Bibby downgraded… big changes coming in the North Sea DSV market

Clarkson Platou issued a research report today highlighting the “growing default risk” at Bibby Offshore following ratings downgrades from both Moodys (t0 Caa2) and S&P (CCC+ Negative). The report is generally excellent but I have a couple of points to add:

  1. The Bibby bonds traded at .62 and are secured on the Bibby Sapphire and Bibby Polaris: I do not believe anyone in offshore today really believes that an administrator could realise nearly GBP 110m for those two vessels. Frankly people would be ecstatic with 40-50% of that.
  2. Bibby Line Group are unlikely, in my opinion, to put equity into the company at current valuations as the equity is worthless. Maybe in a restructuring but certainly not in a way that would imply anything like that value for the bondholders.
  3. I think it extremely unlikely that the old Harkand boats (now called Nor Offshore) will be restarted as DSVs in the North Sea: there is a vast amount of regulatory and procedural work to be undertaken before this could actually happen and there is no credible dive contractor to use the vessels (a point I have made more than once to a number of the bondholders and which I am led to believe they accept somewhat grudgingly). Even with the latest liquidity injection the Nor bondholders (who are really equity holders) are undercapitalised to go diving; not to mention the  extreme excess capacity in the North Sea DSV market. For example DOF with the redelivered Skandi Achiever have no work booked in for next year, so to pretend the old Harkand management could simply walk in and start diving again is a akin to belief in finding a pink unicorn.
  4. In 2017 Subsea7 is delivering the Seven Kestrel and Technip the Deep Explorer,  adding more capacity to an oversupplied DSV market. These vessels are substantially better than the Nor DSVs and come with the committed infrastructure of two of the most operationally competent companies in the industry.
  5. Nor Offshore would be the sixth player in an oversupplied market with less infrastructure than anyone else.
  6. Nor Offshore don’t even appear to have a credible plan as to who will pay for the tendering of the light IRM work they are chasing (let alone tendering for DSV work). Nor will have substantially less than 12 months OPEX if they start seriously tendering for work.
  7. Diving involves putting people on the seabed and E&P companies do not need to take the risk of new operator with untried systems doing this when Nor could offer no cost saving as all the other DSVs are trading at OPEX plus diver costs (and I am not sure that proposition could be sold at any price to a large number of risk averse E&P companies).

The core problem for Bibby and Nor is this:

North Sea CAPEX 2012-2018

UK Oil and Gas Capex.png

(Source: Oil and Gas UK, 2016)

In the old days (2014) Technip and Subsea 7 didn’t do much Inspection, Repair, and Maintenance work because they were too busy on large CAPEX projects. There is significantly less CAPEX work now what does go ahead is predominantly deepwater West of Shetland (which doesn’t require a DSV). There has been a structural change in the market and in this new environment the DSVs are worth substantially less, and in reality there is no equity value in Bibby at all.

There is clearly a change in the capital structure of Bibby coming in 2017. Whether they proactively restructure before a credit event I am not in a position to say. However the price of the bonds surely reflects the lack of liquidity rather than a view of the intrinsic asset base on which they are secured and likelihood of economic recovery. The Nor bonds have traded in the mid to low 30’s which seems far more realistic in terms of what the assets are worth (c. USD 38m) although they have shown in the current market that high-end DSVs are actually unsellable at virtually any price (do the investors report under IFRS 39?).

The Nor Offshore/Harkand bondholders have been exceptionally generous to the Port of Blyth (having sat there for 8 months without a single days work) and their suppliers (given the publicly disclosed OPEX of c. USD 10k per day) and seem determined to continue this largesse for the foreseeable future. However sooner or later a group of rational financial investors is bound to realise that they want the ships to work and start behaving vaguely sensibly. That won’t involve entering the North Sea dive market based on current fundamentals.

[Disclosure of interest: I am an ex- Director of Bibby Offshore Holdings Ltd.]

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