Interview with Polarcus CEO: What’s ahead for marine seismic?

Rod Starr (photo) was named the CEO of Polarcus, a marine geophysical company, in February 2015, at the time when the oil price was slightly over $50 a barrel, down from over a $100 in mid-2014, after having spent years at TGS-NOPEC (TGS), another Oslo-listed seismic company. We caught him on the phone while in Dubai, where his current company’s HQ is located.

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OET: Mr. Starr you joined Polarcus from another big name in the seismic industry, TGS. What was the main driver behind the decision, as being the CEO of a seismic company today doesn’t seem to be a job everybody would take.

Starr (laughingly): “That’s a fair question. I’d been in TGS for thirteen years. – It is a great company, with a strategic model that works in today’s market.

(Regarding the Polarcus CEO position) “I saw Polarcus not only as a personal challenge, but also an attractive opportunity to reshape and grow the company.”

Starr did acknowledge that is was pretty tough time to be in the seismic market, but he saw a lot of positive opportunities with Polarcus; a solid marine operations, a unique environmental agenda, and strong people. He was very familiar with many in the organization since Polarcus was a partner, a competitor and a supplier during his time at TGS.

“I saw a lot of strong fundamentals in the company. I thought there were huge opportunities to grow the company with some urgent changes needed. The sales structure, for example, was an obvious starting point as the majority of Polarcus’ sales organization was centralized in the Dubai headquarter – not where our clients were located,” he said.

 Growth phase

When he was taking over as CEO of Polarcus in February 2015, the oil price was slightly over $50 a barrel, down from over a $100 in mid-2014. He then said he would lead the company “through the current cycle for the next phase of growth”.

Asked to reflect on the past year and a half, and the accomplishments achieved, Starr reiterated he had known the company well prior to joining, and while Polarcus had all the right fundamentals, the company needed to act quickly to adjust to the rapidly evolving market.

“I set a short-term set of plans and associated actions, something we termed “The 2015 Agenda”. This was to focus the organization, as well as keep my own priorities – and possibly my sanity,” Starr said.

He placed revenues generation on top of the list of the “2015 Agenda”.

“We established a new sales strategy, including moving our sales people into our core markets and closer to our clients. I am convinced the changes are working. Since Q2 2015, the company has developed and maintained the best backlog in the industry with no idle time for our operating fleet,” Starr said.

Another key agenda item of critical importance, Starr said, was cost management and reduction. He said Polarcus has managed to cut gross cost of sales 35% YoY, reduce overhead 20% YoY, with more savings to come in 2016 as a result of recent organizational changes.

The final element of “The 2015 Agenda” was balance sheet management. During his tenure, Polarcus has managed to restructure the company’s capital structure, including reducing the debt service by $180M through 2018.

“We’ve managed to cut debt on balance sheet nearly in half, or more than $300 million. This, of course, with support from all our financial stakeholders and at a significant cost to shareholders and bondholders,” Starr adds.

Among other achievements, the new CEO said Polarcus continued to maintain operational excellence with lowest technical downtime in the industry, while also maintaining highest EHSQ standards.

He also said that Polarcus, despite these testing times, is staying true to its core values and continues to innovate, with advances in both acquisition and processing, including the launch of new technologies such as XArray™, advancements in drag reduction allowing larger seismic spreads to be deployed and improved onboard processing capabilities “where Polarcus offers the most advanced processed fast track data on the market”.

OET: You recently said that Polarcus had entered a new era. Can you expand on that?

Starr: “Just to be clear, the definition of “ERA” is: a point in time – typically an important date or event – which begins a new period in history. I believe the company portrays multiple examples of entering a new era: a new capital structure with lower debt service payments and improved balance sheet; a new leadership team which is agile, dedicated, creative and accountable; a new sales strategy, where the company is growing its market share; a new cost structure, with the company maintaining its best-in-class cost position; and new innovations, where the company offers clear advances in imaging solutions.

“The industry has also entered a new era, demanding all seismic providers to re-look at their businesses.”

OET: Marine seismic contractors have been adversely affected by declining E&P spending, with pressures on day rates, and more vessels competing for less work. What is Polarcus doing to mitigate the effects of the industry down cycle?

Starr: “We’re reducing our underlying cost structure, and we’re now organized to operate in a very tight and highly competitive market. Previously, I believe the company was still in ‘start-up’ mode, where it was organized for additional vessels, and a very different market environment.

We have also reduced debt service payments through 2018, considering a prolonged weak market.

Furthermore, we’re innovating without large R&D budgets, and we’re working closely with clients to understand their needs, and develop appropriate solutions.”

OET: Can you talk about your fleet’s contract coverage, and tell us – geographically speaking – where you see an opportunity for growth. Arctic, maybe?

Starr: “One of our goals with the new sales strategy is to penetrate new markets. The team is achieving this goal with recent new entries into multiple new waters including Brazil, Guyana and Indonesia.  We see the highest number of tenders now coming from Asia Pacific and South America, with less activity in Europe, Africa and U.S. GOM.

There are certainly growth opportunities in the Arctic region, but limited now with sanctions on Russia and high Finding & Dev costs (e.g. Chuchki Sea in Alaska).”

OET: You say the activity is slow in the U.S. Gulf and Europe? Why, is the area over-explored?

Starr: “My view on U.S. Gulf of Mexico is that there is a lot of data as well as a reduction in the leasing activity in both the Western and the Central Gulf of Mexico, over the last two years.  Regarding the deepwater and ultra-deepwater areas of the U.S. GOM, while there is existing data that companies have in their hands today in a lot of those areas, I believe many companies have, at least for the short term, de-prioritized many of their deep-water exploration programs there.

As for the North Sea, lower commodity prices have impacted exploration there as well.  It is typically a multi-client market, and all seismic companies are finding it difficult to secure industry pre-funding to initiate projects.  I am pleased to say, however, we have two vessels working in Europe on contracts during the current summer season.”

OET: Also, if you may, the Obama administration recently removed the Atlantic from a proposed lease sale, citing in part, a fear of seismic testing negatively affecting the sea life? What is your take on that?

Starr: “Yes, I think it is completely unfounded and there are many lobbyists working hard to prevent seismic because they don’t want the ultimate oil production offshore the East Coast. So this is an early excuse to stop the oil activity overall, which starts with seismic, as you know.”

OET: Looking at the number of contracts and LoIs Polarcus has announced late in 2015 and so far in 2016, one would say that there IS work out there? But, at what day rates compared to pre-slump levels?

Starr: “No doubt there has been downward pressure on all energy services, and seismic acquisition has been impacted as well.  Depending on the operating jurisdiction and technical requirements, we see day rates down roughly 50% from their highs.

There is work out there, and we have been very good at booking up our capacity.  I continue to be proud of the organization for maintaining the best backlog in the industry and growing our market share.  As mentioned previously, the company has not had an idle vessel waiting for work for the last 15 months – since we cold-stacked 1 vessel at the end of Q1, 2015.

We see many of the major oil companies as returning customers, and they are very satisfied with our safety, operational performance records and recent innovations. These are key to securing repeat business and to be able to survive in this competitive market.”

OET: Your 2010-built Polarcus Nadia vessel has been stacked for more than a year now. Can you speak about the rationale behind the decision to stack the Nadia?

Starr: “It was clear that there was an oversupply of seismic vessels in the industry. Tender activity simply did not support capacity. We took the difficult decision with a minimum of one year in mind due to costs involved in decommissioning the vessel.

Globally, there are approximately 45 seismic vessels. 12 of these are cold-stacked, including the Polarcus Nadia. Of the remaining 33, we see approximately 10-12 warm-stacked, leaving 20-22 operating at any given time.

Contrary to Polarcus Nadia, there is legacy tonnage which lacks the efficiency and standards needed to operate in today’s environment, and I believe some vessels will struggle to compete if brought back even in a strengthening market.”

If you may, how much does it cost per day to keep the vessel cold-stacked? Also, what would it take to see Polarcus Nadia back to work again?

Starr: “It costs us approximately $1.6M per year to cold-stack the vessel. To re-fit with streamer package and other consumables, it is estimated to be approximately $40 million if paying full new market price. If there were used streamer packages in the market, this figure could be considerably less.”

OET: Am I getting this right? Polarcus would need to pay $40 million to return the Polarcus Nadia to the ready-for-work state?

Starr: “Not necessarily; there are a couple of factors. Our first two vessels, of which Polarcus Nadia was one, were in need of a propulsion upgrade, conversion on the thrusters. The Polarcus Naila was upgraded in 2014 and is one of our best operating vessels. The Polarcus Nadia thruster upgrade is still pending. We paid to build the thruster back in 2013-14, and to install it would be in roughly $8 million and take three months.

As any seismic contractor does when cold-stacking a vessel, we utilize the streamers to replace streamers on other operating vessels. So, in addition to upgrading the thrusters, we would need to reinstall a streamer package on Polarcus Nadia. As mentioned, if one were to buy a new package off-the-shelf today, it’s probably $35-40 million. However, we know that there is plenty of streamer equipment readily available today. So, I expect the cost would be a fraction of that today.”

Do you expect to have the Polarcus Nadia back online within the next two years?

Starr: “Anybody who lays up a vessel would probably do that with at least one year in mind because of the costs involved. We would have to see improved and sustained market demand to bring the vessel back.

And again, when I say improved market, meaning a consistent longer view on tender activity.

It is interesting that we’ve lost three jobs that were won during the summer season in different parts of the world. This was due to the fact that we didn’t have the vessel capacity during the prime summer season. While we would have liked to bring the Polarcus Nadia back for the summer season, we don’t see the long term demand yet. For example, there is still spare capacity to book during the coming winter months (Q4-16 and Q1-17).”

OET: Down cycles such as this one, while obviously negative for the upstream industry and the supply chain, are also an opportunity for M&As. Do you expect to see any major transaction within the marine seismic sector, or is there no cash around for such a swoop?

Starr: “I believe it would be difficult to find new money in this current market to support a straight M&A transaction. With Polarcus plus only three other high-end 3D seismic vessel companies in the world, it can be argued that there is little room for consolidation. I believe we would have to see activity increasing and the resulting rates improve first.

With that said, there are companies in the market who have made it clear that they want out of the seismic acquisition business.”

OET: Polarcus is famous for its inverted X-bow designed, green painted, fleet of seismic vessels. But, can you speak a bit about what’s under the hull, that you feel separates Polarcus from the competition?

Starr: “As you noted, one key differentiator is our Green agenda. This goes far beyond the green color of our hulls. Polarcus is the only company with DNV-GL’s Triple-E rating, for environmental and energy efficiency rating, on its entire fleet. All vessels are double-hulled, eliminating any direct contact of fuel with outside skin/hull. Speaking of fuel, Polarcus is the only seismic company to use low-sulphur marine gas oil versus the less environmentally sound heavy fuel oil of our competitors. Our vessels maintain scrubbers to reduce exhaust emissions, putting our gaseous emissions well below IMO regulations and by far the cleanest fleet in the business.

During 2015, we actually reduced our emissions by an additional 17% through continued improvements in our exhaust scrubber technology. Polarcus is the only company to report its emissions for the entire fleet.  In addition, each client receives an emissions report for each and every project we complete.

We live our Green agenda with multiple other procedural factors; such as trash handling, where we will take refuse out of many countries or jurisdictions if proper local handling facilities are not available. Our RIGHT-size vessels are more efficient than larger competitors, yet we can still tow the largest spreads. Our XArray™ acquisition technology, where we can improve image quality with less equipment in the water, also improves productivity with less drag. In addition to this, our uniform fleet allows us to benefit from the inter-changeability of our vessels, enabling Polarcus to reduce transit times. We achieve more productivity, with less emissions (and effectively improved day rates).”

OET: Every now and then, a seismic company comes out, boasting the industry’s largest seismic spread deployed at an offshore project. How is this measured, and why is it important to have the largest spread?

Starr: “The width of our recent spread in Myanmar at the front ends was 10 streamers X 200-meter spacing, or 1800 meters across – the widest ever.  This allowed us to acquire up to 180 SQKM per day.  The typical 3D seismic project achieves 60-75 SQKM per day.  Very efficient!

This achievement was enabled by creative drag reductions improvements on our in-sea equipment, which was developed in-house in collaboration with our suppliers.”

Polarcus recently received a letter of intent for a survey in the Barents Sea, where the company will use its XArray™ solution. What exactly is XArray, and how does it work?

“XArray is a solution where we are able to improve both inline and cross-line data density by using multiple sources instead of receivers. The industry has seen somewhat of an arms race for more and more streamers in the water to improve data quality and efficiency. However, with the same number of streamers, we can now increase data quality significantly by just adding additional sources rather than adding more streamers. We do not only see improvements in our data quality, we can also operate more safely with less exposure handling fewer streamers, and the financial exposure of having less equipment in the water is a great benefit too.”

OET: What I’ve noticed since the downturn started, seismic companies, while sharing news about new contracts, have been reluctant about disclosing the names of the clients and the financial details of those contracts? Why is that? Is it to keep the competition in the dark?

Starr: “There are two reasons: Clients are reluctant to have their company names and project areas announced; and in today’s highly competitive market, we don’t want to reveal project locations, client names, etc.”

OET: Do you expect the marine seismic industry, at some point, will recover to the pre-down cycle levels?

Starr: “I believe it must.  O&G companies are measured on reserves replacement.  Eventually, they must invest in exploring for new reserves. Those exploration efforts require 3D seismic. The seismic spend is typically the first of discretionary expense to be reduced, and it also the first to return.”

OET: To conclude, Mr. Starr, are you brave enough to provide the outlook for the seismic industry beyond 2016?

Starr: “It is difficult to predict, but I will give it a go – our current outlook suggests that the market will continue to be weak through mid-2017. Bottom line, the industry needs to see stability in oil price.  I believe seismic spend will return when our clients see price stability.”

Offshore Energy Today Staff