WELLSTREAM HOLDINGS PLC

RESULTS FOR THE YEAR ENDED

31 DECEMBER 2009

Wellstream, a leading designer and manufacturer of bespoke flexible pipeline products, systems and solutions for the oil and gas industry, today announces its results for the year ended 31 December 2009.

Financial Highlights

(GBP £ millions unless stated otherwise)

Operational Highlights

·     Solid operational performance with throughput increasing 19% to 436nKm(b)

·     Project awards included the initial phases of the Tupi development in Brazil

·     Improved operational efficiency and reduced cost base

·     Backlog(c) in excess of £160m

·     Net debt reduced to £38.7m (2008: £65.8m) and strong cash flow generation

·     Dividend maintained at 10 pence per share

Commenting on the results, Alasdair MacDonald, Acting CEO, said:

"We are pleased to report another year of strong results with record revenue, significantly improved operating cash flow and reduced net debt.  Despite difficult market conditions in 2009, we experienced a positive performance across the Group particularly in Brazil.

Outside of Brazil, the market remains challenging and we are continuing to focus on managing our cost base and maintaining excellent operational performance. 

Looking forward, the potential for significant growth in Brazil is clear and evidence of an improvement in market activity elsewhere supports some optimism, although the Board's near term outlook remains unchanged.  Longer term, the fundamentals of the sector remain compelling."

Conference Calls

A presentation for analysts and investors will be held at 9.00 am (GMT) today. This presentation will have a call in facility which will be in listen only mode.

The presentation is available for download on the company webpage (www.wellstream.com)

To participate in the call, dial:

+44 (0) 1452 568 051 (access code 59406114). 

A recording will also be available for 7 days after the call, dial:

+44 (0) 1452 55 00 00 (access code: 59406114#).

Notes to Editors:

Wellstream

Wellstream is a leading designer and manufacturer of bespoke flexible pipeline products, systems and solutions for the oil and gas industry. Wellstream's portfolio includes established product lines for use as dynamic flexible risers and static flowlines in deep and ultra-deepwater environments.  In addition, newer product lines designed for use in high temperature/high pressure drilling and well service applications have also been introduced.  With over 850 employees internationally, Wellstream has offices and facilities in the UK, USA, Brazil, and Australia.

Notes to Results:

Wellstream has presented these supplemental measures because they are used by

Wellstream in managing its business performance, although not all are measures of profit or operating performance recognised under IFRS.

a)   Diluted EPS represents Profit for the year divided by the weighted average diluted number of ordinary shares in issue.

b)   Normalised kilometre (nKm) is based on the work centre hours required to produce a standard 8 inch ID pipe.  A relative scale factor is applied to other pipes to convert actual production lengths and composition into nKm.

c)   Revenue Backlog is the aggregate of revenue that has not been recognised in the accounts from contracts that have been entered into and from contracts that the directors are confident will be entered into and revenue that the directors are confident will arise in the next year from the Petrobras Framework Agreement.  Further revenue from the Framework Agreement and orders from customers in the form of limited non-binding commitments are not included in revenue backlog.

d) Source: Wellstream and Douglas Westwood Ltd

Chairman's Statement

I am pleased to report that against difficult trading conditions, the Group has maintained a strong operational performance, with revenue growth, lower net debt and earnings in line with expectations. 

The rapid fall in oil prices at the end of 2008, and the on-going financial crisis in the first half of 2009, significantly interrupted the investment phase and pace of offshore developments outside Brazil.  However, a recovery during the second half of 2009 has left current oil prices substantially above the level required to ensure offshore developments are economic.  This and returning customer confidence as the global economy recovers, leaves the Board more optimistic regarding the outlook for the business.

As a manufacturer of specialist products, the Group is uniquely positioned to benefit from long term growth within a critical sector of the Oil and Gas industry.  During the year we completed the expansion of our production capacity, extended our product qualification envelope and improved the operational efficiency of the Group.  This, will enable us to capitalise on the significant growth opportunities that are clearly available.

Financial Performance

The Group achieved record revenues in the 12 months to 31 December 2009 of £400.7m (2008: £369.9m). Profitability was below that achieved in a record 2008, nevertheless, the Group generated diluted earnings per share of 34.2p (2008 52.3p); the second highest result the Group has ever achieved.  Operating activities generated strong cash flow of £39.7m (2008: £36.3m) and we propose to maintain our full year dividend at 10p (2008: 10p).

Operations

Throughout the year Wellstream's business in Brazil has performed exceptionally well and the production facility has run close to full capacity.  Our Brazilian team has secured a number of key contracts to supply flexible products for the initial phases of the Tupi project - the first major Pre-Salt development. In June we also commenced a major programme that will see us qualify a broad range of Wellstream products for use in deepwater Pre-Salt developments.  This positions the Group well for what is a significant market opportunity.

Outside of Brazil, trading conditions have been more challenging during 2009.  The financial crisis in 2008 resulted in customers postponing final investment decisions and in response to this market weakness we undertook a Group wide cost reduction programme.

Notwithstanding the difficult market, the Group has moved forward on a number of fronts and 2009 has seen some significant achievements for the business including;

·     Successful delivery of the TUPI Extended Well Test (EWT) project for Petrobras

·     On-going awards under the four year Framework Agreement with Petrobras which total some £200 million

·     Securing additional leased land adjacent to our Niterói facility

·     Manufacture of the first high pressure, (15,000psi) risers for Anadarko Petroleum's Caesar Tonga project in the Gulf of Mexico

·     Successful divestment of our onshore FlexSteel^TM business

·     Substantial completion of our first major installation project through the Seastream Joint Venture.

Further, 2009 has seen the Group achieve its best ever safety performance with a Lost Time Incident (LTI) free year in Newcastle and a record safety performance in Niterói.  This is a fantastic achievement and the result of a long-standing and continuing focus on delivering the highest safety standards across the entire business.

Board of Directors

During the year we appointed two directors to the Board, Luis Araujo and Alasdair MacDonald.  Both bring significant sector experience and abilities and I look forward to working closely with them.

Gordon Chapman, our CEO was unfortunately taken ill and is recuperating at home.  The Board and staff wish him well for a speedy recovery. Alasdair MacDonald was appointed as Acting CEO in his absence and I thank him for his contribution.

Outlook

The Group has successfully addressed a number of challenges in 2009 which positions us well to benefit from an upturn in the oil and gas industry as a whole, and the subsea sector in particular.

The flexible pipeline market has seen compound growth rates of 7%-10% per annum(d) and the drivers for this growth are still very much intact.  The outlook for the sector remains positive despite short term uncertainty outside Brazil and our focus on developing criticaltechnology and integrated solutions will allow us to further benefit from this.  Looking forward, the potential for significant growth in Brazil is clear and evidence of an improvement in market activity elsewhere supports some optimism, although the Board's near term outlook remains unchanged.

Finally, I pay tribute to the professionalism of our staff whose hard work and dedication have delivered this strong operational performance.

John Kennedy

Chairman

Chief Executive's Review

Financial Highlights

(GBP £ millions)

We are pleased to report another year of strong results with record revenue, significantly improved operational cash flow and reduced net debt. This is an excellent performance, especially in Brazil, that has been achieved against challenging trading conditions.

2009 Significant events

·     Delivery of the TUPI extended well test project

·     The award of the TUPI qualification programme

·     Completion of a 39% increase in capacity with minimal disruption

·     Leased additional land adjacent to the Niterói facility

·     Manufacture of the 15,000 psi high pressure risers for Anadarko's Caesar Tonga project

·     Successful divestment of our onshore FlexSteel operations for £19.6m to Prime Natural Resources Inc

·     Substantial completion of the Group's first major installation project

We have delivered a Lost Time Incident (LTI) free year in Newcastle and achieved our best ever safety performance in Niterói.  This is a tremendous achievement and complements our objective to be a worldwide leader in QHSE performance.

We look forward with optimism as the Oil and Gas industry continues to explore ever deeper and more remote oil and gas fields where the production facilities are dependent upon flexible pipe.  The Group has performed very well in a buoyant Brazilian market and exceeded its operational targets.  The long term future is bright and the restructuring steps taken during the year will maintain the Group's ability and skills to take advantage of the long term growth within our sector.

Service

"We commit, we deliver, no excuses" is our mantra.  We have a long tradition of excellent customer service and responsiveness which is one of our key differentiators over our competitors.  We are very proud of our quality record where our design specifications and attention to detail have resulted in an excellent record of delivering flexible pipe that has performed beyond customer expectations.  This is a tribute to our organisation and to our people who continue to demonstrate a dedication to meeting customer needs and I record my thanks to them.

Strategy

Wellstream's strategy continues to be one of building a leadership position as a supplier of bespoke engineered flexible pipeline products for the hydrocarbon industry around the world.  This leadership position is being built through superior customer relationships, innovation, technology, engineering, manufacturing and project delivery excellence.  The business will continue to deliver growth organically and through alliances and acquisitions as opportunities arise.

Currently we are focussing on: -

·     Qualification of new materials for sour service and deepwater applications

·     Research and development of high pressure technologies

·     Enhancing local R&D capabilities

·     Offering an Integrity Management Service in order to monitor in-service performance of installed products

·     Developing and acquiring installation equipment to provide a differentiated technology for installation services whilst optimising our timing according to market conditions

Major highlights during the year

Major highlights during the year include securing additional leased land adjacent to the Niterói plant of approximately 55,000m².  This gives us the capacity to further expand the Brazil factory as the market dictates and to offer logistics support and other services.  The site is particularly well located in relation to the new Pre-Salt TUPI discovery and we are pleased to have secured the flexibility that this facility offers.  This will also place us in a stronger position to access the wider South Atlantic basin including the target market of West Africa.

Earlier in the year we increased capacity in the Niterói facility by 80%, to 270nKms pa, which together with an increase of 15% in Newcastle to 300nKms pa, gives a total capacity Group wide of 570 nKms pa.  Total throughput for the plants increased by 19% to 436nKms in 2009 (2008: 367nKms)

We were awarded the contract to supply flowlines and risers for the TUPI Pre-Salt Extended Well Test (EWT) project.  Subsequently we were pleased to be awarded the contract to supply flexible pipelines for further phases of the project.  This, along with the Caesar Tonga contract for 15,000 psi high pressure risers, demonstrates our customers' confidence in Wellstream's cutting edge technology expertise.

We divested our FlexSteel^TM onshore business for £19.6m in September to Prime Natural Resources Inc.  This has enabled us to concentrate more fully on our core offshore business.

During the year we also undertook a cost restructuring exercise to position the Group for the downturn.  During this process we have been careful to retain the knowledge and skills critical to remaining a world class manufacturer and to be able to rapidly respond to a recovery in the market.

We substantially completed our first major installation contract offshore North Western Australia under the Seastream joint venture.  A total of 54Kms of flexible pipe product was installed using Wellstream equipment.  The completion of this project represents a significant milestone for the business and the experience gained allows us to look forward with confidence to delivery of future installation projects.

Offshore market overview and future trends

The repercussions of the financial crisis and the dramatic fall in oil prices at the end of 2008 were felt throughout the oil and gas industry during 2009.  These two factors combined to cause delays in project awards throughout the year.  However, a recovery in the second half of 2009 has seen oil prices stabilise around $60/bbl to $70/bbl.  Long term, the fundamentals of the sector in which Wellstream operates remain very positive, and current oil prices are substantially above the level required to ensure floating production projects are economic and this should set the stage for a recovery.

Despite the slow down in contract awards, the number of FPSO projects in the bidding phase has remained constant and the number of FPSO's being planned has increased from last year.  Between 2009 and 2013, annual expenditure on FPSO systems is expected to increase by 40% from $4.4bn to $6.2bn.(d)

Oil and Gas remains the world's dominant energy source, and accessible resources onshore and in shallow water areas offshore are diminishing. Oil companies are therefore continuing to focus on exploring and developing offshore in deepwater utilising subsea and floating production technologies.  Flexible pipelines are a critical element of the majority of these developments; connecting the wellheads to the surface via flexible flowlines and risers.  Thus, the increased use of these facilities in combination with subsea completions has been one of the drivers for rapid growth in Wellstream's business.

National Oil Companies, and in particular Petrobras, continued to invest significantly during 2009 in order to sustain their long term growth plans.  Petrobras has stated that they require 4,000km of flexible pipe products between 2009 and 2013; primarily to develop their recent Pre-Salt discoveries.  This demand, combined with increasing activity levels driven by other International and Independent Oil companies in Brazil, will underpin production in our Brazilian facility going forward.

Elsewhere, long term demand growth is evident in both Asia and West Africa and this potential is further supplemented by the recent increase in interest around FLNG (Floating Liquefied Natural Gas) developments; all of which will require significant volumes of flexible pipeline products.

The market for flexible pipelines and risers is a subset of a larger "deepwater pipeline" market which includes alternative rigid pipeline solutions. These compete with flexible solutions and converting these developments into projects that utilise flexible pipeline products provides the potential for growth.  Conversion of these projects has the potential to grow the market by over 50%. Enabling this growth and increasing the adoption rate of flexible pipeline technology is central to Wellstream's strategy.

In addition to project development driven demand, 2009 has seen an increase in the number of enquires regarding integrity management for either aging installed infrastructure, or complex new developments.  This therefore, is seen as an emerging market segment which presents Wellstream with significant opportunities for further growth.

Technology

The 2008 Annual report highlighted the 1,034bar (15,000psi) pressure rating programme undertaken with Anadarko Petroleum and described some of the work that would be undertaken.  As with all developments that significantly enhance the performance envelope, it has successfully employed cross-functional teams, utilising specialists from R&D, engineering, analysis, materials, testing and manufacturing.  This has ensured that we have met the stringent industry safety standards and also the performance criteria for the high pressure market.

The programme through 2009 has continued to produce results which really showcase the capability of the proposed high pressure riser design.  Static tests, including burst, tension and hydrostatic collapse results, continue to prove the synergy of our design methodologies in predicting product performance.  For the hydrostatic collapse, there was the added benefit that the results presented capability beyond 3,000m, far exceeding current market requirements. 

Moving into 2010, the dynamic fatigue tests continue to progress well and the milestones for in-service lifetime have already been met, and the programmes now continue as validation data for our in-house software that is used to predict service life.

Building on the success of the TUPI EWT, we are participating in the TUPI qualification programme, which encompasses Gas Lift, Water Injection, Gas Injection and Production structures, and is planned to be concluded in 2010.  This programme is enhancing our database for materials exposed to super-critical carbon dioxide and for full product tests at the extremes of the Pre-Salt design envelope.

Our commitment to the Pre-Salt began ahead of the main TUPI qualification contract, resulting in significant progress on our materials tests with more than 3000 samples.  This programme is therefore already supplying valuable data to our design teams to meet the challenges on the Pre-Salt. Likewise, the full-scale tests are already underway with an extensive programme of almost 100 tests for the TUPI structures and again, some structures are presenting successful results far exceeding the field requirements of 2,500m.

We will continue to build our local R&D capability in Brazil where we will focus on the demands of the deepwater Pre-Salt but also to enhance our global provision.  We are developing our relationship with the Federal University of Rio de Janeiro - COPPE, where a number of research programmes have already been identified, as well as the Petrobras research centre CENPES. We also work with 5 other Universities in Brazil.  In both the UK and US, our focus will be to continue to support global operations and enhance focus on product innovation and monitoring technology.

Projects

Brazil

During the year 36 projects were worked on for Petrobras ranging in value from £0.3million up to £55million.  Most notable were the Cachalote, Petrobras P51, Marlim Leste Module 2 and Barracuda Caratinga projects.  Also completed during the year was the Peregrino project for Statoil's South Atlantic Holdings.

Rest of the World

A diverse range of projects were undertaken, generally smaller in scale than in Brazil. Projects were undertaken for Maersk, ConocoPhillips, ExxonMobil, Chevron, Anadarko Petroleum, BHP Billiton, Total, BP, StatoilHydro, Mariner, Halliburton, CNR and PetroSA.

Installation

Seastream largely completed the base scope of its first major project in North Western Australia.  Seastream performed the offshore works over a 9 month period utilising the new build Sea Trucks' construction vessel "Jascon 25".

Supply Chain

During 2009 the supply chain risks arising from the global economic recession were successfully managed.  We experienced some disruption in the first half due to a one off material processing challenge.  While this impacted the business in H1 we were able to mitigate its effects and supplies for the remainder of the year were unaffected.

Increased localisation of supplies into Brazil was a key feature of the year.  This helped to offset the risks arising from the global recession by reduced logistics costs and lead times and the widening of the pool of available suppliers.

Renewal of key long term agreements will provide for continuity of competitive supply and the development of new products to support the company's product development objectives.  To achieve economies of scale the key raw materials of carbon steels, stainless steels and polymers continue to be sourced globally with local supply prioritised where applicable.

The Company continues to reinforce ethical trading within the supply chain working closely with the HSEQ function to monitor key competencies in this field.  We conduct regular visits to suppliers to monitor their performance, facilities and systems including environmental management systems.

The Supply Chain is an integral part of the Company's corporate risk monitoring process to ensure that all potential risks and sustainability are fully assessed and managed.

Risks and Uncertainties

Wellstream employs a comprehensive risk management system where risk is evaluated at the operational level and then cascaded upwards through management to the Audit Committee and Board.  The Chief Executive Officer is responsible for risk within the Group.  The Audit Committee reviews the risk management process and reports its findings to the Board.

Risk mapping is used which includes an assessment of operational, financial, strategic, compliance and environmental risks and mitigating actions.  Key risks highlighted at the 2009 year-end include:

Petrobras is a key customer of Wellstream

Petrobras commanded over 59% of Wellstream's business in 2009 and we continue to focus on diversifying our client base.

Supply chain

Wellstream's supply chain is critical to the operation and for certain material types there are sole source vendors for which the risk is elevated.  Through 2009 we have worked closely with the suppliers and have maintained good levels of quality and delivery after some initial disruption and attendant materials processing issues experienced in the first quarter.  There have been no major interruptions to the supply base during the remainder of the year.  The establishment of effective long term vendor framework agreements remains an integral part of the supply chain strategy.

Customer concentration

Wellstream's business is founded on a relatively small number of high value customers including Petrobras.  If requested project lead times from these customers change significantly, revenue and margin performance could be put at risk. In order to mitigate this, Wellstream continues to broaden its customer base, develop new relationships in selected regions and apply the principle of focussed account management to its strategically targeted customer base.

Volatility of the oil and gas industry

The price of oil and gas and levels of business confidence across oil and gas markets are key drivers for Wellstream's business.  The trends towards the use of deepwater, floating production and subsea technologies are also important.  A sustained and significant reduction in oil and gas prices and/or a reduction in business confidence or continued volatility as seen over recent months could have an adverse impact on the level of customer spending.  To mitigate this exposure Wellstream strives to maintain in-depth market intelligence, to gather and use client feedback and to plan capacity, throughput and its cost base so that any downturn can be weathered effectively.

Margin pressure and competition risk

The current downturn has inevitably put pressure on margin as we react to industry drivers to cut cost and remain competitive.  These pressures are likely to persist. By aggressively challenging our cost base we have retained our competitiveness.  We are beginning to see some signs of the pressures easing with increasing FPSO deliveries.  Reduced backlog worldwide has led to increased competitive pressure and competitor expansion may increase these pressures further however barriers to entry remain high.

Installation

Where it is a customer preference, we can offer flexible pipe on an installed basis utilising EPCI style contracting, managing all the services necessary to install flexible pipe and other water column ancillaries.  Risks of offering our flexible pipe on an installed basis can differ from those associated with flexible pipe supply; in particular possible project delays, broader competition impacting project margin and potential execution risk.  We manage this by closely monitoring project execution and by negotiating appropriate contractual terms.

Treasury and financial risk are referred to in the Financial Overview.

Alasdair MacDonald

Acting Chief Executive Officer

15 March 2010

FINANCIAL OVERVIEW

Revenue for the year ended 31 December 2009, including that from the discontinued Onshore business, increased by 8.3 % to £400.7m (2008: £369.9m).  Profit before Taxation of £42.8m (2008: £77.5m) was impacted by generally lower margins in the Offshore business that were further diluted by an increase in installation revenue to £55.3m (2008: £13.6m) upon which lower margin was earned and restructuring costs of £5.0m.

On 30 September 2009 the Groups Onshore business was sold to Prime Natural Resources Inc for £19.6m generating a profit of £5.0m on disposal.

The Group's Profit for the year of £34.5m (2008: £52.7m) contributed to improved Net Debt at the year end of £38.7m (2008: £65.8m) and diluted earnings per share of 34.2p (2008: 52.3p).

Revenue

Revenue for the year ended 31 December 2009 increased by 8.3% to £400.7m (2008: £369.9m). This included £14.6m (2008: £13.7m) from the discontinued Onshore operations.

Offshore revenue grew by 8.4% to £386.1m (2008: £356.2m) driven by the continuing ramp up of production in the Niteroi facility and increased installation revenues offset, to some extent, in the Newcastle facility where revenue generation reduced during the year.  A weaker product mix, primarily in the Newcastle facility, and a generally deflationary environment for input costs caused a reduction of 19% in the average revenue per normalised kilometre of offshore pipe.

Gross Margin

Gross Profit for the year ended 31 December 2009 was £87.9m (2008: £117.8m).

Offshore Gross Profit of £86.44m (2008: £118.3m) benefitted from installation activities albeit with a dilutive margin.  The core offshore pipe business delivered a lower contribution versus 2009; material cost reductions of 14% per normalised kilometre only partially offset the corresponding reduction in revenue and additional production costs were incurred in Brazil as a result of its increased capacity.

Gross Profit in the discontinued Onshore operations was £1.43m (2008: £0.5m loss) which reflected a mix change towards larger diameter, higher pressure product being sold into a developing South American market.

Operating Profit

Administrative expenses were £37.8m (2008: £37.8m). Underlying these expenses is a build up in the Brazilian infrastructure and lower costs in the UK.  Leverage achieved over this cost base reflects increased installation activity and initial savings from cost reduction plans announced during 2009.

Resultant Operating profit before restructuring costs of £51.2m (2008: £81.0m) includes a net contribution of £0.4m (2008: £3.1m loss) from the discontinued Onshore operations.  Operating profit before restructuring costs was £25.9m in the second half of the year versus £25.3m in the first half.

During the year the Newcastle facility saw reducing activity and backlog as a result of a general slowdown in market demand outside of Brazil.  Consequently it was necessary to address the Group's global cost base, the cost of these actions was £5.0m. Initial savings were evident in the latter months of 2009 and will be seen increasingly through 2010.

Financing Costs

Net financing costs incurred in the year totalled £3.4m (2008: £3.5m). The first half of the year was characterised by lower interest rates than were seen in 2008.  The second half of the year reflected higher interest rate margins payable under the Group's increased facilities offset, to some extent, by interest received on cash held overseas. 

Profit before Tax

Profit before taxation of £42.8m (2008: £77.5m) is stated after restructuring costs of £5.0m and a contribution from discontinued operations of £0.4m.

Taxation

The effective rate of taxation for the Group was 31.0% (2008: 30.5%).  A relative increase in profits earned in Brazil, which are taxed at 34% underlies the increased average rate.

Sale of Onshore Operations

On 30 September 2009 Wellstream completed the sale of all assets that comprised its Onshore operation for a consideration of £19.6m.  All proceeds from this sale have been received and a post tax profit on sale of £5.0m recorded.

Revenue from the discontinued onshore operations was £14.6m (2008: £13.7m) in the period, generating operating profit of £0.4m (2008: £3.1m loss).

EPS

Earnings per share for the year ended 31 December 2009 was 34.6p (2008: 52.9p) and diluted earnings per share was 34.2p (2008: 52.3p).  Profit earned on the sale of Onshore operations offset the restructuring costs in the year.  Second half earnings per share of 17.7p were marginally ahead of the 16.9p earned in the first half.

Dividend

It is the Company's aim to pay a dividend covered some 4-5 times by profit after tax across the trading cycle.  The Company paid an interim dividend of 4p (2008: 4p) in October 2009 and proposes a final dividend of 6p per share (2008: 6p).  If approved the final dividend will be payable on 11 June 2010 to shareholders on the register at the close of business on 21 May 2010.  The ex dividend date will be 19 May 2010.

Operating cash flow

Cash flow from operations was £62.7m (2008: £49.5m). Focus throughout the year on working capital was evidenced by significantly lower inventory and trade debtor balances. At the year end inventory represented 10 weeks production (2008: 13 weeks) and debtors amounted to 29 days sales (2008: 76 days).  However, lower activity in the Newcastle facility during Q4 2009 and the ensuing reduction in customer deposits, left overall working capital, excluding provisions, £4.2m below that of 2008.

Taxation payments of £21.1m (2008: £10.0m) include an acceleration of Brazilian tax.

The net cash increase from operating activities in the year was £39.7m (2008: £36.3m)

Capital Expenditure and Receipts

Net capital expenditure of £16.9m (2008: £51.1m) included completion of the Brazil capacity expansion, purchase of installation equipment and background expenditure on reels and plant and machinery. 

Financing Activities

During the year net proceeds on new financing amounted to £4.8m; the Group utilised a net £3.0m of additional debt from its increased UK facility and a further £1.8m under its ICMS (sales tax) facility with the Rio State Government.

Net Debt

Net Debt at 31 December 2009 of £38.7m (2008: £65.8m) included net cash of £34.8m (2008: £0.1m).  This cash balance was largely held overseas reflecting significant debtor receipts late in the year and the increased size of operations outside of the UK.

Treasury and Financial Risk

The Group's day to day cash requirements and its capital investment programme are financed through loan and debt facilities totalling £150m (2008: £96.9m).  These were refinanced in July 2009 by Lloyds and Bank of Scotland with additional capacity being provided by Barclays.  This refinancing was undertaken primarily to underwrite capital expenditure and working capital associated with an enhancement of the Group's Offshore installation capability.

The new facility comprises an amortising term loan of £60m, drawn-down periodically on short term fixed interest rates and a revolving credit facility that is accessed when needed either on short term fixed interest rates or at variable interest rates.  Since draw-down the majority of debt has been provided under the term loan.  This facility reduces at the end of each six month period by £5m, commencing June 2010, until its expiry in December 2012.  The Group also has a facility to draw down a local currency denominated loan of up to £26.8m with the Rio State government, to date £13.4m of this facility has been utilised.

Although a substantial part of the Group's revenue and profit is earned outside of the UK, subsidiaries generally trade in either local currency or Sterling.  As a result, the Group is not normally exposed to significant foreign exchange transactional risk.  The Group does occasionally generate revenue in a third party currency and, where this occurs, the potential risk is assessed against any natural hedges that exist within the Group before any financial hedges are considered.  The Group also has an exposure to foreign currency that arises upon the translation of overseas results into Sterling.

The Group did not hold any financial instruments to hedge either currency or interest rates at the year end or at the date of this report though increased activity in Brazil did necessitate hedging consequent currency exposures that arose during the second half of 2009.

The nature of the Group's offshore business necessitates it trading with a limited number of customers and the acceptance of the credit risk that ensues from a number of large contracts with these customers.  The Group seeks to contract its business in such a way that it receives regular stage payments from its customers that are appropriate to the stage of completion of the contract.  This payment profile is approved by senior management in advance of accepting a contract and is monitored subsequent to acceptance at regular intervals.  This approach and the Group's customer profile which consist largely of national and international oil companies with well established and substantial credit histories, significantly mitigates the risk of financial loss from default.

Going Concern

The Directors have considered current business conditions, financial forecasts including cash flows and sensitivities, internal planning and control procedures and financial risks summarised above together with those identified in the Chief Executive's Review.  Whilst acknowledging each carries with it some uncertainty, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, the directors continue to adopt the going concern basis in preparing the accounts.

Chris Gill

Finance Director

15 March 2010