DSV market runs out of ‘Greater Fools’… Keppel version…

It might have been supposed that competition between expert professionals, possessing judgment and knowledge beyond that of the average private investor, would correct the vagaries of the ignorant individual left to himself. It happens, however, that the energies and skill of the professional investor and speculator are mainly occupied otherwise. For most of these persons are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public. They are concerned, not with what an investment is really worth to a man who buys it for “keeps”, but with what the market will value it at, under the influence of mass psychology, three months or a year hence.

— John Maynard Keynes

If something cannot go on forever, it will stop.” (Stein’s Law)

— Herbert Stein

The greater fool investment theory is acribed to the Great Man, who in a famous passage noted that the stock market worked like a beauty parade and that picking a winner was not about backing one’s own judgement:

“It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.”

(Keynes, General Theory of Employment, Interest and Money, 1936)

This led to the ‘greater fool’ theory as it has been observed that assets trade not on an intrinsic value (i.e. the cash they can be assumed to generate) but on the basis of what people believe others will pay for them at some point in the future. The boom in DSV building is running into the wall of cash requirements and a shortage of fools willing to invest in them.

If the market scuttlebut is true, and I believe it is, somewhere in 31 Shipyard Road, if it hasn’t happened already, a terrible realisation is taking place: New Orient Marine Pte Ltd, a subsidiary of  Marine Construction Services Ltd (Luxembourg), has a financing issue with the new ICE Class DSV, and in reality isn’t going to take delivery as planned. SOR reported last week that they were seeking a charterer at rates of USD 80-100k a day, a number that if true is so absurd it is beyond satire. The vessel as you can see from the Keppel Q1 presentation is due to be delivered at some time this year.

You can write the script here I suspect: New Orient will be a thinly capitalised company that had sufficient funds to make the progress payments only. Unable to get work for the vessel they have now have no takeout financing, and will be unable to take delivery from Keppel. A frantic search is therefore underway to find someone, anyone, to try and take the vessel off their hands.

At the time the order was signed in 2015 (when the market was cooling significantly), Keppel issued this press release with the comment:

Mr Knut Reinertz, Director of Maritime Construction Services, said, “There is a demand for modern ice-class multi-purpose vessels in the market and we believe this new state-of-the art vessel we are building with Keppel Singmarine is ideally suited to meet this need.

The problem I have with this statement is that how much demand there was/is? And how you split the risk? And even more importantly what is the supply side looking like? MCS/MRTS have used the Toisa Paladin in the region and it has never been on a 365 basis, and they certainly never had the forward order book to justify going long on a vessel of this complexity and cost. So they were either completely mad, or wildly optimistic as to their prospects to resell or recharter the vessel prior to delivery (and they aren’t the only people doing this in the DSV space). Unfortunately the timing is spectacularly bad. I don’t know what the payment profile was for this asset but I can guess it was something like 5% down with 10% later, and if Keppel were lucky, another 10% further on. But apart from that I don’t see them getting any more for this.

I actually believe this vessel, with a reported build costs of USD 200m, or SGD 265m, is valueless. I say this not to be controversial but a cold examination of the market and the asset.

Firstly, and most importantly, the vessel is being classed by Bureau Veritas. That wasn’t a joke, I’m serious. You can read the BV press release and documentation here. Those who have worked for a saturation diving company will appreciate the significance of this, while others may wonder where I am going with it? Saturation diving isn’t rocket science, but not everyone can do it either, you need a certain number of systems, and processes, and high quality people to be there to create a certain institutional knowledge base to do it safely and efficiently (particularly North Sea/ ICE work). Small things can cost you a lot of money and this is a classic example where cutting corners, is I believe, going to render this hull worthless. For those still here, there is no other DSV in the world classed by BV, it is just not a classification society recognised to give a vessel SAT notation. The only reason you would use them, and not DNV or Lloyds (and maybe ABS at a push), is to save money, and anyone looking at buying this vessel at anything close to its construction cost would know the original purchaser did this to be cheap. Very cheap.

Secondly, the chambers and other equipment are not NORSOK compliant. I don’t even think a BV system could be NORSOK compliant without a vast amount of bridging documentation and ancillary work (I am happy to be proven wrong on this). The only market in the world where you can get day rates that would cover that build cost is Norway, and they already have two NORSOK DSVs for a total market of 550-600 DSV days on a good year.

Thirdly, the dive system is a Lexmar, and has had known installation problems throughout the build. No one spends USD 200m on a dive vessel with a Lexmar system. Again it was done to be cheap and it will in all likelihood render the vessel unsellable.

Although I am a paid consultant I have therefore done Keppel a favour and compiled a list of all the possible buyers for this asset (who says consultants ask for your watch and then tell you the time?):

 

 

 

Unfortunately, as you can see, it’s quite a small list. But the number of people needing a USD 200m DSV at the moment is 0. The largest owner of high class DSVs is rapidly beoming Yard Inc. Lichtenstein is still in Shenzhen, Vard has the Haldane, and now Keppel has the New Orient DSV. And that is without getting into idle tonnage and the DSVs still to be delivered. If you speak to people associated with these assets they all assure you that they are close to selling them, yet if these vessels are not used in the North Sea they are only worth the Asian/African DSV price, where you are competing with modular systems on a PSV, and all the North Sea contractors have too much tonnage, as the Nor vessels prove. Find me a CFO from one of the big 6 who could take one of these DSVs at anything like book value, and who is willing to go to the stockmarket, with backlog collapsing, and say he has paid anything less than a steal for one of these? No one outside of these companies could get the vessel into a region where they could hope to recover that sort of cost – and even then not in the current market.

New Orient Marine Pte Ltd , are in turn linked with MRTS, a Russian owned contractor focused on the Sakhalin region (although I think they have done other work in the Caspian).  It’s worthwhile having a look at their fleet to see the sophistication of vessel they are normally used to dealing with here and the risk Keppel took in this contract given this. MCS have hired DSVs on a time charter basis, but have never owned a DSV; you therefore have to admire their… courage?… in striking out to build one of the most advanced DSVs in the world.

Clearly they were hoping to sell something well above it’s intrinsic value by being bold. The payoff was an asymetric one to MCS though, who stood to benefit enormously while Keppel are going to be stuck with this eccentric design for a long time prior to reality setting in I suspect. Keppel are a big company with a multi-billion market cap so this isn’t a “farmburner” for them, but they could realistically have to writeoff USD 150-200m here which is going to be very painful all the same. The Chinese yards have decided to play for time, the Tasik DSV was yard financed and  UDS are the potential saviour for the Lichtenstein. Not everyone can be saved here because there is just insufficient demand until the DSVs return to construction work not maintenance, and that looks a long way off.

17 thoughts on “DSV market runs out of ‘Greater Fools’… Keppel version…

  1. An interesting and indeed thought-provoking article Jeremy, with a number of valid points made about the current state of the DSV market. Of course, your observations are a reflection of the events of the past three years since the collapse of the oil price in H2 ’14 – an event that took many of the pundits of the time by surprise, but we all know that predicting the oil price is more akin to guessing next week’s weather than market perception. Looking forward, recovery – if and when – will be linked not to what we know now but what may happen next. Current and recent events in the world political arena are testament to that uncertainty.

    Anyway, the purpose of my comment is not to cast aspersions on your analysis of this particular vessel’s history and future, but to add some corrective facts to the technical points made regarding Lexmar and BV. These are my personal observations as an involved party, and are made objectively for the benefit of those who have not had visibility of this particular vessel and its immediate predecessors.

    Firstly to Lexmar. Whilst it is true that in previous times Lexmar built a number of diving systems that were considered by some to be not up to the standards of others – and that also did not meet the expectations of some, these systems have been operational for many years and racked up an impressive tally of safe, incident-free operational days. Yes, there were some quality and design issues that others have avoided – and this was no secret to Lexmar.

    With the award of the Kreuz Endeavour contract, Lexmar made a conscious decision to adjust their business model, and in doing so, make technical changes to their dive system offering. These changes were rooted in a desire to provide a system with a higher specification and more up to date technology than previous, whilst preserving an appropriate level of cost and complexity that would match the target operational area for the vessel. Some of the more significant design changes involved the wholesale replacement of the outdated hydraulic LARS with a state of the art electric system from Parkburn – similar to that installed by Drager on the Seven Kestrel (ex Havila) and Bibby Topaz. Next was the choice of Class Society for dive system certification which went to DNVGL. The Paladin system was also DNV certified, but recent changes within DNV have raised that particular bar significantly. The chamber designs and machinery were improved with various engineering enhancements flowing through from operator feedback and industry best practices. SAT Control panels were completely revamped to include up to date control, instrumentation and communications equipment in addition to improved ergonomics and operability. Similarly, the diving bells and topside control room equipment was refreshed with the latest communications, electrical systems and diver monitoring instrumentation.

    The end result is a completely different offering to what came before.

    The Mermaid Ausana (now UDS Lichtenstein) followed in the same pattern, with lessons learned (some hard) from the Kreuz system facilitating its delivery ahead of the Endeavour.

    And then to the New Orient Marine Everest. Third time around the loop, and construction time is improved again with the benefit of two near-identical recent predecessors. With the step-change in design and quality of the ‘new’ Lexmar systems, your comment that the choice of a Lexmar system was “done to be cheap” significantly misrepresents the technical offering, regardless of what the price tag may have been. I was once corrected many years ago by Don Rodocker of Gas Services not to confuse ‘cheap’ and ‘low cost’ – and Don knew much of these things. In engineering terms, ‘cheap’ is a reflection of quality, whereas cost relates just to commercials.

    The selection of BV as the certifying authority is, as you are right to point out, an unusual choice for a new-build diving system. But is it the wrong choice? Our experience of dealing with BV on this particular vessel is that they have taken much from the DNVGL model in their approach to design review and build survey. Granted, they may be somewhat light in diving experience, but have you had recent exposure to the CMC process of the others where many of the approval engineers have never set foot on a diving vessel let alone designed its diving system? Junior / graduate engineers beleaguered with their rule books and with a propensity to ask often stupidly obvious questions. What value or quality controls does this bring to the table? The real responsibility and duty of care lies with the equipment and system builders – and of course the end users and their experienced technical and operational personnel. That’s how it really is in the diving industry.

    Perhaps the reason for selecting BV rather than one of the others was to increase the system builder’s options for Class certification going forward. From a commercial perspective, the option of a new CA to system builders is a good thing – but only the brave go first. Despite their immediate lack of diving credentials, BV is a Class Society with 66,000 employees in 140 countries and annual revenues of around 5bn Euros are therefore should not to be taken lightly. If they made it their business to cross-recruit only 10 industry experts, they could carry equal weight to the others without question.

    On the broader subject of the DSV market as a whole, I am unqualified to comment – but I suspect that the most relevant alma mater for this role would be from the Astrological Association rather than anything more ‘serious’. And for those interested, a diploma in this area of expertise can be procured for the discounted price of £225. Plus VAT.

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  2. You should do a better research before you posted an article like this ! The vessel is fully paid already and will be delivered as scheduled ! The BV class is a specific choice, as vessel is dual class ! This vessel is build for a purpose ! Luckily there are still owners you are willing to invest in this difficult times, easy to be negative of you are on the sideline and have no skin in the game ! We need positivity!

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    • No one prepays for a 200m vessel prior to delivery. Can you prove that? Never in the history of maritime finance would a buyer have done that. And if so show me where it is in the prepayments in Keppel accounts?

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      • 85 % of the vessel is paid and 15% is on a escrow account ! Lock in ! For final delivery
        Sorry you don’t know what you are talking about., you should have known the payment terms at least if you write such articles and not make wild guesses!

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  3. It is disappointing that individuals relish creating or spreading bad news rather than supporting developments in industry and congratulating people or companies on their success or efforts. This vessel is by far one of the most advanced DSV’s with class leading technology from all companies involved and not a simple “lets do the same again with old cheap technology out of the arc”. From a diving perspective, all three DSV’s now including Lexmar inbuilt systems should be commended and congratulated by industry rather than talked down. What happens with vessel owners and buyers will always be something beyond the control of suppliers as can be seen now with Ultra Deep taking over the previous efforts of Mermaid and now renaming the vessel Lichtenstein. Again these moves should be congratulated not scorned. Social media today has become a tool of propaganda and that is wrong, it should be used in a constructive manner to further industry and not from gripes or groans. In addition, the move to BV for classification is a good move for industry, providing additional sources of expertise whilst also providing fresh eyes and approaches to solving age old set in their way methods. It by no means reduces any aspect of safety or attention to detail by any supplier.

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    • Andy I think you are missing the point. Firstly, economics isn’t called “the dismal science” for nothing. Secondly, it is an economic fact that greater uncertainty creates a greater discount to asset values. A new BV system from Lexmark, by definition nto industry standard, will have a lower value to anyone othert than the people who commisioned it. Rightly or wrongly the “brand” is not known as a high end product. Thirdly, it isn’t being negative, but realistic, to state there is no resale market for high end DSVs at the moment. For what it is worth I have never heard anyone in the industry state anything other than that Parkburn is an absolutely quality name and premium product. If you are responsible for the bell handling kit and other items it goes without saying they will be of the highest order.

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      • Mr from the Southsea, first of all its all to easy to comment on future developments which is essential to lift up the industry, i call it courage, same negative stories happened with the Liechtenstein. Its coming over that you have not a warn hard for the industry and only write destructive articles to harm the industry even more. I think its not showing great courage to Publish without giving your name…. Jan Eelman

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      • Any positive articles about the industry ?? after DOF, Bibby, Everest etc????….. would be nice to see more positive supporive articles…. think the industry will not appreciate the negativety during these dark times where many people lost their jobs…. very subjective journalism with lots of comments from the industry ……. JAN EELMAN

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  4. I fully agree with your comment Andy. Positivity in a down market is something that costs little but brings significant value. Yes, there are undisputed facts around the state of the industry, the oil price, the lack of diving work and the number of vessels tied up waiting for the market to turn. If we all looked at our boots and became despondent the world would be a depressing place. Take any positive events and embrace them – you may surprise yourself!

    On that (positive) note, it is great to see the UDS Lichtenstein heading out to work on contract for Petronas in Malaysia. A long-term engagement I am led to believe – which demonstrates that there is work for a vessel of this capability. I don’t know (or really care) about the day rate, book value, ownership model or the likes. What I do know is that a DSV out working on a contract for a major operator is way better than it tied up against the wall unsold in the shipyard, like we may have been led to believe. At any price.

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  5. […] DOF Subsea is a good company, and they are strong in Brazil and Norway which strategically is as good as it gets in macro terms for offshore, but they simply cannot be immune to the enormous retraction in demand the industry is experiencing. DOF Subsea also has the DOF problem which they blithely dismiss but which no one can get past: are they a contractors’ contractor or a contractor? As the industry consolidates it is increasingly hard to see someone being able to be both. It is also hard to believe that when all the flexlay vessels come off contract with Petrobras they will be employed at anything like the current rate creating a huge residual value issue on entry for stockholders (unless they were relying on the greater fool theory). […]

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