FPSOs: The next leg of growth
Floating production is one of the only oil services subsectors to have
seen returns stagnate over the past few years. We believe nearterm
M&A activity could increase project IRRs. We initiate coverage
of Prosafe Production and Sevan Marine at Buy.

Positive market backdrop
New field developments are farther from shore and in deeper water. Thus, the use of
fixed platforms and piping systems to onshore terminals and facilities is often
technically unfeasible or too costly, and floating production units (FPSOs, TLPs,
semisubmersibles or TLPs) are the chosen field development solution. Douglas-
Westwood forecasts the installation of more than 120 floaters, the vast majority
being FPSOs, and investment of US$40bn-45bn over the next five years.
Initiate coverage of Prosafe Production at Buy, NKr39.2 target price
Prosafe Production is a pure-play FPSO lease business with the highest margins in the
industry and an excellent operational uptime track record. It has publicly stated that
it intends to increase pricing on future bids for FPSOs. Its three current conversion
projects should complete in early 2009. We believe that the company’s renewed focus
on cost control via better use of subcontractors and more detailed inhouse preproject
engineering work should also help it to achieve higher targeted returns.
Initiate coverage of Sevan Marine at Buy, NKr89 target price
Medium-term oil futures point to a sustainable high oil price, which has reinvigorated
the focus of some oil companies to small and medium-size fields that require
improved and more cost-effective technological solutions. Sevan Marine is a start-up
company with a unique, compact, cost-efficient, cylinder-shaped design that allows
for scalable storage capacity. The costly turret and swivel arrangements of
conventional ship-based FPSOs are replaced by a spread mooring solution. The
company estimates that its cost advantage over a similar-size ship-based FPSO unit
is about 30-40%. Currently Sevan Marine has four Sevan 300 FPSO units and three
Sevan 650 drilling units contracted to clients. We believe the company will continue
to grow at a fast pace. We see upside to forecasts from better financing terms, which
should reduce its WACC and improve its project IRRs.

Contents
O I L E Q U I P M E N T & S E R V I C E S 1 9 J U N E 2 0 0 8 2
S E C T O R D Y N A M I C S
FPSOs: The next leg of growth 3
The floating production sector is one of the only oil services subsectors to have
seen returns stagnate over the past few years. We believe M&A activity could
increase project IRRs in a largely top-line-driven market.
A strong market backdrop 3
A late-cycle sector 8
C O M P A N Y P R O F I L E S
Prosafe Production 10
Sevan Marine 42
A P P E N D I X
Floating production systems 84
FPSOs remain the most popular type of floating production systems because of
their flexibility and the ample supply of tankers for conversion.
Main FPSO players 88
The FPSO market is competitive. When comparing group financials we note many
differences related to varying accounting principles, business mix and on-balance
sheet asset recognition.
Global FPSO fleet 97
FPSOs: The next leg of growth
The floating production sector is one of the only oil services subsectors to
have seen returns stagnate over the past few years. We believe M&A activity
could increase project IRRs in a largely top-line-driven market.
A strong market backdrop
Oil majors had traditionally owned and operated their own floating production storage
and offloading units (FPSOs) – they still own and operate 51% of the global FPSO
fleet-, but now increasingly favour leasing the units and outsourcing the operations to
various contractors.
The past 10 years have seen a substantial increase in deepwater oil and gas
discoveries, which in turn has led to the development of the deepwater construction
market across the globe.