HugeStadSea and Olympic

Two major pieces of restructuring news today with Solstad merging with Farstad and Deep Sea Supply and Olympic finalising its deal. The interesting thing is the contrast: Solstad goes long on offshore supply while Olympic goes for subsea. I get the Olympic deal but for what its worth I’m not sure about creating a bigger HugeStadSea.

The Solstad/Farstad/Deep Sea is about as complicated as it gets (full details here). However in simple terms Solstad currently has 20 PSVs (32%), 16 AHTS (25%), and 27 CSV/Subsea (43%) as opposed to the new merged fleet of 154 vessels has 66 PSVs (43%), 55 AHTS (36%), and 33 CSV/ subsea (21%). That doesn’t seem like a good deal to me. I get the financial metrics mean Solstad, with a (slightly) better debt profile and fleet profile, is taking a proportionately bigger share. But the economics seem simple to me: Supply and Subsea have similar daily running costs but unless you are a true beliver its hard to see asset price appreciation in supply whereas subsea has the potential for a service element that can add value beyond the steel in addition to the vessels holding their value better. Not many people would trade a fleet with 43% exposure to subsea and trade it for one with 21% in this market.

I don’t see how this business will have enough scale to lower unit costs to make the merger worthwhile? Procurement is still regional in the industry and while it will be a large company with 2100 supply vessels in the industry it won’t be big enough to have any effect on market pricing. Savings of NOK 500m across a fleet of 154 vessels with such high running costs look to have almost no effect. Put me in the sceptical camp. I would have passed on Farstad if I was either Deep Sea or Solstad but I accept different people are more confident in the long-term supply market, but exposing yourself to a similar cost base on commodity vessels when the upturn seems so uncertain is bold to say they least (which could well be one of the many reasons JF is a billionaire and I am not).

Olympic seem to have realised this and effectively cauterised the risk of the supply vessels (by handing them back to the bank and bondholders effectively) and offering upside only on the subsea fleet while providing only for basic running costs for the supply fleet (deal here). Significant new equity is injected (from the main shareholders), along with the ship and crew management companies, and the medium-term liquidity looks confirmed (barring a credit event I guess?). This strikes me as a far more investible proposition whereas the HugeStadSea looks more like assets looking for a transaction to buy them time and hope.

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