New rigs from old
Ades chief executive Mohamed Farouk reveals his firm’s formula for offering oil companies rigs at lower-than-market rates
Every dark cloud, they say, has a silver lining. As the global oil industry languished after the post-2014 price collapse, one Egyptian oilfield services company was lucky enough to discover that proverbial precious-metal lining. Advanced Energy Systems (Ades) was well-placed to cash in on the misery that oil firms around the world were enduring. For the company's business model is to buy up and refurbish legacy rigs before leasing them at a low cost to oil and gas operators.
"The oil-price crash affected us in a positive manner," Mohamed Farouk, Ades' chief executive, told Petroleum Economist. "We found a lot of good assets to acquire, that companies couldn't afford to keep."
It was a favourable environment for Ades to pick up bargains and for oil firms to benefit from cut-price deals on rigs. "When oil prices drop," Farouk continued, "operators tend to lower their costs." At that point they seek "a tier-one company that can offer good service at a good price. We were there, serving them, allowing them to have 40% or 50% discounts on the daily rate."
Ades was established in Cairo in 1997 when the oil market was tight and rig demand high. But soon after the start of operations, Brent prices fell, leaving the new firm struggling. "It was a tough start," Farouk said, "but it helped the company create an ethos, from day one, of being a low-cost and efficient firm."
In its first decade, Ades focussed first on onshore rigs, and later on offshore as well, meeting a demand from operators in the shallow waters of the Gulf of Suez. In 2012, when Farouk joined Ades as chief executive, the company expanded its operations—despite the fact that Egypt was in turmoil. The previous year had witnessed the start of the popular uprising that drove President Hosni Mubarak out of power.
"Surprisingly," Farouk continued, "there was a lot of demand for jack-up rigs. In the Gulf of Suez, a lot of exploration and development plans were delayed because of the non-availability of rigs. So we decided to offer jack-up rigs that Transocean were selling at that time. And in a short time, between 2012 and 2014, we became the number one offshore player in the Gulf of Suez," with BP, Eni and Egypt General Petroleum Corporation among its clients.
Up to this point, Ades' operations were confined to Egypt. But in 2015 it found its first new client outside the country: Algeria's state energy giant Sonatrach. A year later Saudi Aramco was operating three jack-up rigs from Ades. Farouk says his ambition is to move into more markets in North Africa and the Gulf states. Today, around half of Ades' business is in Egypt. Its plan is to reduce this share to 25% by the end of 2019, as regional involvement grows. Ades has its eye on new exploration activity that Saudi Arabia is planning in the Red Sea. And it has formed a joint venture with Vantage Drilling to explore for new natural gas reserves in Egypt's deepwater offshore—in the wake of Eni's massive Zohr discovery.
Farouk says Ades aims to occupy what he calls "the middle ground" of the rig-supply business: "In Egypt we have a good understanding of the market and a good reputation. Now we're getting a good regional footprint. So we have the advantage of being local and cost-effective, yet we are able to meet the level of service, safety standards and operational excellence required by multinationals." So Ades, he continued, is neither a local company operating in just one country; nor is it a global firm with the inherent high costs.
Farouk is immensely proud of Ades' cost structure. The first element is the identification of available rigs-often built in the 1970s and 80s-that might be suitable for refurbishment. "We have a very good team looking into assets around the world," Farouk said. "Once we have a good estimation of a rig's status and how much it would cost us, we send a third party, usually DNV or Lloyds, to give assurance to us and, more importantly, our lenders. They need these third-party reports to make sure we're not buying junk assets." Once a rig is acquired, "Ades has a very good project team with the capability to refurbish and get these assets into operation in the shortest time, with a licence to operate from the American Bureau of Shipping or DNV".
Low opex costs
Ades' other big advantage over global players, according to Farouk, is the "very, very low" level of general and administrative expenses in Egypt, compared to its competitors operating out of London, Houston, Geneva, or even Dubai. More important, are low opex costs because we have access to the Egyptian workforce, allowing us to get very talented resources at maybe 40-50% of standard operating resources."
Today, Ades has 11 offshore and three onshore rigs. Last December, it bought, for $83m, another three offshore rigs from Nabors Industries that had been operating in Saudi Arabia. Nearly all its rigs are in operation. By the end of 2018, Ades—listed on the London Stock Exchange—aims to grow its financial backlog to $1bn.
Farouk, who speaks fast and fluently, has a clear vision of how Ades might expand in future. His own path to the company began when he gained a PhD in systems engineering and control from the University of Ohio in the US. He then worked for the UK's Invensys, which provided automation systems for energy companies, including Saudi Aramco, ExxonMobil and Chevron. As a senior vice-president for operations worldwide, Farouk said he became "executive sponsor for Aramco and other Middle East accounts. So I knew the clients very well, I knew their mindset". So his transfer to Ades involved simply shifting from the management of one firm to another, "dealing with the same clients, but upstream rather than downstream. It wasn't a big shift."
While he had no experience in rigs, he brought in experts. "I provided the management expertise," he said, "and made sure I had the right team with domain knowledge. I made sure I had a good, knowledgeable driller in my team. This is a good mix and it has allowed us to get to a new model which has been quite successful."
So enthusiastic did Farouk sound about his time at Ades that I decided to toss him an easy question to enable him to enthuse further. How much, I wondered, did he enjoy his job? A rare smile, and then an answer that surprised me: "Actually it's quite stressful and demanding. The enjoyment is the fact that we're able to grow in a tough time and deliver results—better than market expectations." In the long term, Farouk's ambition is to become "less engaged in day-to-day operations, and more engaged at the board level—to relieve some of the stress I have on a day-to-day basis".
How, then, does Farouk shed that daily stress and relax? "I like to go and do some sailing," he said. "I have a small boat and I sail in the Red Sea. Sometimes in the summer I go to the Mediterranean between Greece and Turkey."
At which time, presumably, there are neither dark clouds nor silver linings for Farouk to worry about.