year, as it did last year. As recently as 2019, Wood was valued at over US$6 billion, so this is a spectacular fall from grace.

In 2023 and 2024, Wood was nearly put out of its misery acquired by two separate bidders, both of whom valued the equity in the company at around US$1 billion and the whole business with debt at US$2 billion or more.

Unfortunately, neither American private equity group Apollo, which made an offer in May 2023, nor Dubai-based Sidara, which made an approach in 2024, went through with their acquisition plan, presumably much to the relief of their principals, given what has now emerged. Sidara abandoned its bid, blaming global market turmoil and geopolitical risks, as per Forbes.

Mr Gilmartin was appointed as CEO in July 2022, and now looks rather foolish for not having closed a deal with one of the suitors.

Bye, bye, bye – CFO resigns

Oh, and a few days after the trading update shocked the market, Wood’s Chief Financial Officer Arvind Balan stepped down from his role with immediate effect, after it turned out that he had given an incorrect description of his professional qualifications.

"I made an honest oversight with respect to the description of my professional qualification as a chartered accountant instead of a certified practicing accountant," Balan said in the obligatory, remorse-filled statement.

The problems seem not to relate to the accounting nous of the now former CFO, who had only joined Wood in April of last year. Instead, once again, it was the problem of legacy lumpsum engineering, procurement and construction (EPC) contracts.

These contracts, whereby Wood is obliged to deliver a complete facility (like a refinery or a carbon storage facility or a tank farm) to its client, who needs only "turn a key" to start operating the facility – which is why EPC contracts are often called turnkey construction contracts.

Like McDermott, Wood exemplifies the problems of badly planned acquisitions and badly costed turnkey contracts (which also proved fatal for Petrofac).

For McDermott, its acquisition of Chicago Bridge and Iron (CB&I) was disastrous, as we have covered at length. For Wood, it was the acquisition of Amec Foster Wheeler in 2017 for just under US$3 billion, which came complete with unexpected corruption charges and fines, and burdened Wood with billions in extra debt.

But there are wider lessons for the offshore industry from the woes of Wood. Firstly, chasing sales is futile if the projects are loss-making. Wood reported 2024 revenue of roughly US$5.7 billion, and an orderbook of US$6.2 billion at the end of the year.

Unfortunately, it will report a net loss for 2025 because executing the contracts cost more than the customer pays Wood – a rather fundamental problem.

Saipem has another Natalie Imbruglia moment

Last month, yet another EPC contractor was found to be on the hook for millions of dollars of cost-overruns, this time, Saipem, which has faced what Bloomberg politely described as “difficulties” in drilling 64 foundations for wind turbine monopiles at the EDF-led Calvados/Courseulles-sur-Mer offshore wind project in northwestern France.

There is a predictable story here, which seems to repeat over and over again – contractors taking on lump-sum risk and losing their shirts. It has happened to both Petrofac and Wood, it happened to CB&I in Colombia at the Ecopetrol refinery in Cartagena, and it happened in 2021 to Saipem when the company faced issues at the Neart na Gaoithe wind farm off Scotland, which it was installing for EDF Renewables.

Again, Saipem linked the delays and cost overruns to soil problems and issues with the foundations of the 54 turbine jackets it was fabricating and installing for the wind farm, along with the jackets for two substation platforms.

At that time, Saipem took a US$1 billion hit to earnings from that project and others, and required an Italian state assisted bail-out, as we reported (“Nothing’s right, I’m torn”).

This is a perennial problem of the EPC business – and why investors should be sceptical of wind farm installer Cadeler’s decision to take on more project risk, and more turnkey projects. It only takes one bad EPC contract to destroy a company’s balance sheet, and it can take years to close out legacy contracts, as Wood has discovered. 

As with Wood, its appears our upbeat assessment of Saipem’s prospects in October, when it announced stellar results, will be proved wrong, thwarted by the structural problems of the fickle EPC business.

Chainsaws out in Wood

In order to try yet another turnaround, Mr Gilmartin has axed employee and executive bonuses at Wood (which is at least better than events at McDermott where the then-CEO made out like a bandit as the company spiralled to Chapter 11). Wood’s simplification programme was launched in March 2024 and the company reports that it is on track to deliver annualised savings of around US$60 million in 2025.

Faced with its deteriorating cashflows, Mr Gilmartin announced that the programme was now being extended to target a further US$85 million of annualised savings from 2026 onwards, with a view to reduce the Wood Group’s cost base by US$145 million from 2023 to 2026.

So, Wood Group employees face a lot of uncertainty, with job losses likely and further disposals of businesses, on top of the sale of EthosEnergy for net cash proceeds of US$138 million in December.

Chevron also cuts despite US$17 billion in profits

At least Wood employees can genuinely see the existential threat the company faces. Business is not good, clearly, and Wood will bleed cash this year.

When Chevron reported its fourth quarter 2024 results, the American major reported earnings of US$3.2 billion for the quarter and US$17.7 billion for the year, down slightly from 2023, but not exactly shabby.

Chevron said that it returned a record US$27 billion cash to shareholders in 2024 and increased it worldwide and US production by seven and 19 per cent, respectively, to record levels in 2024.

Strange then that Chevron told employees during an internal town hall at the start of this month that between 15 and 20 per cent of employees will be laid off and that staff can begin opting for voluntary redundancy packages (“buyouts” in American parlance) over the next three months until May.

"Chevron is taking action to simplify our organisational structure, execute faster and more effectively, and position the company for stronger long-term competitiveness," said Mark Nelson, vice chairman of Chevron, in a statement reported by Reuters. "We do not take these actions lightly and will support our employees through the transition."

Following BP and Petronas

Coming on top of lay-offs announced by BP and Petronas Carigali in Malaysia, they suggest a degree of strategic uncertainty for the large integrated oil and gas players. Brent crude stands at US$74 per barrel at the time of writing, and whilst profits are lower than the peaks after the bloody Russian invasion of Ukraine, the oil and gas majors are clearly very profitable.

Like BP, Chevron does face some company-specific challenges. Its efforts to buy Hess for US$53 billion, and gain control over Hess’ stake in the hugely lucrative Stabroek block, operated by ExxonMobil in Guyana, is caught up in legal limbo since it was announced in October 2023.

Exxon and China’s CNOOC, the other partner in Stabroek, which is in its fifth year of production and where the seventh floating production system is about to be approved, have taken Chevron's bid for Hess to court. Exxon and CNOOC claim that they have first right of refusal on Hess's equity in the Stabroek block, and that Chevron should not be allowed to buy it.

Worse, Chevron’s proven oil and gas reserves have fallen to their lowest levels in a decade, Reuters reported. Chevron's reserves declined from 11.1 billion barrels of oil equivalent at the end of 2023 to 9.8 billion by the end of 2024.

ExxonMobil, Shell, and TotalEnergies have all reported increases in proven reserves (in ExxonMobil’s case thanks to its acquisitions of Pioneer Natural Resources). If Chevron fails to close the Hess deal, its falling reserves will be a major challenge.

But every challenge is also an opportunity. The best way for Chevron to recover its reserves is not to fire its staff or try to drag its contractors into lose/lose contract disputes or renegotiations.

Namibia, Cyprus and Suriname plans

Instead, it could simply drill more wells. Unfortunately, its first well offshore Namibia in block PEL 90 was dry, but Chevron announced it had taken an 80 per cent stake in another block offshore Walvis Bay, PEL 82, and that it is planning to drill its first exploration well offshore Suriname later this year.

There was also good news that Chevron has finally received approval from the Cypriot government for its updated development plan for the US$4 billion Aphrodite deepwater gas project, which will utilise a floating production unit (FPU).

The project is targeting first gas in 2031 and the FPU will be designed to process about 800 million cubic feet per day, as per Upstream, with the gas exported from Block 12 to gas-hungry Egypt via a subsea pipeline.

Cyprus’s first commercial offshore development is great news for the country’s treasury and for the likely development of the other deepwater gas discoveries in its territorial waters.

Who was it that said “drill baby, drill”?