AlphaValue Corporate Services Fundamental Analysis FR
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Dolfines

CR
Bloomberg   ALDOL FP
Engineering-Heavy Constr.  /  France  Web Site   |   Investors Relation
Expanding services into wind
Target
Upside 114%
Price (€) 0.30
Market Cap (€M) 5.69
Money Making

Dolfines has two divisions which ensure rather stable cash flows (Factorig and Services), another two divisions the activities of which are lumpier and more dependent on exploration and production spending (Solutions and Contracting), and one wild card division with high growth potential (New Energies).

Oil & Gas
Services

The company has a vast network of qualified manpower that it can send to production sites around the world on an individual basis or as a multidisciplinary team. Customers are exploration and production companies and larger oil and gas services companies. Typically, the customer will contract the workforce for a specific mission, but Dolfines also has several multi-year agreements with long-standing clients.

Providing a technical workforce is a high volume, low margin business. Contractual prices for assistance and temporary manpower are competitive in the oil and gas industry and this is a fragmented market with low barriers to entry. EBIT margins can reach 6-7%, higher than generalists in workforce solutions (Adecco has an EBIT margin of c.4.5%), reflecting the specialised talents Dolfines can provide.

Dolfines uses its network and technical knowledge to allocate its team around the various projects in which it is working on. A higher number of contracts allows for optimisation of manpower and usually improves margins when talents are in demand. The strength of Dolfines in this activity is its ability to recruit talent on a timely basis (and avoiding costly inter-contracts).

We expect the trend in manpower outsourcing to continue in oil and gas, especially on operational activities, due to the nature of exploration and production which requires specific competencies at each step of the project.

Factorig

Dolfines is an independent third-party rig and QHSE (quality, health, system, and environment) auditor. It assists oil and gas contractors in reducing their operational risks. Works include full condition surveys once the rig has been delivered to the client, rig inspection during operation, inspection of new equipment prior to its integration, etc. The Factorig division is based in Abu Dhabi and has a strong presence in the Middle East.

The company can recertify blow-out preventers (BOP). It has both ISO9001 and API Q2 certifications, which are crucial quality management system requirements for contractors. A BOP is some safety equipment which is used to hold well pressure and prevent uncontrolled flow.

Inspecting and auditing a rig is a recurring business that occurs throughout the whole lifespan of the asset:

In addition to rig inspection, the company can now recertify BOPs from Shenkai.

The BOP recertification market is a good addition to the Factorig division. Safety regulations have increased after the Macondo oil spill in 2010, at which the BOP failed, with BOPs recertification occurring every five years. BOP manufacturers are strongly incentivised to stick to safety requirements. As a reminder, Cameron International Corp, the BOP manufacturer for Macondo well, agreed to a $250m settlement with BP in 2011.

Good execution from Dolfines on the Shenkai BOPs could give them access to partnerships with additional BOP manufacturers.

The Factorig division operates in a niche market where EBIT margins can be above 20%, with customers that are not likely to switch from one contractor to another. The recurrence of the activity associated with customer retention gives audit and inspection a singular and attractive feature within oil services.

Solutions & Contracting

Dolfines is at heart a firm of engineers and has a good track record, with projects realised for various contractors (mainly European and Middle Eastern companies).

Contracting: Dolfines provides project management and services throughout the whole lifespan of a rig. It is focused mainly on complex drilling operations, using the expertise of its other divisions to offer an integrated solution to its clients.

Solutions: This is Dolfines’ engineering unit. The company has been involved in many projects, including the designs of rigs that required ad hoc specifications and studies on modular cluster rigs. It also has expertise in offshore with designs done on jack-up rigs, tender-assisted drilling barges and swamp barges. The Solutions division also offers technical support to the Factorig and Services divisions.

Its size makes it less vulnerable to bigger engineering firms (such as TechnipFMC and Saipem) as it will compete for smaller projects and will typically serve those contractors when it can bring its expertise (such as rig reactivation services).

While, business will be more volatile than the Services and Factorig divisions (engineering activities depend on exploration and production capital spending), margins will also be higher (c.25%).

There is also hidden value with having the engineering division located at the headquarters and providing technical support to the units abroad. For instance, Dolfines has done an engineering study to upgrade a rig for Perenco that required a BOP system. Dolfines can participate in these types of projects thanks to its API Q2 certification and the engineering branch.

New Energies
Business model

Dolfines will be contracted by developers. The scope of Dolfines’ activities can vary according to developers’ needs. Dolfines’ responsibilities can include:

  1. project management (project follow-up including construction and installation);
  2. detailed engineering (engineering, licensing, software, certification);
  3. supply of equipment (ballasts, crane, chain connection, power generation for installation);
  4. on-site installation (towing, mobilisation, connection to pre-laid moorings, supervision);
  5. supply of mooring lines (chains, anchors, buoys, shackles);
  6. water launching and provision of the yard during the erection of the turbine.

As regards the construction of the float, two solutions are being envisioned. The first one is a joint venture where Dolfines doesn’t earn fees on the construction contract. The second one, where Dolfines handles the entire process (float and BOP) under the form of an EPCI contract. Below is a chart summarising the overall structure:

The total cost of an installed unit should range between €30m and €35m for an order of one unit only, while prices for bigger orders are expected to be reduced by c.€3-4m. Dolfines could be contracted either on an EPC or EPCI basis. Typical EPC contracts would only include the design, engineering, supervision and licensing revenue and their value should range between €8m and €10m. An EPCI contract would include installation works and be valued at c.€20-25m, the only revenue not included being the turbine itself as well as the cost of connecting the farm to the grid.

Total cost breakdown, for one unit


Source: Dolfines, AlphaValue estimates

Dolfines will also bid for the maintenance of its floaters throughout their expected lifetime (20-25 years). These contracts could be part of the initial contract or attributed separately. We have valued these revenues at c.€200k per unit per year and have chosen to include maintenance revenues for all floaters sold as we deem it likely that the company would win these contracts given its accumulated know-how in the maintenance offshore platform.

Like in any nascent, high potential market, we expect margins to remain relatively low during the first years as players try to gain market share. We forecast a 10% EBITDA margin and a 6% net profit margin. Based on a c.€10m price, we therefore estimate an EBITDA of €1m per unit ordered. For future, higher-capacity turbines (12MW+), we estimate a slight increase in prices, translating higher costs partly offset by efficiencies, economies of scale and increased competition. We therefore forecast €7.5m, €10m and €12.5m revenue for a 4MW, 6MW and 12MW turbines, respectively.

As for contracts signed with oil majors, we expect similar margins, i.e. 8-10%, although it is likely that some of the first contracts will first be oriented towards engineering as specific solutions will have to be crafted to fit every client’s needs (on-board storage solution, power generators). We expect the first orders to be mainly one-time contracts as oil groups will want to test the solution on a smaller scale before filing bigger orders. We have taken a conservative stance and decided not to include any revenue from this market, besides the €150k already landed in 2018.

Capex is expected to remain modest given the lightness of the business model. We forecast small intangible investments, mostly software licences in the vicinity of c.€12k per year and per employee. As for the number of staff, we use Dolfines’ estimates of five employees per unit ordered, for pilot and small wind farms, and fewer employees per turbine for bigger orders as the their scale allow for some cost reduction.

Risks

The main risk comes from timing and competition as Dolfines’ main competitors are on average one year ahead in terms of developments. Naval Energie has already secured a contract with EOLFI, for the construction of a pilot project consisting of four floating support structures, to be delivered by 2021. Principle Power Inc. has already tested and decommissioned a full-scale 2MW prototype of its WindFloat design. Ideol’s first demonstration (Floatgen) became operational in September 2018 and has already been delivering power to the grid since then.

Another disadvantage could be Dolfines’ own size as the company’s current revenue is lower than the price of a single floater. Therefore, the development of the New Energies division will be limited to pilot and small-scale wind farms during the first years and bigger developers are likely to prefer to wait to see the first unit in operation before placing large orders.

Lastly, the financing of the new entity is likely to require the participation of a partner. The best fit would be to find an industrial partner with extensive experience in maritime construction works, able to install the floaters at their final location. Finding an ideal partner ready to share risk and engage into a minority participation will be key.

Change 21E/20 Change 22E/21E
  12/20A 12/21E 12/22E 12/23E €th of % total €th of % total
Total -1,706 -1,096 -550 -551 610 100% 546 100%
Services -205 -204 -143 -132 1 0% 61 11%
Factorig -423 -436 -140 139 -13 -2% 296 54%
Solutions -21.6 2.50 5.00 5.00 24 4% 3 0%
Contracting -240 -175 -19.3 -14.3 65 11% 156 29%
New Energies -816 -284 -253 -549 532 87% 31 6%
Other/cancellations
 
12/20A
12/21E
12/22E
12/23E
 
Total
-67.5%
-18.2% -7.56% -6.63%  
Services
-26.4%
-13.6% -8.40% -7.31%  
Factorig
-30.6%
-25.7% -5.62% 4.47%  
Solutions
-75.9%
5.00% 5.00% 5.00%  
Contracting
-71.5%
-50.0% -6.43% -2.86%  
New Energies
-11.7% -9.45% -19.6%  
       
Changes to Story : 10/11/2021, Changes to Forecasts : 10/11/2021.