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When it comes to any key asset capital expenditure, investors, owners and operators are actively focused on the key question of investment risk vs. investment reward.
While CapEx may present well on paper, the journey to operational success can be fraught with pitfalls, risks and dangers — both seen and unforeseen.
Due diligence plays a vitally important part in the risk mitigation process. But all too often it is isolated, not integrated across the plan, design, build and operate lifecycle of the asset. In this article we’ll look at the benefits of taking a holistic 3-step strategy that can help investors, owners and operators across the offshore sector mitigate CapEx risk in a more effective way.
Whenever it comes to critical asset capital expenditure, clients strive to answer two fundamental questions — How do they substantiate that an idea is viable? How do they make sure that their ROI hits the target?
It's a question of risk vs. reward and it’s not an easy one to answer — because there are risks at every stage of the plan, design, build and operate lifecycle including:
- Design risk
- Regulatory risk
- Manufacturing risk
- Operational risk
- Cost risk
It’s a hugely complex maze to attempt to navigate, and it’s one that ultimately takes a multi-layered approach to solve. How does an investor minimize their exposure? Does the owner chart as smooth a journey as possible to get the desired outcome and the operator better understand if they will get the return, they need from the market they want to operate in? And how do all three integrate to achieve the outcomes they ultimately seek?
Given the sheer scale of an investment of this type, it is vitally important to connect all phases and understand the needs of all stakeholders by de-risking the planning, design, build and operational stages holistically. The solution lies in developing connected teams across all phases that provide a seamless journey from one stage to the next, rather than seeing planning, designing, building and operating as three separate phases.
Here at ABS Group, we are increasingly adopting a 3-step model to address these challenges. One of the keys to this is our worldwide regulatory teams that enable us to deliver a synergized approach to de-risking the asset investment at every stage of the process to meet the clients’ specific needs — providing clarity and consistency across the project.
We also combine this with external expertise in finance, investment, appraisals and specialist advisors across the marine and offshore sector that bring their own levels of specialism to the benefit of the client, and in wider cases the clients’ client where we are advising a ship owner, who is in turn working with a charterer.
It's an approach that adds value, mitigating risk and creating efficiencies across the asset lifecycle. So, what does this approach to due diligence look like in practice? Let’s say, for example, a client wants to invest in a new ship:
Step 1 – Planning and feasibility: Clients will share their idea and talk about the market opportunity they are looking at before market intelligence based on these preliminary discussions is undertaken, covering areas dependent on the client status, which can include:
- Feasibility studies
- Market analysis
- Shipyard review
- Owner/operator capability review
- Design review and verification
Adopting a holistic 3-step approach to mitigate capital expenditure risk
Financing is clearly critical and is considered and researched at Step 1, taking into account key finance considerations including:
- Non-recourse
- Long-term
- Annuity based
- Cash flow generated from revenue.
- The unit may not be easily marketable
- Typically applies to floating storage regasification units , bulkers and tankers
At this intelligence gathering stage, consultation will determine viability and feasibility. A positive outcome will often lead to the design step.
Step 2 – Designing: Just because it looks like a good idea on paper, doesn’t mean it is. Therefore, Step 2 concentrates on any issues and investment challenges a client may face. Its aims are to identify the main risks at different decision gates by reviewing the commercial, technical and project documentation to ensure that a reasonable approach has been taken in regard to planned project implementation.
Through this process, we will look at five major components:
- Asset (specification and technical review)
- Manufacturer (shipyard)
- Charterer - Potential user, or market for these assets (charter requirement review)
- Operator (track record)
- Project/Project team (experience, past project history)
At this stage we are acting as the center point for the client and all of the parties involved. We think about feasibility — will it work how you need it to, what about best practices, will it be fit for the operator and their teams?
Independent, specialist and objective third-party advice is vital to ensure as much as possible that the investment is sound. This involves workshops, engineering assessments, analysis reviews, reports — developing supporting evidence that you can feed back to investors, boards and financers to help the decision-making process develop further.
From engineering we can go to verification of the actual goals before moving to the asset and configuration of the service. We are at this point taking everything we have learned and putting it into the asset — managing and mitigating risk. We often see the end goal changing through these stages in line with what has been learned through working with all stakeholders — asset owner, shipyard, charterer and project team.
We want to connect all of the parties involved, bringing together the multiple strands that are active within this phase. We are effectively building the asset twice – the first time envisioning the desired result and testing it before then taking that knowledge and building it into the physical asset itself — based on multi-stakeholder input. Following consultation, once sanctioned, we will look at the third step in the process — construction.
Step 3 – Construction: The planning for and the physical build will be undertaken through a Construction Monitoring Program — again designed to mitigate risk by planning, reviewing and monitoring throughout the asset construction period. As part of the program, ABS Group verifies compliance with the applicable technical specifications, standards, procedures, governmental regulations and Classification Society rules.
The intensity as well as the frequency of the Construction Monitoring Program is dependent on the Project Life Stage as well as Project Risk Profile — leading to detailed monitoring and frequent visits during critical stages of the project and can cover critical areas including:
- Completion risks
- Resource risks
- Operating risks
- Currency risk
Throughout this step our people will be physically visiting the chosen shipyard to act on behalf of the client and their investment, helping ensure that it is technically sound, and the build is progressing as planned.
Critically, at Step 3 having specialist expertise is vital to ensure an understanding of where the project is, where it needs to be and identifying any potential issues or risks. As a result, we utilize a team of shipping professionals, former captains, chief engineers and shipyard professionals who understand the end-to-end process from the first piece of steel cut to commissioning and yard departure.
As part of quality control and compliance verification, our team will also review equipment test results and materials certification associated with the equipment and components scheduled for installation on board the newly built vessel.
Risk vs. Reward: Navigating the journey
Engineering, procurement and construction projects are large, complex and capital-intensive, which bring with them a unique set of risks at every stage.
Answering the question of investment risk vs. investment reward is not linear and is a journey that needs to be connectively navigated from start to finish through the core project phases. By taking this approach stakeholders gain a much greater understanding of the potential risk profiles inherent across each phase, enabling them to make better decisions and significantly, anticipate and avoid problems.
It is this integrated approach across the key stages that provides a highly effective way to reduce and mitigate risk enabling a project to achieve its contractual, regulatory and operational milestones better and more efficiently.
For more information, visit abs-group.com.
