If you thought North Sea DSV rates were cheap last year…

Next week Bibby Offshore is shutting down the US business Bibby Subsea Inc. completely. It’s the right move as the business is subscale, lacks a competitive position or asset, has a very high cost base, and has no booked work at all for next year. However, it does mean the new owners, only three weeks in, have given up on the £130m revenue target for 2018 management had been promoting to potential investors in November. The gulf between the new owners and management would appear to be huge and it is a total repudiation of the past management strategy and actions. The new strategy is clear: create a small UK DSV business and sell as quickly as possible to minimise losses.

The new owners of the business, clearly outlined in the Scheme of Arrangement document here, now own a 2 x North Sea DSV business, one chartered and one operational, and the Bibby Sapphire in lay-up. Norway, Singapore and the US have gone, dreams of building an international contractor have collided with the cash cost and risk of building one. This is going to be a much easier business to get into than get out of and the consequence of this will be a very competitive North Sea DSV market for 2018 as the new owners are forced to try and build up the order book at any cost in order to get out of the business before next winter.

The closure of the US means the new owners have to sell and make profitable a 2 x DSV  North Sea business. There is an entire layer of corporate management now that is surplus and it doesn’t take a genius to see what will happen here. In all likelihood a strong Executive Chairman will be brought in above the current UK management to help sell the business. M&A advisers will be brought in, and as soon as the order book has some substance, and some costs reduced, look to get the investors out of this position before the company consumes too much of the £40m cash that has been pumped in.

This will not be an easy business to run or sell. The new owners only have a year to use the Bibby name, and won’t want to spend money on an expensive rebranding exercise, so use the branding as an external sign of how confident they are of selling the business.

The question is how long the £40m can last?  This isn’t a project management business it’s a hotels like business, only one thing matters for a small boat owner: days utilised * day rate. I suspect the new owners have now done some downside calculations based on air dive work and a forecast cost base and are horrified at how much cash they could burn through by June, hence they taking no risk at all on sticking with the US business. The UK business needs the vessels in SAT, at fairly high utilisation levels, or it simply isn’t an economic entity. It is very hard to see any more money going in now the strategy is clear and the only thing being sold is a small UK focused contractor, so it has to last until a sale.

The asset base is the weakest now of any North Sea contractor. The Bibby Sapphire (a vessel I feel a strange emotional attachment to as the first ship I ever transacted) is likely never to return to the North Sea I believe, but even  lay up costs are likely to be $1200-1500 per day + 500k to get it there (e.g. a lot will need to be spent on the dive system procedures to make sure reactivation is possible, humidifiers). The problem is that outside of the North Sea DSV rates are low, driven by oversupply (unless your ship is painted red), and there is a binary price difference between a North Sea DSV and one that isn’t (although the Boskalis transactions blurred that boundary). Brokers I have spoken to think USD 10m is reasonable and even that could take time to achieve. No one needs the boat for the same reason Bibby couldn’t get her utilised: there is no work unless it is bid very cheaply. There might be an interesting discussion between the auditors and investors on vessel values in the last accounts coming up.

The 1999 built Bibby Polaris is a generation behind the other DSVs in the market. The vessel is popular with customers but the awkward forward bell arrangement means no one would go out of their way to buy it, but it is working and a core UK asset. The Topaz is on charter with minimum committed spend and a charter that de-risks cash spend but lowers margin as the vessel works in SAT mode.

The Olympic vessels are a smokescreen: they are total commodity vessels in the current market. Every single small ROV contractor out there has access to similar tonnage and on pay-as-you-go charters the margin is minimal. No one is giving Bibby a real construction contract until their financial position is sorted, and they if don’t have one for 2018 now (which they don’t) then it isn’t real anyway. James Fisher recently used one of the Olympic vessels and even put their own ROV crew on. Access to the Olympic vessels might move the revenue needle a little but in reality they add nothing to the economic cost base. The only question is if the current Olympic charter is continued for whether the creation of the new TopCo allows for its legal termination? The cost of this charter is material as it is significantly above market rates.

The only thing in the M&A bankers arsenal is the cost synergies a new owner could get from taking over this 2 x DSV operation and further reducing the costs. Pretty quickly, if the US office example is anything to go by, the unescessary costs will go from the business and a small 80-90 person business will emerge. But it will be hard for any buyer to reduce that dramatically in cost terms because you still need three project crews per DSV and a certain number of commercial personnel. But it is the only financial incentive to buy beyond the contracted revenue, which is all short-term.

The need for synergies means that only an industrial buyer makes sense here. Bokalis may want the service agreements but it has two better boats now so won’t want the assets. DOF Subsea? No cash to buy and won’t want the DSVs, but it may make sense to take the infrastructure and get the Achiever working (although what they really want is for the market to pick up and Technip to take her back) and get the Vard newbuild. DeepOcean? Triton as the controlling shareholder will not be bailing this deal out and won’t want Polaris or Sapphire. McDemott? Just done a large deal and don’t need a loss making DSV operation to win work. Ocean Installer? The sellers will be getting shares only in another subscale business. It is a depressingly small list for a sell side adviser.

If you were going to recreate the business from scratch really you’d just take the Vard DSV and the Topaz and not bother with Polaris. But for the current owners that isn’t an option… but for anyone else as a buyer it is? Splitting the operational and asset base makes perfect sense for any buyer here but almost none for the seller as if the Polaris leaves the North Sea she too will see her limited value drop by a quantum.

Another problem the Bibby owners face is that to get out quickly all the cost savings and new operational model will not have any operating history. When you sell completely on pro-forma accounts you take a big discount though, and worse a discount combined with paper/shares not cash normally, because it’s all just a promise. However, stick with this until next summer and the business will in all likelihood need another cash injection and a special survey for Polaris beckons. The bankers will earn their money on this.

So the new owners have to sell SAT days: now. They need an order book.  Working as an air dive contractor at 90k a day won’t even cover the new reduced cost base. A sale requires market share in SAT, and the only way to guarantee that is to drop the rates and build backlog. A sale by June, when hopefully the burn rate has slowed, and there is some SAT order book, is now the imperative.

Unfortunately there is the competition: three multi-billion market capitalisation companies with open DSV schedules. Boskalis has just taken delivery of two North Sea class DSVs and needs to get them working. Technip and Subsea 7 also realise now there is a chance to finish off a fourth player in the market and can flood the market with cheap capacity. The new shareholders cannot cross subsidise from other business lines and have a much higher cost of capital. It is a very weak strategic position to be in for a company with such a high fixed cost base, something the competition is only too aware of.

Therefore every single one of these companies will be calling on the Aberdeen market with once-in-a-lifetime pricing on DSVs next year. If you thought rates were low at the start of 2017, at £90k for a fully kitted out DSV with a 15 man team, you can expect them to be there again now for periods and won’t rise above last year’s peak of £130k

Demand won’t save anyone for 2018. The planned increases in spend are marginal and relatively fixed now and there is very little DSV construction work. Platform shutdown plans and schedules have been made. Engineering capacity for the 2018 summer has been locked in E&P company budgets with only small increases possible. Only unplanned outages, or rates so low work is brought forward, offer room for increases in planned work now. And the reason Bibby and others don’t have much work now is the E&P companies believe they will have ample options in the new year… and they are right. 2018 promises to be another grim year to be a DSV owner in the North Sea.

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