“The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating.”
BNP Paribas press release, August 9,2007
I don’t want realism. I want magic!
TENNESSEE WILLIAMS, A Streetcar Named Desire
“Reality is that which, when you stop believing in it, doesn’t go away.”
Philip K Dick, I Hope I Shall Arrive Soon
Right now is the toughest DSV that has existed since a massive DSV rebuild programme began in earnest in 2000. At the moment Toisa are in restructuring talks, Bibby have not made money for at least two years, Harkand are no more, and a host of other smaller companies have gone bankrupt. The cause was that there was too little work at profitable rates.
Currently there is a vast inventory of North Sea class Dive Support vessels mounting up: 2 x Nor Offshore, 1 x Vard, 1 x Bibby Sapphire, various assets of Technip and Subsea 7, and various Toisa, for non-comprehensive list. In Asia the number of underutilised DSVs is so vast, and the competition so intense from PSVs with modular SAT systems, that the new normal is OpEx breakeven if you are lucky. Keppel have a USD 200m DSV that can’t be sold and another Toisa DSV is in the production line in China . As in Europe intense price competition is stopping anyone of the dive companies making any money.
By any traditional measure of economic and financial analysis this is not a good time to launch a new DSV company, either as an owner, where the market is oversupplied and no owner can even get his book value back on the boats, or as a dive contractor where an excess of capacity is driving the price of work to its cost or less. It is worth noting that the new build Tasik DSV, with a 365 five year charter to Fugro, could not get takeout financing from the yard.
Into this maelstrom is coming Ultradeep Solutions (“UDS”),Flash Tekk Engineering, and a Chinese yard…
The distinction between the North Sea fleet and the rest of the world is important as everyone knows in the market the North Sea environmental conditions demand a higher specification vessel and therefore day rates have always been higher. The ROW has never chartered tonnage of the same cost because they don’t need too, older vessels traded out of the North Sea and finished their days in Asia or Africa for lower rates but trading on the higher spec and build quality.
UDS is building North Sea standard tonnage when both Harkand and Bibby, pure IRM and diving companies, could not operate similar, less expensive tonnage, profitably. That is a statement of fact. In order to operate in the North Sea you need a certain amount of infrastructure that I estimate at a minimum costs c. £5-8m per annum for two vessels, to cover things like bidding, HSE, business development, plus the vessel running costs (detailed below). Or you could just charter the vessels to someone willing to pay. There is no middle ground here. Nor Offshore recently tried and got zero utilisation, it is not a product anyone wants, or needs, to buy.
The problem is there are no charterers, and companies like Bibby, who despite their capital structure still offer a very good product, cannot even break even on the vessels: this should be a word of warning for companies seeking to enter. No owner wants to accept there has been a structural change in demand in the North Sea as it means writing off tens of millions of dollars on asset values. Like the financial crisis, which began nearly ten years ago today, everyone owning a DSV claims their assets are impossible to value fairly, what they mean is the price they would get isn’t one they are prepared to accept (cognitively even if they had to take it financially). Just like the financial crisis securities the vessels are used as collateral, when the risks of ownership of these assets cannot easily be assessed, as with DSVs now, their price falls and they become in effect untradeable at any price.
Anyone raising money for a high-end DSV at the moment needs to explain how even if they paid the yard delivered price only why they wouldn’t then go down the road to Vard and offer 10% less for theirs, then the Nor bondholders and offer them 20% less, and then Keppel and offer them 50% less, and then start the whole cycle again. These are extremely illiquid assets with very high holding costs and the option value doesn’t look great. Yes maybe, a big maybe, these Chinese built vessels are operationally better, but does that add anything for the client or a way to charge more? No.
At the moment the Nor Da Vinci is steaming to Trinidad for c. 35 days work for BP, and it takes 25 (ish) days in transit time to get there. This vessel is a near sister ship of the Ausana that UDS have taken on. Unless you believe that every single dive contractor/DSV owner in the world has forgotten to bid for certain jobs then you need to accept the market is suffering from chronic oversupply at the high end. Nor raised USD 15m in Nov last year, ostensibly to keep the vessels trading in the North Sea, they are not taking the vessel to Trinidad because the crane wants to go sunbathing, it is the only work they can get. Nor will need to do a liquidity issue soon and decide where to position the vessels again this November. Every single job UDS go for will have people just as desperate as them to win work for years to come. The last Nor propospectus also made clear that crewing costs, on a near identical vessel to the Ausana, at safe manning level only, were USD 350k per vessel per month + c. 100k for the dive techs and maintenance. These are very expensive assets to hold an option on.
I don’t want to spend a lot of time on UDS, I admire anyone setting up a company and making a go of it, but its really simple for me: either we are going to see the company raise literally hundreds of millions of dollars to pay for some DSVs and working capital, in a market when asset values are dropping and no one is making break-even money, or the yard is going to have to subsidise the vessels and the working capital question becomes interesting. Because someone still needs to pickup the tab for the OpEx which is around USD 10k per vessel per day. 30k per day is c. USD 1m a month with some corporate overhead included and unexpected expenses included. That size of fundraising is institutional money and will leave a documentary trail. I can’t find anything yet which leads me to believe they are undercapitalised (I am happy to be proven wrong here). Raising that sort of money without any backlog at all will I believe be impossible in current financial markets. The return required for hedge funds and other alternative investors to get behind this simply cannot be demonstrated.
It is just not possible in this market, where extremely good operating companies are struggling for work for someone to know of jobs that everyone else forgot about. It’s just not possible in this market to deliver dive vessels tens of millions in cost more than local competitive vessels and claim that you are the only person who can make money and all that is stopping everyone else is negativity.
The fact of the matter is unless those UDS vessels work at North Sea rates, and UDS commits to the sort of infrastructure required to do this or finds a charterer, the vessels will never make money in an economic sense. And even then UDS would have to explain what they are going to do that Harkand and Bibby didn’t or can’t? No one builds USD 150m dive vessels for Asia because people won’t pay for them. That doesn’t mean UDS won’t make money, owe the bank 1m you are in trouble, owe the bank 100m and they are. The yard has a problem here and needs these vessels to work if they are finished off as DSVs. But even if UDS come up with the vast amount of working capital required it doesn’t make the vessels economic units and that will be bad for the industry as whole.
We will see. I could be wrong… But sooner or later the cash flow constraint is going to bite here because the numbers are so big. If I was a supplier I’d really be hoping my contract was with the yard.