COMMENTS by CEO Dan Sten Olsson
Designed to last
In bad times only companies with positive cash-flows survive. Companies with no debt normally have positive cash-flows through complete business cycles. Indebted loss making companies must produce cash either by having spare liquidity, by letting profitable parts of the business support their less lucky partners or by selling assets that can generate cash. Stena is a conglomerate originally built on various shipping activities. The ferry lines are the most stable and offshore drilling the most volatile pieces of our marine business. Nevertheless, the cycles are normally contra-cyclical. Such is the case also at present. Our 21 ferry lines produce record results, whereas offshore drilling is going through the worst depression since 30 to 35 years ago. Tankers and LNG carriers are just now going through mini depressions and are recovering quite nicely. Our companies contained in our investment company are doing fine. Our property group is doing extremely well. By selling 17 percent of our property assets and being compensated with MSEK 8,000, we have safeguarded cash for the foreseeable future for the group.
Like long bridges our 21 ferry lines connect Scandinavia and Britain to their neighboring overseas countries. The traffic volumes consisting of cargo carried by lorry and trailer and passengers in cars and buses fluctuate roughly with 20 percent at most. With present outlook for the European economies save for possible consequences of Brexit the future for ferry lines look bright. Despite functioning like bridges ferry lines are complicated pieces of business. The ferries as ships must work with not less than 99.7 percent reliability. Frequent departures enabling a consistent flow of traffic are very important. On board services must offer exciting experiences, as the crossing for most people is a sort of mini cruise. Connectivity to and from ports to roads, cities, hotels and distribution centers must be flawless. The ferry passage is normally only a part of a longer sequence of travel. All our services on offer give us, as an operator, ample opportunities to add value.
Ferries as ships are complicated pieces of engineering. They must be designed to maximise the revenue intake for a given line. From the beginning Stena has considered the ferry-assets to be a business in its own right. Stena RoRo owns 7 Ro-Pax ferries and 9 RoRo ships for trailers. All these ships are chartered to operators similar to Stena Line. For Stena RoRo the ships as assets is the business idea. The vessels for Stena RoRo are therefore assets for trading. The business idea for Stena Line is the ferry lines as such.
Stena Drilling operates marine units, which are even more complicated than ferries. Our technical department is quite large in order to handle the complexities of ferries and drilling units. Drilling services as such are quite complicated and require very skilled crews. Due to strict safety standards and rigorous procedures the productivity between different drilling units varies but is not immense. Despite being the most costly part off a field development and despite the huge building costs for drilling units offshore drilling has a tendency to be treated as a commodity business. The demand for drilling fluctuates enormously and employment of drilling units fluctuates with it. It is costly to have a drilling unit in lay-up and even more costly to mobilize it again before work. Despite drilling units vary a lot in value over the cycles comparatively little trade is done with these assets.
Tankers are normally commodity assets and their services are like taxi services mostly commoditized. Nevertheless the Stena tankers are by design and maintenance considered first class ships. By operating seventy midsized ships (50,000–60,000 tons dwt) and twenty Suezmax ships (150.000 tons dwt) we have the critical mass to reduce voyages in ballast and give our clients a good service. The fluctuation in value is the most profitable part in tanker shipping for those, who get it right. Trading with the ships therefore constitutes a big part of this business.
By an immaculate attention to running and maintaining our properties, we have been capable to buy build and collect such a sizable portfolio that it now constitutes our largest asset base. With low interest rates property values have increased and are now more compatible than before to its replacement costs. The economy in Sweden is doing well for the moment and we have used the time to sell most of our Swedish commercial properties, while retaining our commercial premises in the Netherlands, France and US. Residential houses entertain consistent cash flows guaranteeing stable asset values. Our intention is to expand our Swedish asset base in this field by new buildings to the tune of MSEK 1,000 per year and improvements to existing buildings to the tune of MSEK 500 per year. Luckily we have land to build on for the next ten years.
Stena AB would not be really diversified, if we did not have a portfolio of midsized conventional companies as well. With strong market positions in their niches the likelihood that they will generate good results with moderate fluctuations is very high. This has also been the case so far.
With a liquidity or cash position always good enough to withstand three bad years we feel reasonably secure. We can develop our companies to take positive advantage of their market positions. On top, we have so far since 2005 managed to produce 8 percent p.a. in positive return from our liquid financial investments.
“With AI we improve our internal efficiency”
Digital Business Development
Our digitalisation efforts are now being noticed both internally and externally. At the end of 2017 our efforts within artificial intelligence won CIO Sweden’s award “the digital project of the year”. More important however, is the engagement and commitment shown by our regional and functional leaders in Management Forums, when reviewing our digital focus areas and plans for the future. Digitalisation is not any more after all too complicated. We develop new services and communication to our clients with new apps. We often use AI boxes in this work. With AI we improve our internal efficiency.
Our productivity is increasing every year by a consistent strive to be efficient and effective with our own resources as well as resources belonging to our business partners. As a consequence we have reduced our operational expenses with Stena Drilling by 30 percent on a sustainable level and at the same time we have reduced our corporate selling and administration cost by some by 35 percent since 2015. To safeguard won efficiencies we are now introducing an account/control program to follow up and see to it that gained efficiencies are not lost.
Our work is centered on four focus areas linked to the UN Sustainable Development Goals. The Energy Savings Program (ESP) contributed to lowering CO2 emissions by 2.1 percent per nm for the year.
In addition, the Stena Line fleet´s sulfur emissions was reduced by 15 percent per nm due to the use of a lower sulfur grade fuel on our Irish Sea operations. With sulfur-cleaning scrubbers installed in many Stena Line ferries we are now evaluating introducing scrubbers in our tankers as well. New on-shore power supply (OPS) was inaugurated in Trelleborg. For 2018 Stena Line is planning its first battery project.
In order to ensure Responsible Consumption a new Stena Marine Supplier standard is under development.
For eight years we have supported World Ocean Health Index. It has now been adopted by 28 countries and is UN’s preferred index to measure the health of each ocean. This year we have joined a new initiative called the Friends of the Ocean. This organisation is supported by UN and World Economic Forum (WEF). Norway and Sweden represented by their prime minister and deputy prime minister are the initiators and guardians in particular.
The rebalancing of the oil market has likely been achieved. The decline in excess inventories accelerated in late 2017 mainly by strong demand growth, high OPEC compliance and collapsing Venezuela production. Even though the Brent price have reached close to USD 70 per barrel OPEC and non-OPEC remain committed to their output cuts as they remain focused on reducing surplus stocks.
The US shale community will not grow enough to balance the short-term market due to the delay between rig activity and production. It’s unclear whether the industry is about to substantially add more rigs given its hedged production at prices around USD 50 per barrel WTI, recent increase in service costs, limitation of fracking crews and infrastructure limitations.
Current depletion rate is 6–7 percent but underlying depletion rate is rather up to 8 percent as production efficiencies hide about 1–2 percent in decline. Looking at 2025 the oil supply gap is estimated to about 18 mb/d – potential contributors is estimated to;
- 5–7 mb/d from US Shale
- 3–4 mb/d from OPEC / other Onshore
- Remaining gap of 8–10 mb/d building up with aggregates of 1,5 mb/d yearly probably to come from Offshore.
Offshore oil can be sanctioned today at a break-even level of USD 40–60 per barrel. The 60 percent decrease in exploration activity since 2015 makes expanded offshore exploration drilling a must. The tendering activity for Stena Drilling has to our relief rendered positive results. All our units seem to be if not completely partly employed in 2018 and 2019.
It looks as if the world economy now enters a mature expansion period. There is healthy growth in all major economies and in most sectors with a global GDP growth rate of around 4 percent on a y-o-y basis. Despite political uncertainty it is anticipated that this healthy growth can last for another couple of years, without inflation necessary speeding up significantly, even though this is one of the biggest threats.
All our pieces of business will take advantage of this situation and we look positively forward to 2018.
Gothenburg 18th of February
Dan Sten Olsson
CEO Stena AB
2017 HIGHLIGHTS AND FOCUS AHEAD
STABLE RESULTS IN A CHALLENGING MARKET
- Revenue SEK 33.7 (34.8) billion
- EBITDA SEK 8.6 (11.0) billion incl. valuation of our investment properties and sales of non-current assets
- EBT SEK 1.3 (2.3) billion
STRONG LIQUIDITY AND CREDIT PROFILE
- Available cash, unused credit facilities and financial assets SEK 15.2 billion
- Cash conversion cycle 8 days
- Total investments SEK 7 billion.
– Acquisition Superfast VII & VIII
– Newbuilding and upgrade to “PLUS” apartments for Stena Property, 1,300 apartments in
production/decided on for production
– Special Periodic Survey (SPS) Stena Drillmax & Stena IceMax
– Equipment (MPD & BOP) for Stena Drilling
– Digitalisation projects
– 4 RoPax vessels for Stena Line and Stena RoRo
– IMOIIMAX vessels for Stena Bulk
– 1,300 apartments Stena Property
STRONG BALANCE SHEET
- Book value of vessel and rig fleet SEK 43 (43) billion
- Market value of property portfolio SEK 38.3 (35.5) billion
- Net debt excl. property loans SEK 30 (32) billion
- Net debt to EBITDA excl. property loans, 5.8x (3.5x)
- Equity incl. deferred tax SEK 50 billion