Whaam… Lichtenstein meets the market

“I’m interested in portraying a sort of antisensibility that pervades society”

Roy Lichtenstein

Roy Lichtenstein was known for his themes on parody. I’m going to file that under irony. I’m also going to be honest here and ask the questions everyone in the industry is asking but no one is saying out loud:

  1. Where on earth (and I mean that literally) is the UDS Lichtenstein, and the other new builds, going?
  2. Who is funding this?

The newbuild DSV UDS Lichtenstein, if the build quality matches the specification, will be one of the best DSVs in the world. Maybe not as good as the Deep Explorer or Seven Kestrel, as these have been commissioned by organisations with a strong track record of complex vessel delivery, but certainly a fine vessel. And at DP 3, and other specs, the vessels are well suited to the North Sea market… er… apart from any sort of demand or market need for them that is.

In order for the North Sea market for DSVs to return to healthy days for offshore contractors the construction market needs to return, and actually its really a sub segment of that: the shallow water, small field development, with flexible flowlines. Technip (Apache II) and Subsea 7 (Seven Navica) have the rigid reel construction market all to themselves and this is traditionally 80% of the total construction market. As the market has softened they have taken the lions share of the work available and made rigid reel cost effective over shorter distances. Bibby and DOF are hurting in the DSV market because the smaller jobs, which require longer flexibles, and therefore more diver days, are simply not being done. The market has ample DSVs for IRM work and Subsea 7 and Technip continue to redefine their position in this space as IRM contractors (until the construction market comes back). The thesis, that I used to subscribe to as much as anyone and maybe more, that maintenance work would keep everyone at OPEX neutral levels, was quite simply, wrong.

Day rates in the North Sea are still only just above OPEX once the divers and project crews have been stripped out, although this is likely to be higher for the peak summer months. UDS could be arriving in 4-8 weeks but without any infrastructure or project crew. The ex-Harkand DSVs provide a rare natural experiment in economics of complete financial irrationality, having sat in Blyth for nearly a year with no work (and now trying to win 100 days in the UAE), there is no reason to believe UDS would fare any differently. In order to have any hope of work UDS would need companies like Ocean Installer to start winning large scale construction projects in the UKCS that need DSVs, and there is no sign of that happening, and even then would they subcontract that to a newcomer?

For the rest of the world the UDS new-build DSVs are over specified (and therefore over capitalised) to an extraordinary degree, and this would not be reflected in the day rates. The UDS Lichtenstein would compete against anything with a modular system or above. The exception is Canada, but there is a reason no one dedicates a DSV to the region, apart from cabotage regulations… there isn’t much work. Certainly not enough to keep an investor interested or a bank happy… even a German shipping bank.

In short: DSVs globally are some of the most overbuilt offshore tonnage, that will rely on the ultimate bull-market scenario to come back to historically depreciated values. Relatively shallow water, capital and engineering intensive projects, with short production life, are some of the most economically unattractive ways of increasing oil and gas output at the moment. Yet these form the basis for a DSV recovery story… Especially now the domestic stability of the North Sea counts for little as the US ramps up production. Many of these developments were funded by raising capital on the London Aim, yet just £192m was raised for oil and gas companies in 2016 from this market, and most of that for exploration, and only two projects are currently sanctioned.

This is an industry that overbuilt DSV tonnage in a boom and the issue is that these assets last 25-30 years. The only economically rational adjustment here is one on pricing expectations for the assets unless there is a sudden, and dramatic, increase in demand.

Maybe the UDS investors are betting on a cyclical recovery with a scrapping of the old DSV fleet? The problem with this is the running costs. When Nor/Harkand did their USD 15m (“super senior”) capital raise  (nov 2017) they put the running costs per vessel at USD 370k per month (vessel) + USD 109k per moth (dive system) , and there is no reason to believe the UDS Lichtenstein will be any different. Incidentally, Nor listed their “low case” as no work for either vessel for the year ending Dec 2017, this would require USD 15.9m in funding, a situation that must seem ominously real now, and certainly more likely than their “base case” which had one vessel starting a charter at USD 15k per day in March.

Who is funding that sort of open ended commitment for UDS? In order to set up diving operations they face another quantum of costs for management systems, vessel audits, trial bell runs, business development, tendering etc. When people are making 60% operating margin on 350 days utilisation that seems logical, but at the moment the leading independent North Sea company, Bibby Offshore, looks set to report yet another serious loss on March 23, driven by poor utilisation and potentially a USD 15m write-off on EMAS.

I can find no details of the takeout financing from the yard or any other capital raising for UDS or the vessel. Rumours abound of Chinese money, but from who and on what terms? What is the strategic rationale here? Will UDS be another Toisa and just charter these vessels, or an integrated offshore contractor with a diving capability? Both are markets in chronic oversupply. UDS’ shareholders have sufficient personal wealth I believe to fund the working capital of one vessel, but not indefinitely. And more to the point: why would you? This is at a time when I believe the Tasik Subsea DSV financing to be in real trouble, and this has a contract with Fugro! Vard cannot give the Haldane away at a good (or any) price, and Mermaid have commenced operations with some good new Asian tonnage. I could go on…

Maybe I have missed something, as has everyone I have talked to. Maybe companies like Bibby, Technip, and Subsea 7, have been sitting around missing a large number of diving days that were there for the taking. I’d love to be wrong, But you need more than a degree of optimism when you start delivering USD 135m vessels: you need cash flow sooner or later. I really admire the optimism and verve to get these vessels built, but ultimately being a glass half-empty kind of guy I just really want some details?

Good luck UDS. If you can pull this off Roy Lichtenstein himself would be proud.

 

4 thoughts on “Whaam… Lichtenstein meets the market

  1. Good article. A lot of people have been looking at the UDS business model. Which is to build the best ships at the lowest price by making use of the downturn in the market. Strategic advantage, for a company that has no financial burden from assets built in the boom years and no loans to pay off, is that they can have a relative competitive day rate (lower build cost). They will have the newest DNV class ships built by the latest standards, that will give them an advantage with companies that are heavy on HSE. I understood that UDS is targeting maintenance on certain types of wellheads at certain depth.

    So how do they get the funding? First is lucrative Chinese financing for the build. Most equipment and designs is Norwegian, equipment financing will be partly Norwegian and most likely supported by subsidies on the equipment/designer level. Companies like Kongsberg, Marinteknikk, RR would have access bodies that need to make investments for the Norwegian pension funds. Don’t forget Flashtek which designs and builds the sat dive equipment. The sat dive spread might be 40% of the vessel, depending on the number of divers. FT is located in the same building as UDS, so there will probably be cross ownership. Starting a new build, financed by the Chinese government, will be cash in direct for FT. USD would only put in 5-10% equity.
    Than there the investors, which can be anybody (probably the Chinese). I heard that UDS offers a participation in the ownership of a vessel. And here is the catch, your article suggests the value of 135mUSD on the asset but investors are offered a part of an asset valued much higher (which would be ‘market rate’). If , for example, they can convince investors to invest in a 250mUSD and they get only half of that money, than UDS has the CAPEX. Income collected via dayrates could be used for the OPEX.

    From UDS’ owners perspective it all makes sense, they have the opportunity to break even before the vessels start to work. The people running it have a good track record and sales pitch. They own industry specific expertise and can imagine that they have the ability to convince investors outside of the industry, the risk is with them.
    If the market picks up and UDS manages to secure the jobs that they foresee, than this setup will be lucurative for both UDS and the investors. If they cannot deliver on the market share, where the risks are that you underline in your article, it might look like a ponzi scheme from an investor point of view. In both cases the people behind UDS will do well.

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    • As anonymous says; the Chinese market. It is about the technology and showing that they are coming of age and to be taken seriously. A new empire in the ascension old ones on the wane, a change to the new world order, Basically a cock measuring contest in the school yard. Almost everywhere you go, however remote, there are Chinese there, all over Africa, buying up/leasing assets, whether it be mineral rights or arable land for food production in exchange for infrastructure projects (which inevitably benefit the export of said products. No different to the British Empire and Commonwealth in its heyday. All roads lead to Beijing. The Chinese have stated this overtly.
      Why else do we produce highly detailed construction procedures for all the projects? Knowledge is the key and currency and will help them develop in record time. No long drawn out industrial revolution required. Subsea construction by numbers, see monkey, do monkey.
      Why else did the Chinese Navy trumpet the success the 300m saturation dive achievement?

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  2. A lot of fancy theories and words, but you haven’t mentioned the old, dangerous tonnage that is masquerading as DSVs. Most of this scrap would fail a valid audit and is downright dangerous. The diving companies and clients are turning a blind eye of course, in the interests of cost saving.
    KEEP BATTERING IN THE WOODEN WEDGES AND WRITING OUT THE “CERTS” ………

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