Like most people in offshore I reacted with a degree of amazement when I read this week that the old Cal Dive fleet had been sold to an AIM listed E&P company with onshore acreage in Columbia. The industry is going through a total reset at the moment, a sign perhaps we are nearing the bottom, but I still feel when financial investors, with no operational knowledge at all step in, one has to question the industrial strategy. As an investor I was exposed to Red7, a company that made a specialty of going long on old tonnage, and it was a disastrous failure. Maintenance bills cripple older tonnage where drydock expenses can exceed the capital value of the assets. Companies operating older tonnage are forced to compete at the very bottom of the market and therefore often do not charge enough to cover for anything other than daily OPEX. One big maintenance bill or drydock and it’s all over.
On a strategic level does anyone mourn Cal Dive? The Horizon acquisition finished them as they overpaid for a company that specialised in laying shallow water pipe in the US Gulf of Mexico, a market that died a natural death as shale became big. Diving in the US Gulf is about as price competitive as anywhere in the world and the safety standards among the lowest. Currently a mass of four-point mooring vessels sit idle and there is a dearth of work. From an economic point-of-view it’s structurally one of the most unattractive markets you could design.
It’s so incongruous, therefore, in this market, to go long on old Cal Dive assets and try and put the band back together so to speak. To be clear of the 11 vessels six are classed as in lay-up! One was built in 1967!!! The barge, built in 1995, is also in lay-up. But Global Energy Developments, a company with no offshore operational experience ever, went long on the oldest, most downmarket, un-operational vessels you could possibly scour the globe for. I was looking for a Nigerian email address for the company to send their account details to but this wasn’t outlined in the documents. Others in the market clearly felt the same way as the shares dropped c. 15% on the news.
You can get a large amount of the background from the regulatory filings here. The crucial one dealing with the transaction is this. I could be cynical but I got the feeling it was largely designed to be impenetrable.
This investment story begins in July 2014 when DeepCore Marine Inc. (a company 76.5% owned by Alan Quasha) purchased the Cal Dive surface dive fleet for USD 18.9m and giving the seller (Cal Dive) 19.9% of the company. Financing for this deal was provided by McClarty and potentially Caleura (although it appears they joined later). In July 2015 Everest Hill Energy Group Ltd (a company 100% owned by interests associated with Mr Quasha) acquired 5 vessels from the Cal Dive administrator, including Pacific, Cal Diver I, Rider, Midnight Star and Mystic Viking, as well as related equipment. The total consideration for all five and the equipment was USD 10m.
Global Energy Development Plc (“GED”) is a company c.62% owned by HKN and effectively Alan Quasha. The Executive Chairman of GED is effectively one of the beneficial owners of HKN. Having sold its profitable assets in 2014 it was flush with USD 21m cash. Coincidentally in September 2015 HKN and GDE issued loan notes to Everest of USD 10m. Later GED would buy its shareholder, HKN, out of its share of the loan note (at par), add USD 2m to it, and change the repayment terms to a position less favourable to itself. It seems safe to assume this was used for consideration of the vessels.
Now GED is entering into two transactions to purchase the vessels that essentially puts the Cal Dive fleet back together. In one of the great ironies of this a core company that owns DSVs as a financial investor is called Maritime Finance Corp (“MFC”). In this case MFC is an SPV designed to do nothing other than make the acquisition clean, in the Nor Offshore DSVs, at the other end of the spectrum, is MFC Bermuda, a par bondholder from the inception of their original deal to back the high-spec North Sea DSVs. What appears to link these companies in more than a name is a firm desire to hark back to the past that doesn’t exist at either end of the DSV quality spectrum and design an industrial strategy for a time unlikely to return.
In Transaction A GED gets three vessels, ranging from the Cal Diver 1, a vessel so ancient and decrepit rumour has it dinosaurs refused to cross the GoM in it because of rust damage (built 1974), the Midnight Star, built 1975, and the Mystic Viking built 1983. All classed in lay-up. For the privilege, GED will write off USD 8m of the loan note! Bear in mind Everest settled 5 vessels for USD 10 and some ancillary equipment, and that these vessels have just been floating around since then. In addition (seriously) they are paying the less of USD 5m or 75% of EBITDA of the vessels for 18 months. That will be 0. Seriously 0.
Let me assure you, as I am sure most people who read this blog will realise, it will cost millions to get those vessels classed and in shape to pass a US Coast Guard inspection.
The Cal Diver 1. The future apparently!
Transaction B is even better. These are the old DeepCore Marine Inc. (“DCM”) vessels that were purchased from Cal Dive. In this transaction the sellers of the vessels agree to purchase a USD 10m loan note from GED and in return hand over 5 x 4 point mooring DSV vessels, built in 1967, 1969, 1983, 1977, and 2000 and 3 out of service vessels. In addition the 1995 built Rider Barge, classed in lay-up, will also be delivered. But in return they also get USD 21.6m in loan notes from the company as consideration bearing the attractive interest rate of 6% and these do not expire until 2029 and 2032.
Everest is a 76.5% holder of equity in DCM. DCM borrowed money off McClarty Capital (a local PE House) and Caleura (which appears to be Luxembourg company registered in September 2015) to buy the assets off Cal Dive. Interest has accrued and not been paid. These assets have been capitalised in a new company which is being handed over as part of the deal (Maritime Finance Corporation). Everest appears to do particularly well in the deal because having brought the Rider Barge as part of the transaction A assets originally (for USD 10m in total) it is selling the barge back to the company for USD 6.1m in loan notes (USD 5.5m clean) having already made USD 8 on the three vessels in lay-up that constitute transaction A. The extra carry in the loan notes on the barge would appear to cover any losses incurred on the loan note covered in transaction A.
In an extremely complicated completion mechanism the sellers of this tonnage get issued with USD 21.6m in loan notes. But do you get what happened here? They hand over USD 10.5m (and get 8% per annum back), to a company with USD 21m cash in hand, and no other apparent transactions planned, a company controlled by the sellers and with no other creditors, and in return for the vessels took loan notes of USD 21.6 m (with a 6% yield) and have USD 8m written off. You need to put money in here because otherwise the enitre equity value has been wiped out by the issuance of the loan notes. I’d go long on this trade every day of the week with unlimited money… only if I was the seller mind…
I am not suggesting anything improper. Norton Rose are the GED lawyers, and “[t]he Independent Directors, having consulted with finnCap (the company financial adviser)… [believe]… that the terms… are fair and reasonable”. Kennedy Marr blessed Transaction A with a Fair Value USD 8m brokerage report apparently (although scant details are provided). But what is clear is that these assets were purchased from the administrator of Cal Dive in a quick process, have been laid up for two years, during that time the market has significantly worsened, and yet the investors via this transaction are made whole temporarily via a company they control 62% of.
Its just extraordinary on a number of levels. All of us, with even a modicum of vessel knowledge, consider these assets to be some of the most compromised and poor quality in the market. I don’t believe you could get USD 8m for the vessels in Transaction A in an open market deal under any circumstances. They are just such bad ships the sooner they become Matchbox cars, or whatever else you do with recycled steel, the better. Prediction is hard, especially about the future, as Nils Bohr said, but the scenarios under which there was any economic value in those assets must be on a statistical basis with a large meteorite strike.
The old DCM assets are actually so bad I can’t be bothered expending mental energy on insulting them. They are still being advertised on the DCM website and the only real route to market is through them. A company owned 76.5 by the seller, and no apparent sale-and-leaseback arrangements, as would often be the case here. DCM have had extremely poor utilisation with these vessels post-acquisition from Cal Dive.
I rang a contact in the US today to make sure I wasn’t going mad and he actually couldn’t stop laughing when I talked him through this. Unlike the North Sea, the Gulf has a lower level that is really low, and some really unsafe and unsound tonnage can find work. But a Plc cannot compete in this space, and its real “Mom and Pop’ stuff, and it is absolutely not the future. I accept Cal Dive’s issues were largely related to the Horizon acquisition, but their issues were also to do with the quality of tonnage used. The Rider Barge is emblematic of that: shallow water pipelay stopped on the US GoM shelf around 2005, that’s why Horizon was such a bad acquisition for Cal Dive. It drove them bankrupt. There is simply no market for shelf pipelay, and unlikely to be ever.
The charitable explanation here is that this transaction helps the company access the tax credits on USD 26m of earnings. I can’t help feeling more would have been made of this if really the case. But it would take a lunatic to believe these assets, in the most price competitive market in the world, or actually any market in the world, actually represent a serious industrial strategy.