Acergy SA (ACGY)

London-based Acergy S.A. (ACGY), previously known as Stolt Offshore S.A. (SOSA), is a leading oilfield contractor engaged in the designing, procurement, building, installation, and servicing of a range of offshore surface and sub-surface equipment for the oil and gas industry. This equipment includes the above-water topsides and platforms used for processing oil and gas, pipelines, and electrical and hydraulic cables (also called umbilicals') used to control sub-sea wells. The company also provides field-decommissioning services (the removal of offshore structures and equipment) after the field has been depleted and is to be abandoned.

Acergy S.A. classifies its service capabilities into these five areas: Sub-sea construction, Umbilicals, Risers, and Flowlines (SURF) Conventional (includes construction of above-water platforms) Inspection, Maintenance, and Repair (IMR) Trunklines (includes the installation of large-diameter pipelines offshore) and Corporate. The company reports its operations on a regional basis: Africa, the Mediterranean and the Caspian Sea (AFMED), Northern Europe and Canada (NEC), North America and Mexico (NAMEX), South America (SAM), and Asia and the Middle East (AME). Activities, which cover more than one region, are classified under the Corporate segment. In fiscal year 2007 (fiscal year ends on November 30th), the AFMED, NEC, SAM, and AME segments accounted for 53%, 34%, 9%, and 4%, respectively of the company's total revenue. The NAMEX region and the Corporate segment's contribution to 2007 revenue were insignificant. The company has announced the sale of its Conventional and IMR assets however, it will continue to use those assets to complete currently ongoing projects.

With the sale of its Conventional and IMR assets, Acergy has almost completed its restructuring program. This involved increasing its focus on the deepwater markets, divesting non-core assets, and strengthening its balance sheet. With the restructuring issues largely behind it, Acergy has positioned itself to capitalize on the secular growth in deepwater activity levels. This is reflected in Acergy's growing backlog, which at the end of fiscal third-quarter 2008 (ended August 31, 2008) stood at approximately $3.3 billion (a 20% year-over-year increase). While the sharp commodity-price pullback remains a headwind, we do not expect any significant impact on deepwater activity levels beyond the occasional project delay. We believe that most of the projects sponsored by the national oil companies (NOC) and the majors will remain unaffected.

The strong backlog position has significantly enhanced visibility on the company's long-term prospects. This is corroborated by the fact that a high level of bidding activity is in progress for projects in West Africa now going out to 2010, and continuing market growth in the North Sea, Asia, and Brazil. The awards of many of the major contracts are however, expected to be delayed for a few months due to rising costs and local constraints. It is also a well-established practice for Acergy to enter into strategic joint ventures to broaden its scope of work, either on a project or on long-term basis. These un-consolidated joint ventures are increasingly contributing a meaningful ratio of the company's total operating income.

As Acergy reinforces its SURF operations by becoming what it calls, the acknowledged leader in the seabed-to-surface engineering and construction sector, we expect that it will move more into the relatively high-margin deepwater markets. We believe that it could be an important strategic shift by the company, considering the fact that in spite of the financial crisis currently affecting equity markets, we do not foresee any significant decline in global exploration and production activity, reflecting operators' needs to replace depleting reserves. This augurs well for Acergy's SURF business, particularly in the West African region (part of AFMED, which comprises approximately 45% of ACGY's backlog, which remains a key growth opportunity for the company. This is likely to increase the revenue contribution from the company's SURF activity, up from the 2007 share of 72%. Till date, Acergy has not been adversely impacted by the current economic downturn, as more than 90% of the company's work contracts are with major (like Exxon Mobil, BP) or state-owned energy companies (like Petrobras).

Last year, Acergy successfully completed the Greater Plutonio project (the company's single largest project to date) in deepwater offshore Angola. In August 2008, Acergy announced the award of a contract worth approximately $60 million in the Norwegian Sea from BP. In the first half of 2008, Acergy announced the award of two offshore engineering and construction contracts from Denmark-based DONG Energy. Recently, the company announced the award of a contract worth approximately $250 million from Angola LNG Limited for the development of the near shore/onshore segment of the pipeline network required for the transportation of gas from Blocks 0, 14, 15, 17 and 18 to Angola LNG's plant in Soyo, Angola. Additionally, in November 2007 and in January 2008, the company received two important contracts in Angola a $670 million contract in Block 15, and a $700 million contract in the deepwater Pazflor field in Block 17. Further, in May this year, Acergy was awarded a subsea fabrication contract valued at approximately $50 million by Cameron Offshore Systems for the fabrication and assembly of assorted subsea structures for use at the Usan Oilfield located offshore Nigeria. Earlier, the company had won a major contract from TOTAL for the Moho-Bilondo project in the deepwaters offshore Congo. The company was also awarded the Mondo deepwater construction project in Angola by Esso Exploration Angola (Block 15) Limited, an ExxonMobil affiliate. During the fiscal second-quarter of 2008, Acergy completed the offshore installation of the Moho-Bilondo (though there is still a period of equipment testing on Moho and as a result, contract closure is expected in early 2009) and the Mondo projects. In addition, during the quarter, Acergy also completed the offshore operations of the PRA-1 project in Brazil and the Maari project in New Zealand.

In the last two years, the company has received contract awards worth approximately $180 million from Statoil two contracts valued at $60 million for the pre-installation of static and dynamic umbilicals in the North Sea, and a $120 million contract for survey services in the North Sea. Additionally, in early 2007, the company was awarded another significant $140 million contract in Norway by Marathon Oil. In April 2007, the company secured another significant contract from Petrobras valued at $400 million, which is expected to be a major contribution to the company's growth in the region this year. Additionally, in July 2007 and in February 2008, the company was awarded two separate contracts in Australia the first one was an $85 million contract by Apache Energy for installation of the Van Gogh field in Australia, while the second award was a $150 million contract from Woodside for offshore installation work on the Pluto LNG Project North West of Karratha, Western Australia. In February 2008, Acergy received a $195 million contact from EnCana, which will further increase the revenue contributions from the NEC region. Acergy also remains well positioned in the Asia/Middle East region, where it continues to increase its presence. Approximately 7% of ACGY's backlog as of August 31, 2008, is for execution in this region. Acergy's recent establishment of a joint venture with Malaysia's leading oilfield service company, SapuraCrest Petroleum to build and operate the most advanced deepwater construction ship in the region is a step in that direction. The hull of the vessel, named Sapura 3000 was constructed in China at a cost of $200 million and reached Singapore at the end of July 2006. The success of this joint venture is reflected in the wining of contracts valued at $875 million on the Kikeh field (offshore Sabah, Malaysia) from Murphy Oil. The ship was delivered during February 2008 and has completed the first offshore phase of the Kikeh Project. Recently, the joint venture was awarded its first project in India for an installation in 2009. During the third quarter of 2008, Acergy saw significantly higher in activity in this region the completion of the Liu Hua project in the South China Sea

As evident from recent results, Acergy's ability to run complex operations and execute projects has been steadily improving. With its improving business outlook, Acergy has been actively taking steps to return cash to shareholders. In September 2006, it initiated a $300 million share buyback program, which was completed during the fiscal second-quarter of 2008. Acergy also paid $37.5 million to shareholders as its inaugural dividend in the June of fiscal year 2007. Recently, the company has increased its annual dividend by another 17% to $0.21 per share. Acergy currently has more cash than debt on its balance sheet. This provides adequate financial flexibility to increase its capacity through newbuild programs or through strategic acquisitions. Of the company s regions of operation, we expect the growth drivers to be Africa & Mediterranean and Asia & Middle East.

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