In a widely telegraphed move Boskalis has now taken both of the Nor DSVs and this would appear to be the start of the end game for the restructuring of the North Sea DSV market. I remain convinced Boskalis had preliminary discussions about buying Bibby but gave up on price and complexity. This transaction is clean for them and allows them to organically grow a business in line with their culture and values and will clearly be a significant IRM/ light construction player over the years.
A number of implications flow from this:
- Rates in the North Sea for DSV will remain under pressure. These vessels did not work in the North Sea last year and if you accept my broad categorization of the North Sea fleet, then these vessels c. 20-25% more capacity to the market for high-end SAT work (depending on how you calculate the lay-up tonnage SS7 reactivated etc and if you include the Skandi Achiever). While the amount of IRM work will increase in 2018 it will not go up in proportion to overall potential capacity
- Boskalis will win work with these assets and they will do it initially on price and schedule (a derivative of price in the summer months to some extent)
- A refinancing of Bibby Offshore from anyone outside the current Bondholder group is DOA at current price levels. Only the mad or committed back themselves to compete indefinitely against companies with the balance sheet strength of Boskalis, SS7, and Technip in a market where rates are only marginally above cash break even and low growth is forecast
- Bibby Offshore looks suspiciously like the Harkand of old with two North Sea class DSVs and an overspecified US unit struggling for utilisation while being owned by a distressed debt investor. The upgraded Swordfish was probably a better proportionate asset than the Sapphire. The ~£70m that Bibby is holding firm on the asset values of the Sapphire and Polaris would appear to be a fantasy
- If you are building a North Sea spec DSV in Asia the vessel is worth USD 60m at best. It doesn’t matter how much it cost to build the most you could claim it is worth is what Boskalis just paid. In reality it is probably worth less as the number of companies willing and able to pay USD 60m is an ever decreasing pool and that price reflects an operator who can get North Sea rates
- It is a reminder that such complex assets take months to sell and the running costs of such assets must be subtracted from any realistic asset value calculation. Nor put the cost of running the vessels in their public documents at c. USD 500k per month per vessel. There is a very small pool of buyers and that diminishes with each round of distressed purchase
- Trying to seperate out the asset value from the infrastructure required to run a North Sea class DSV is a mistake. Without a credible contractor to run the asset in the region they will trade only at Rest of the World prices (i.e. much lower)
- The Sapphire looks almost certain never to return to the North Sea now
- The business model of purchasing DSVs for USD150-200m and then operating in the spot market for periods of a few days to a few weeks looks broken. Banks will insist on signficant forward cover to finance assets or only those players with strong balance sheets can compete. The days of small upstart offshore companies with a few good ideas and small contracts have vanished (and that is not just in the DSV space). Such a market looked reasonable when everyone was making a 60% gross margin off DSVs but the both the reduction and the volatility of the associated cash flows have changed the market forever
- The North Sea diving market for IRM is now dominated by firms for whom it is not a core activity and they will therefore price accordingly (lower). Boskalis, SS7, and Technip are all construction/renewables/dredging focused firms. They have a business model that doesn’t rely on diving being profitable in its own right which means they can sustain low margins for long periods of time. The same is simply not true for Bibby Offshore. Any new entrants into the SAT dive market will view it as an “add-on” service and will bargain a lower utilisation and day rates that were historically the norm. This will affect vessel values that will not recover to anything like 2014 levels and in reality will be lower than implied depreciated values from that period forever
- The Nor bondholders got lucky here that Boskalis decided not to muck around on a 20 year investment and pay a decent premium for convience and transaction success. There were no other bidders at anything like these levels and Nor was out of money in February. This was a binary pay-off model where without this transaction they would have been required to inject new money that would have devastated the value of the investors in these boats
- I think USD 60m isn’t a fire-sale but a reasonable price at which you could expect to earn a reasonable economic return on the asset over an economic cycle. Boskalis has to commit to a certain amount of infrastructure and fixed cost to achieve this but it can spread this over its existing overhead better than anyone else and therefore do this at a lower per unit cost than others
Boskalis have played a good hand well here.