One of the Nor DSVs off to Africa?

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I’ve always had a soft spot for McDermott. I remember when it was J R McDermott. Who else but a good ole boy from Houston would start out barge lifting and build a great global contractor? I also still believe the franchise is good enough for them to become a proper SURF contractor if they commit over a multi-year period. Everyone in the industry knows that if something goes really wrong in a complex project McDermott has the intellectual horsepower, somewhere in their vast repository, to solve it. You might need French mathematical skills to drop 30″ PIP at 3000m in Brazil, but if you need a solid platform or jacket in the Middle East there is only one contractor of choice; and when clients come to make crucial decisionsMcDermott have enough heritage and balance sheet strength to be a serious contender on larger projects. A rights issue at the opportune time to buy some bargain assets would transform them quickly into a tier 1 SURF contractor.

McDermott, so I am told, are going long on one of the Nor Offshore vessels and taking it to Africa. McDermott has deep institutional roots in  Africa and they have won a lot of work in the region recently. Their current DSV in the region Emerald Sea  is a 1996 build with a small, single-bell, system and a carousel. McDermott could hugely reduce project execution risk with a twin-bell vessel and have enough ancillary work to get decent utilisation of the ROVs and crane.

I am not privy to the details but if I were McDermott I would go for a 5 year bareboat charter with a purchase option. The purchase option is going to be the killer for the current investors (and I understand it was on this point discussions earlier in the year broke down). Pitch it at USD 55-60m and the original bondholders will have a sense of humour failure but the late/distressed investors may be able to live with it. A near 1.7x straight money multiple (assuming the brought in c. .35-.38), excluding charter revenue, might be in play given the reduction in opex. McDermott don’t need to go any higher, they have the in-house skills to take the ex-Mermaid vessel and the yard is getting desperate there. Given the current outlook for Nor you could negotiate a day rate for 2017 that may be even less than the daily opex the owners face now: how hard are they really going to push you if you offer to escalate it over five years? Nor face residual value risk if their asset is redelivered after five years in Africa; but there are no good deals on the table at the moment and failure to do a deal like this will see them seeking more cash next year.

That leaves Nor with one DSV in the North Sea (and given they are likely to have to deliver the vessel in Africa it really raises the question again of why on earth the DSVs were brought to Blyth in the first place?) and a “commercial manager role” (Disclosure: I had a brief discussion about Stamford doing this). Its not looking good as a sub-scale ship owner but to be fair if they can close this deal I think this is as much as could be hoped for in the current market and there isn’t much credit risk with McDermott. As I have said before I think starting dive operations would be an act of economic madness and there are a lot of OSVs with large decks and 150t cranes at the moment so its hard to see what work the vessel can hope for on a regular basis.

With the remaining DSV I’d be trying to partner with DOF to make them a two vessel DSV operator in the North Sea and see what develops, because if you can’t strike a deal, and Bibby re-deliver the Bibby Topaz in June, DOF may well buy/charter it (although its such a good ship I think SS7 and Technip would look at it). The bondholders would surely take ~USD 50m given the competing vessels and this would set price expectations for every other DSV in the market. DOF would become a clear number 4 in the DSV/ IRM market with a much better balance sheet than Bibby, infrastructure, and some really good people, and the ability to cross-subsidise across the fleet to get utilisation.

The Bibby Topaz is the DSV wild card. Yes Bibby have an option on the dive system but who really believes they are going to spend USD 5-8m to take it out and restore the Topaz to original condition? (c. 10% of their remaining cash). Bibby cannot afford to give the Topaz back (because then the bondholders will realise they are never getting there money back at close to par) but they don’t have the forward order book to justify keeping the Topaz at the moment (because then the bondholders will be angry that their money is being spent on an idle vessel charter). Debt is a cruel master. In the current market the Volstad bondholders probably dream of Bibby redelivering it as an OSV… I think the rate at which Bibby can build up their summer order book will define how quickly they will approach the bondholders with a restructuring proposal because if they can sell enough days on the Topaz over summer their funding need will decline markedly.

But if DOF take the Topaz (and probably force Bibby to bring the Bibby Sapphire back to the UK), and Ocean Installer take the Vard new build as has been discussed, and the Chinese yards deliver all the DSVs on order, then the remaining Nor vessel will only be worth whatever an Asian operator will pay. I accept there are a lot of “if’s” but the Vard DSV will come (probably in a risk sharing deal) and at least some of the Chinese tonnage looks far enough through to make it to completion even if the contracted buyers don’t have take-out financing lined-up.

It’s like Kremlin watching but with boats…

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