Great Exepectations and Asset Values in The New Offshore…

“Suffering has been stronger than all other teaching, and has taught me to understand what your heart used to be. I have been bent and broken, but – I hope – into a better shape.”

Charles Dickens, Great Expectations

Further evidence of the narrative turning to shale:

When the facts change … ” Hall wrote to investors in his Stamford, Connecticut, hedge fund, Astenbeck Capital Management LLC, in a July 3 letter obtained by Bloomberg News. “Not only did sentiment plumb new depths but fundamentals appear to have materially worsened.”

U.S. shale drilling is expanding “at a surprisingly fast rate, thus raising the odds for significant oversupply in 2018, even if OPEC maintains its production cuts.”

“When the facts change … ” Hall wrote to investor… “Not only did sentiment plumb new depths but fundamentals appear to have materially worsened.”

U.S. shale drilling is expanding “at a surprisingly fast rate, thus raising the odds for significant oversupply in 2018, even if OPEC maintains its production cuts.”

Reuters notes:

“The market is in trouble and looks very vulnerable to lower numbers,” PVM brokerage said in a note.

I can’t help wondering if some of the private equity money that flooded the North Sea when the price declined in 2015/16 isn’t getting a little worried. The investors behind Siccar Point and Chrysoar for exmaple are some of the largest private equity funds in the world, and the transactions were de-risked by paying a contingent amount on prices following the transaction, but prices are lower than the dominant narrative was at closing and they surely weren’t based on a mid 40s oil price but rather a long-term appreciation trend? Both are very different as well with Siccar Point exposed to Clair Ridge and some new deepwater projects where as Chrysoar is more exposed to the legacy Shell assets. But even still the only viable exit is another massive private sale or preferably a listing and both these companies offer very poor growth prospects in a high cost environment in what are officially declining basins. For North Sea contractors the implications for future demand are serious given how well the new players like Ineos have been at driving down OpEx in other markets. And E&P company spending obviously drives spending for offshore contractors and therefore asset values…

I have gone on about this before but I think the downturn in 2008/09 has a lot to answer for when a short price dip was followed by a very healthy five year boom, but shale simply wasn’t such a big deal and OSV supply was more limited. Just as in offshore fields so in offshore support vessels: those who piled into the Harkand/Nor bonds were typical: Justin Patterson of Intermarket (www.intermarket.us) proudly announced he was a holder of record of the Nor/Harkand bonds in November 2016. Constrained in the number of opportunities in the sector they could buy into they were not interested in understanding the assets or the market, they would just buy and hold… what could go wrong?

The investment is of course now worthless. The Nor investors are discovering either you have a North Sea diving operation or the vessels are only worth what someone in Asia will pay, and that is an order of magnitude less than the implied depreciated value of a North Sea class DSV. There is no magic solution here and as I don’t believe the Demand Fairy will save people here. With a load of sellers of similar assets who would be willing to sell or charter for $1 cheaper than the Nor investors, whatever the price, they need a good story to tell here if they want to convince anyone there is value in their investment.

Surely at some point auditors are going to insist on more cash-flow based assessments of vessel values and that is likely to cause chaos in such investments because they all rely on the Greater Fool Theory at the moment? The Harkand/Nor DSVs are an egregious example of where the valuation of USD 58m per vessel for their last set of accounts simply bears no relation to any realistic sale price the assets may fetch, it may help people like Intermarket show a positive Fair Market Value in their accounts but it isn’t a real number. Similarly Bibby held their DSVs combined at over GBP 100m in the last accounts… collectively this means that 4 North Sea class DSVs that cannot be operated at even cash flow break even are worth in excess of USD 240m, despite no credible reports of an uptick in day rates and other comparable vessels such as the Vard Haldane for sale? Something will have to give and it won’t be economic reality or the “cash flow constraint” as Minsky recoognised.

Expectations of future cash flows are the main driving force of offshore asset transactions at the moment (as opposed to “valuations”) not concerns over lack of supply (so 2014) or the ease of selling the asset to someone else (so 2013). Barring a major change in demand therefore expect asset values to have been permanently impaired and wait for the auditors to start calling time as liquidity needs continue to strain companies that have made it this far despite the hoped for Great Expectations of the 2015/16 investment class.

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