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November 11, 2009

Crisis has produced some kind of a positive impact on Integra

INTERFAX

Antonio Campo, Chief Executive Officer of Integra Group, has briefed Interfax on the impact produced by the crisis on the operations of the Group.

The financial and economic crisis has produced a negative impact on the oilfield services sector of Russia. It caused capital flight, personnel layoffs and reduction in the number of contracts. Antonio Campo, Chief Executive Officer of the Group, has briefed Interfax ANI [Oil News Agency] on the impact the crisis produced on Integra Group.

In the course of financial and economic crisis, the market of oilfield services has suffered a lot. Oil companies cut their orders placed with their service providers. Are the market conditions going to improve? When will this sector get out of this crisis?

As a result of the last-year collapse that hit the oilfield serviceS market, many customers have cut their capital expenses. Some of them have cut their costs, primarily those that are associated with operations that cannot be performed by their in-house specialists. Recent crude oil price growth has boosted the budgets of our customers, and the oilfield services market conditions have improved. I believe that this trend will retain in the third and the fourth quarters. Improvements will turn more vivid next year. As of 2011, the oilfield market improvement will be evident unless substantial economic recession interferes. 

How did Integra survive the crisis? How many employees were fired?

In a way, the financial crisis has produced a positive impact on our Group. It has helped the company initiate a synergy following several acquisitions closed in the past years; it has helped us cut our expenses in each of our businesses, and it has helped us implement tough financial discipline rules. It was a difficult undertaking, given a high market growth rate before the crisis. We had to lay off 25% of our staff. Before the crisis, our Group had 24 thousand employees. Today, we have 17 thousand. These changes have impacted each branch of the company, including our Moscow office, which lost 30% of its personnel. However, now our structure has undergone substantial improvements. So to say, Integra is more linear that it used to be before the crisis.

Are you planning any further changes in terms of your staffing?


I think that we have already completed a major portion of our restructuring in this respect; some insignificant modifications are yet to be implemented. We are reasonably prepared for the growth that is to occur in the coming five years.

Are you planning any further optimisation of the company structure?

We are not up to it in the short term. I believe that our portfolio of orders is stable enough. No particular business has predominance within our company, and our portfolio of orders is sufficiently diversified and balanced in terms of our product lines. 

What are your expectations for the coming 2010?

If we take a look at our latest seismic prospecting applications, we will see that demand for these services is now growing. However, on the other hand, excessive production capacities are available in the market due to the crisis, and this fact impacts our pricing policy. As for other lines of business, a lot will depend on the results of tenders that are to be held by the customers. Market trends will be clearer in late December, and we will be able to assess whether the workload growth may compensate the plummet of prices, and thereafter, more accurate projections can be made for the coming year. So far, we can say that our portfolio of orders for 2010 looks better than the one for the current year.

What portion of its debt will the company be able to repay and to what extent can it reduce its losses by the end of 2009? When will the company reach its breakeven point?

I think that our financial discipline and costs reduction have improved our financial position. A positive impact was also produced by successful GDR placement that was implemented about one month ago. As for our debt, in mid 2008 it was equal to US$540 million, while as of the end of 2009 it will slightly exceed US$200 million. This is an acceptable figure. Moreover, our EBITDA has improved, and the same about our free cash flow.

Are you going to repay you debt in full next year?
We prefer making investments into our development.

What are your projections in terms of your company’s oilfield services market share for the coming year?

Of course, we would like to increase our market presence. I cannot make any assessments in per centum, but I think that our market share will go up next year.

Are you going to develop your business in other regions?

Today Integra operates in Russia and in the former USSR countries. We have also exerted particular efforts to enter foreign markets, for example, Mauritania and Venezuela. Nonetheless, our short-term priorities are to strengthen our positions in Russia and in the former USSR republics, only thereafter we will enter new markets. On the other hand, if any of our Russian customers initiates operations in any foreign market, we will be there to render our services.

What operations does your Group perform in Venezuela? Suggestions were made that Russian oilfield service providers should join National Oil Consortium in its operations in the country.

We are surely willing to get involved in this process, particularly, in the machine building sector. I do know this market very well, as I worked in this region for quite a long time. As far as the prospects of cooperation between Russia and Venezuela are concerned, Integra finds this market truly attractive.

What projects does your company implement in Mauritania?

We have completed two seismic projects there. We have also established our rep office in Kurdistan (Iraq), as we are going to initiate our operations there in the short term. Integra has several lines of business that are ready for exportation, namely, IPM – integrated project management, geophysics and machinery. However, I would like to stress that we would like to concentrate on our further development in Russia and in the former USSR countries.

Is you company going to enter new Russian regions in the Far East, namely, in Sakhalin, where a number of new projects are implemented?

Russia’s future in the oil and gas sector is to a significant extent driven by exploration of oilfields of Eastern Siberia and of offshore deposits. Today we are ready to provide our services to our customers both in Eastern and Western Siberia. As for offshore deposits, Integra is ready to provide selective services, namely, we are ready to implement integrated project management programmes. In the future, we are going to develop our technological services to become a serious market player capable of implementing offshore projects.

What are the most lucrative offshore projects?

We operate in Sakhalin, and we provide supervising services to our offshore drilling customers.

Are you going to acquire any new assets, new subsidiaries in Russia?

I think that we have a plenty of opportunities for organic growth within the limits of our present-day operations, especially, as far as our short-term prospects are concerned. We also seek to develop our product line in terms of our technological services, and we are going to pursue this goal in different ways. We will be developing a number of new lines of business ‘from scratch’ without making any new acquisitions, we will use the pattern previously employed in coiled tubing and directional drilling. We will also be looking for the opportunities of inorganic growth.

How will the oil machinery market conditions change in the aftermath of the crisis?

The crisis has produced a painful impact on the market of oilfield service machinery. On the other hand, a glance at the fleet of drilling rigs operating in Russia and in former USSR states reveals an urgent need to upgrade the existing assets. This project will require substantial capital expenditures and bring in some delightful prospects for our machine-building branch. 

Do Russian companies need any new machinery?

Whenever any crisis arrives, the first thing that companies stop doing is they stop buying any new equipment. As I have already said, given the current condition of the drilling rigs in operation, the situation is unstable and investments into new machinery cannot be postponed for long. Sooner or later, companies will find it necessary to replace and/or upgrade their drilling rigs. Against this background, Integra, given its strong market position, will be ready to benefit from the situation and to manufacture newly designed mobile drilling rigs, cluster drilling rigs, and fixed drilling rigs. Our engineering centre has already offered several options for the upgrade of the outdated fleet to extend the service life of the outdated machinery.

How will Integra develop its production of drilling rigs upon the expiry of the term of its title to the Uralmash brand?

The point is that our drilling rigs, as well as their components, have been produced by ZAO Uralmash-Burovoye Oborudovaniye, that has nothing to do with Uralmash Machine-Building Corporation. Surely, Uralmash name is famous in Russia, in former USSR countries and in other markets. Uralmash means history, traditions and industrial strength. However, the world keeps changing, and any consumer cares not only for a famous brand, but also for quality, prices, and innovations. Therefore, we haven’t bet on the use of this brand in the product line of our machine building section.
We designed new products, particularly, a heavy mobile drilling rig MBU 3200/200 designed for KSA Deutag in 2007, a heavy cluster drilling rig BU 6500/450 ECHRK-BM1(BM2) for OAO Novatek (RTS Stock Exchange code: NVTK) in 2008, echelon type drilling rigs BU 4200/250 EK-BM(CH) Ekaterina for Gazprom (RTS code: GAZP), cluster drilling rigs BU 4500/270 EK-BM, BU 5000/320 EK-BM and BU 5000/320 EK-BM(CH) for Rosneft (RTS code: ROSN) in 2008 and 2009. We are now completing the manufacturing and supply of the new fixed drilling rig designated for exploratory drilling in Eastern Siberia BU 5000/320 BM(CH) for Rosneft. Some of the above projects are quite unique.

Now our engineering department has two principal lines of business, including development of varied options of upgrading outdated drilling rigs, and development of new drilling rigs. In Ekaterinburg, Tyumen and Kostroma, 200 designers are developing new projects. We have also incorporated a small engineering centre in the USA with some 10 employees. Further development of our technologies will be based on a combination of Russian and Western ideas.

That means that this company will be designing a new model of drilling rigs?

Yes.

When will their manufacture be launched?

Our prototype is being designed. This is the project that we will implement in the future. We will launch production of new rigs next year; that means we will be producing rigs that will be stuffed with the ideas that are being developed today. New drilling rigs will be more mobile and less heavy, they will occupy smaller sites, they will be more efficient, and this means a step forward.

Does Integra consider the idea of recruiting any Western top managers to be in charge of its machine-building section?


Our intention is to pay more attention to our machine-building branch. Our first step was incorporation of a research centre in the USA. We send our young engineers and designers there and they master new software programs, 3D simulations and engineering project management techniques there. The skills of Integra’s engineers make me truly happy. I think that the need to recruit foreign managers is minimal.

Is Integra going to participate in the construction of offshore oil platforms?

We are not determined to enter this business. We believe that we are competitive enough to manufacture various components for the above facilities. For example, we can make small case-hardening units, and we are ready to offer our services to manufacturers of offshore facilities.

More intensive replacement of foreign products by locally made units, including those in the oil and gas sector, is being actively debated. Introduction of protectionist measures has been proposed. Is it expedient?

Healthy competition is of vital importance. Any competition turns healthy and fair whenever a foreign company sets the stage for development of local manufacturers and takes account of their interests while bringing advanced technologies and facilitating industrial development in provinces. Norway is the best example, as it has developed its advanced national industry on the back of its natural resources and advanced foreign technologies.