So one, and maybe two (vessel specs), of the UDS vessels is clearly going to Tiger Subsea Services, a start-up based in Louisiana that appears to be made up of ex-Oceaneering staff. I wish the guys luck, starting a business is hard, and bringing a North Sea class DSV to the US hasn’t worked for Bibby (Sapphire), DOF Subsea (Achiever), and Oceaneering (Nor Da Vinci). Having said that of course those companies were seeking to make a return on the capital cost and maintenance of running such a vessel, and there is simply no way that this “charter” is done on a similar economic basis. And if someone offers you a brand new $150m vessel for a one way option I guess you take it? TSS will have taken these vessels on based on some sort of risk/utilisation based charter as they simply don’t have the capital to take on a traditional BIMCO Supplytime Agreement, and in this market no one needs to anyway.
The DSVs above that have moved to the Gulf for other contractors have really only worked subsatantially as SAT DSVs in the tidal regions of Trinidad, and only really for BHP and BP, because no one in the Gulf of Mexico needs such a sophisticated vessel and is therefore prepared to pay for it. SAT diving in the Gulf is arguable the most price sensitive market in the world and handled by a lot of 4 point mooring vessels of questionable quality run by Mom and Pop contractors (with a couple of mid-sized players). There is no evidence that any of the major E&P companies want such sophisticated vessels and plenty of evidence that they will not pay for one.
UDS and TSS are essentially taking a huge gamble, one that has been tried many times before and failed without exception, that if you put an asset in the market at well above the quality of local tonnage you will get work. The problem is in the Gulf of Mexico no one wants the Malmaison they just want to stay at the Travelodge, and pay accordingly. Building a Malmaison and only being able to sell at Travelodge rates is rarely a winning strategy. Maybe the strategy is to take the vessels to the US and sit it out and wait for a market recovery in other regions which could maximise the later value of the vessels, but I have my doubts.
The Chinese yards behind this, and there is no evidence of any take-out financing from the yards at all, are merely doing what the German yards and banks did in traditional freight shipping that caused over €100bn in losses: namely getting work for yards without caring about counterparty risk. Eventually, and it can take a very long time given delivery cycles and how these yards are funded, someone will put a stop to this, but it clearly has some way to go. But eventually, as the Germans found, reality catches up with you, and at least the yards had farmed the risk out to the banks (and therefore ultimately the taxpayer)
From an economic perspective this is all bad for industry profitability and residual asset values. Don’t get me wrong, again I admire the sheer audacity of UDS, the scale of their ambitions, and their ability to deliver vessels without actually paying for them in a traditional sense. Maybe they have soft deal with the Chinese where in exchange for teaching them how to build a DSV they don’t expect any money? I don’t know, it seems a long-shot, and the Lictenstein was clearly an opportune deal. But it is just not possible to believe that in this market, with established payers fighting for anything that moves, that UDS and TSS have discovered a well of work, above market rates, that no one else has managed to find, that would pay for these vessels in any objective economic sense. To be clear these vessels need to work at c. 270 days per annum at ~$120-130k per day in order for that to be the case. A lot of work in the Gulf goes out at ~$40-60k at the moment.
After a laborious process the investors in the Nor DSVs gave up in December 2017 and sold their (similar) vessels to a well capitalised industrial player en bloc for $60m for one vessel, and USD 4500 per day for the second, roughly averaging out at $45m per vessel. These vessels offer little more operationally (and indeed I would argue a DSV is at its most valuable ~5 years old after its first major dry dock), so Boskalis set up a similar business for c.1/3 of the cost with considerably less risk because of their backlog. Sooner or later that sort of finanical advantage will be important.
No one, even UDS, on any reasonable assumptions, or even speculation, should be building another North Sea class DSV and all these vessels are doing, by adding supply to a market trading at below cash break even in many cases, is destroying what residual equity DSV owners have in their vessels (unless you brought at the right time like Boskalis). You can lose money for a long time building market share, look at Netflix, but normally you need a large cache of diversified shareholders making a bet on a market that will grow exponentially, not something you can make the argument for here. You can make a countercyclical bet, like John Paulson, but he did it with an asset that was highly leveraged with essentially no holding cost.
The delivery of these assets will arguably delay any sort of fleet upgrade that may have been going to happen. No one wants to build a $150m vessel when one for a near substitute in operational capability could appear on the market at a fire sale price. Having said that I don’t believe another North Sea class DSV beyond a Kestrel replica will be built for a very long time and only the Vard 801 needs a home (at Technip).
Everyone finds this fascinating because everyone involved in DSVs knows how hard it is to win work at the moment, and that it is even harder to do so at a cash flow positive margin. Although the amount of work is picking up a little oversupply remains chronic and new deliveries (e.g. Kruez Challenger and the Said Aletheia) continue to arrive.
Prior to 2014 everyone used to say that SAT diving had very high barriers to entry, and therefore would be profitable, and that was a reasonable assumption. But it is simply not the case now as there are a vast number of high-end SAT vessels that could cover any realistic short-term upswing in the market, and while setting up diving systems might be time consuming, a large number of people are doing it. That is going to mean structurally lower profits for SAT diving companies for a very long time and in all likelihood even poorer returns from owning DSVs as assets and shipowners/yards help dive contractors win work. This is a complete reversal of market dynamics and fortunes that drove the market post 2003.
I wish everyone luck, but the only realistic outcome is that this will ensure low profitability, and likely losses, for the industry as a whole, the longer this continues.