Oil & gas


    “GLOBAL POPULATION GROWTH AND URBANISATION WILL CONTINUE TO DRIVE DEMAND FOR ENERGY, PARTICULARLY CLEANER BURNING LNG.”
  PETER BENNETT | Business Platform CEO

OVERVIEW

The businesses within this platform are:
CH-IV – Houston, USA
Clough Booth Welsh – Ayrshire, Scotland
Clough Enercore – Calgary, Canada
Clough – Perth, Australia
Clough Murray & Roberts – Cape Town, South Africa
e2o – Adelaide, Australia


Instability in energy markets continued throughout FY2016, with the oil price falling to its lowest level since 2003.

The platform’s strategy has subsequently been reviewed in light of the prolonged downturn in energy markets and seeks to support its revenue base through:

  • Continued geographical diversification of its oil and gas service offerings into international growth markets;
  • Continued focus on commissioning and brownfields oil and gas opportunities, in Australia and internationally; and
  • Tactical diversification into civil infrastructure markets in Australia.

During the past year, the platform continued to provide a range of engineering, construction, commissioning and brownfield services to some of the world’s largest LNG projects, and despite declining market conditions, delivered financial results in line with management expectations.


FINANCIAL

The platform experienced a reduction in revenue and operating profit in FY2016 as a number of the major greenfields LNG projects in Australasia transition from their construction to operations phases. This transition was anticipated and strategies were put in place over previous years to focus the business towards brownfields, maintenance and capital works projects in this market.

The market response to the sudden and significant decline in global energy prices was more abrupt than anticipated. Global energy producers deferred or cancelled several major new projects and, in the short term, deferred discretionary brownfields expenditure to preserve cash.

These macro factors negatively impacted the financial performance of the platform. Revenue decreased to R11,2 billion (FY15: R11,8 billion) while operating profit fell by 37% to R525 million (FY15: R838 million), as clients reduced contracted rates on projects and extended payment terms, and competition for work intensified.

Revenue was generated largely on continuing greenfield Australian LNG projects: Chevron’s Wheatstone and Gorgon projects, and INPEX’s Ichthys LNG project. The North American, UK and Australian businesses also made material contributions to revenue and this was enhanced with the acquisition of Enercore Projects in Canada, subsequently renamed Clough Enercore

The order book at year end was R6,4 billion (FY15: R8,4 billion). The reduction in order book reflects the winding down of a number of large projects and the current challenging oil price environment. It is expected that if the oil price stabilises around USD50 per barrel, confidence in the sector could return and project opportunities previously deferred could be reinstated. Through the continued expansion into international markets and the diversification into complementary infrastructure markets in Australia, the platform aspires to contribute significantly to the Group’s earnings in future.

LEADERSHIP

On 1 February 2016, Peter Bennett was appointed as the chief executive officer of the platform. Peter succeeded Kevin Gallagher, who resigned to lead a major oil producer in Australia.

During the year the leadership team was strengthened with key appointments. Roberta Selleck (HSSE manager), Christian Ainslie (group general counsel and company secretary) and Lana King (head of human resources), were promoted to the executive committee. Business development was also restructured to be independent of operations and is headed by Raj Ratneser.

Two proprietary programmes were also launched: MAP, which implements and verifies critical controls on high-risk project activities and Clearview Assurance, which optimises governance and productivity on projects.

Operating model

Considering the depressed energy market, the business was rightsized and streamlined to become more competitive in winning smaller projects.

The overhead cost base was significantly reduced, which will result in an annual saving of approximately AUD40 million. The restructuring has eliminated duplication across the business and the previous multiple-unit business structure has been replaced with two regional operating divisions:

  • Australia & Asia Pacific Operations; and
  • Americas & EMEA Operations.

The two regional operating divisions will focus on delivering specialised EPC services to their respective regions. The operating divisions are also leveraging Clough’s client network in Australia to develop and maintain relationships beyond Australia and support the expansion of services across the project lifecycle.

   ENGINEERING     CONSTRUCTION &
FABRICATION
 
   GLOBAL MARINE*     COMMISSIONING &
BROWNFIELDS
 
   CORPORATE
OVERHEADS
AND OTHER
 
   TOTAL    
R MILLIONS  2016        2015     2016        2015     2016        2015     2016        2015     2016        2015     2016        2015    
Revenue  2 707        4 679     126        705     936        2 085     6 977        3 384     466        953     11 212        11 806    
Operating profit/(loss) 329        666     (13)       103     (4)       51     735        389     (522)       (371)    525        838    
Margin (%) 12%        14%     (10%)       15%     0%        2%     11%        11%             –     5%        7%    
Order book  1 574        4 405     1 208         –     341        832     3 306        3 209             –     6 429        8 446    
Segment assets                                                                             2 919        3 675    
Segment liabilities                                                                             2 072        2 808    
People                                                                             1 464        2 495    
LTIFR (fatalities)                                                                            0.18(0)       0.24(0)   

* With effect 1 July 2014, Marine is reported under the Oil & Gas platform under Global Marine.

“IT IS EXPECTED THAT IF THE OIL PRICE STABILISES AROUND USD50 PER BARREL, CONFIDENCE IN THE SECTOR COULD RETURN AND PROJECT OPPORTUNITIES PREVIOUSLY DEFERRED COULD BE REINSTATED.”

 

 

 

 

 

 

Seven strategic imperatives will underpin the platform’s achievement of its growth aspiration:

01 BUILD A GLOBAL OIL AND GAS EPC AND EPCM PRODUCTS AND SERVICES BUSINESS
02 BUILD A GLOBAL OIL AND GAS COMMISSIONING AND BROWNFIELDS BUSINES
03 SELECTIVELY PARTICIPATE IN THE WATER, POWER AND INFRASTRUCTURE BUSINESS IN AUSTRALIA
04 ENTER AND GROW THE ASIA PACIFIC OIL AND GAS EPC BUSINESS
05 GROW THE NORTH AMERICAN OIL AND GAS EPC BUSINESS
06 GROW EMEA OIL AND GAS EPC BUSINESS
07 SUSTAINABLY REDUCE OVERHEADS

Governance

The platform continues to align its management systems and policy frameworks to the needs of a global business in order to achieve the highest standards of project delivery, business integrity, ethics and corporate governance. Every Clough employee completed Code of Conduct training to reinforce ethical business practices internally and externally.

RELATIONSHIP

Stakeholder engagement

No work stoppages were experienced on any project sites, however a number of matters were taken to various industrial tribunals.

A difficult matter arose on the Wheatstone Hook-up and Commissioning project with a claim from the three maritime unions, relating to personnel supplied by a maritime manning agent to the Accommodation Support Vessel Operator. The platform provided significant support to its lower-tier contractors and directed their strategy on this case. The Maritime Union of Australia has now withdrawn their claim and defence of this matter saved our client approximately AUD8 million.

Managing human capital

The platform remains committed to providing ongoing development opportunities for its people. In the pursuit of excellence, individual development needs are assessed predominantly through the annual performance review and capability review processes. The approach to talent management was reinvigorated during the year, with a bespoke online tool launched to support the process.

The PMA, launched in FY2015, has continued with strong executive support and a committed cohort of participants. During the year, all initial participants successfully completed Level 1 training, with Level 2 commencing in May 2016. Level 2 modules are designed to teach participants best practice approaches for the various project lifecycle activities and include learnings to enhance both technical and leadership skills. Completing Level 2 training is expected to take 18 months. The deployment of an online solution allows for efficient training, irrespective of work location.

Refining the approach to learning and development over the next 12 months is critical to maximise the reach and effectiveness of the development spend. Focus areas are leadership development, the PMA and other business-critical training.

OPERATIONAL

Project activity declined during the year as the projects that were under construction reached completion, with no new construction projects awarded. Geographic expansion continued as the platform develops its global network of engineering and operating centres. The platform currently has no projects in distress.

Australia & Asia Pacific Operations

This division was the largest contributor to platform revenue and profit, although its performance was impacted by the sharp decline in global energy prices, which caused clients to renegotiate contract terms, extend payment terms and delay future project investment. This trend is expected to continue into FY2017. Significant reduction in expenditure was required to preserve gross margins and remain cost competitive in pursuing smaller brownfields and maintenance project opportunities.

Major project work was completed on projects in Australia, including the construction of the first LNG Train on the Gorgon LNG Project with construction on Trains 2 and 3 continuing.

The Wheatstone LNG Jetty was completed ahead of schedule, which established a good basis for the commercial settlement negotiations on several unresolved claims. The Wheatstone Jetty project won the Group’s project of the year safety award.

Subsidiary company e2o continued to support clients, performing commissioning work on the Gorgon and Wheatstone LNG projects. As these projects move into their operational phases, e2o will continue to provide ongoing operational support. Strong operational performance was also delivered on the hook-up and commissioning contract for the offshore Wheatstone platform, and substantial hook-up contracts were secured on the Ichthys LNG project offshore facilities, thereby continuing Clough’s leading role on this project.

The Clough-Amec Foster Wheeler joint venture continued to undertake work on the ConocoPhillips Bayu-Undan contract, successfully completing scheduled maintenance work during the year. Clough continued to provide brownfield services to support Chevron and ENI’s Australian operations, which present opportunities for future project work.

Americas & EMEA Operations

The near-term future will continue to present ongoing challenges and uncertainties due to the cyclical nature of the oil and gas industry. However, the division is structured and positioned to grow the relevance, size and capability of its global operations, and forging long-term relationships with clients in this region will be important to secure work and repeat business.

Solid advancements and results were achieved in line with the platform’s global expansion strategy. The platform is continuing to grow its bolt-on acquisitions through leveraging the niche capabilities of these subsidiary companies across the platform’s global operations and expanding their service offerings across the project value chain.

CH-IV, acquired during FY2015, continued to grow in line with expectations, securing a number of small but key contracts with Eagle LNG, National Grid and Freeport, providing specialist front-end engineering and regulatory support services. These contracts support the platform’s Early Contractor Involvement strategy of securing front-end work on projects with the ultimate objective of taking on larger full EPC work packages during the project implementation phase.

EC&I engineering firm Booth Welsh, also acquired during FY2015, continued to further develop specialist EC&I products and services. These products and services provide benefits to clients through achieving improved asset performance in areas such as process efficiency, automation, operating costs, reliability and safety. Booth Welsh secured extensions of several framework agreements in the UK with clients such as GlaxoSmithKline, EDF Energy, Scotia Gas Networks and DSM.

During FY2016, the engineering company Enercore Projects was acquired to establish a permanent presence in Canada and now provides engineering capability and operational flexibility to support the delivery of projects in the North America region.

A regional structure has been implemented based on a project operations approach. During the year, there was a strong focus on operational performance and technical excellence, including HSSE performance, improvement of project delivery processes, enhanced functional support services, intercompany support and work share. A key focus has been cost control and aligning cost levels to current market conditions. Further steps are underway to establish stronger project delivery capability across the region.

Currently, corporate M&A activity is focused on developing EPC capability in the North American markets.

RISK

Health and safety

The platform has maintained a strong safety performance, celebrating 224 consecutive days LTI free at year-end.

During the year, the platform continued to apply its award-winning (2015 Coffey IFAP Safety Innovation Award) MAP programme. The implementation of the programme has had a positive impact with no fatal incidents recorded since the programme’s formal inception in January 2015.

Projects across the platform have committed to strong HSSE awareness with continual improvement in the reporting of leading indicators. The Wheatstone Jetty project has been recognised through the Best Safety Performance at Project Level award by the Group. The project was successfully completed and fully demobilised in June 2016 without any lost time incidents. The project duration was two and a half years with 1.65 million man-hours worked.

Technical and structural improvements were introduced to the HSSE management system during the year to better meet business requirements and align with the Group HSE Framework.

Environment

The platform has sustained a strong environmental performance with no serious environmental incidents or incidents of non-compliance occurring during FY2016.

Significantly, the quarantine management programme implemented by Kellogg Joint Venture (Clough share 20%) to support the Gorgon LNG project, has provided biosecurity of the Barrow Island Class “A” nature reserve. This programme involved inspection and as required fumigation of all mobile plant, equipment and supplies to prevent the introduction of any plant, animal or other biota to the waters and island throughout the five years of the construction programme.

In collaboration with clients, projects have continued to implement waste management programmes, which reduce waste generation from shipping and packaging, while optimising recycling of construction materials.

The platform continues to monitor greenhouse gas emissions with the direct carbon footprint related to power consumption remaining at low levels. During FY2016 a reduction in air travel resulted in a 32% decrease in air travel-related CO2 equivalent emissions per capita.

Risk management

The platform actively reviews enterprise and business risks to ensure controls are being progressed and closed-out in line with commitments made by the various risk control owners. This year, a project governance module was presented to the project management academy cohort. This module included training on the Group contracting principles, commercial principles and Clough risk management processes.

To further business development, relationships with clients and potential joint venture partners are being expanded.

Operating cost reduction remains a key focus area. This includes the optimisation of commercial office space in West Perth and Perth CBD offices, the implementation of a group-wide brokered cloud-based IT service delivery model and optimising divisional support costs and indirect project costs.

PROSPECTS

The energy markets remain depressed and are expected to remain depressed for the next 12 to 18 months. The catalyst for improved market conditions will be an increased and more stable oil price. The platform is well positioned in the market and its international expansion plans will bear fruit when new project investment in the energy sector returns.

As a result of the depressed markets, an even stronger emphasis will be placed on order book growth throughout the coming year. Global business development will be enhanced through a newly appointed business development and commercial team, which will focus on the following priorities:

  • International expansion opportunities;
  • Presenting to clients the full project lifecycle service offering and contracting model; and
  • Focusing on existing relationships with clients in Australia to be better positioned for participation in their international LNG projects over the medium term.

The platform will continue with the global expansion of its oil and gas EPC project services in growth markets, particularly in Asia and North America, as well as selected African markets. Business in Australia will primarily come from commissioning and brownfields opportunities on LNG facilities, which is a large and growing market, although highly competitive, as well as selected government infrastructure project opportunities.