Ocean Installer and SolstadFarstad… endless financial winter..

Ocean Installer held a “must attend” townhall this morning. The CEO moves out to a BD role and the CFO is out altogether. In comes an increasingly realistic HitecVision who now must know that the current losses are unsustainable and there are very few suitors in sight who can bail them of this investment.

OI’s problem is that the summer hasn’t come in terms the quantum of work or the rates at which projects are being contracted. Last year shareholders (and creditors) across the subsea contracting industry wanted a business plan which showed them breaking even at worst in 2018 and then a significant recovery in 2019. So in  2017 those business plans were dutifully delivered to the various stakeholders by management. The problem of course is they had no basis in reality and now as the summer has come, schedules are firm, contracts have been signed, and there is now no place to hide from the reality that this is going to be another terrible financial year for many companies. No other plan would have been acceptable to put before the Board, but now it hasn’t been achieved, and there is no realistic chance of doing so, something has to be done.

This scenario is happening now repeatedly across the industry and the bet the industry would recover this year has proven to be wrong. For those with exposure to boats, or business models based on vessel operations, this is a miserable summer.

And who actually can see a catalyst for change that will make 2019 any different? The oil price is higher than most could have hoped for 6 months ago and while it is leading to more work it just isn’t on the scale required to allow a PE house to recover what has been a considerable investment in OI. It is all well and good saying the North Sea semi-sub market is going crackers but that means it is years away before this will flow through to the subsea construction market. The tier one contractors will be there for that work, whether OI will be is another story altogether.

I don’t think there was a problem with the management of OI but rather with the business model. When founded OI took time risk on scarce vessel assets and made a margin on this risk. It was a sensible and sound idea given the market fundamentals at the time. But the cash costs were huge as it took  on engineers at the peak of the market to bid work and try and get market share. Brazil, Perth, and Houston were all significant loss making offices with a lot of engineers at costs of up to USD 1000 per day… Like Ceona the ramp up costs and timeframe to realistically build a sizeable contractor were I think dramatically underestimated (along with not having a rigid reel strategy).

Now why does OI exist? Would you start it tomorrow if you could? If you can’t answer those questions easily in this market, and you don’t have a lot of cash, then the answer is unfortunately you won’t exist eventually. Just taking someone elses vessels and making a tiny markup on them is an okay business model, except for the fact it’s risky and low margin with no hope of scaling up without more investment if a market recovery happens. One wrong bid with a fixed price contract and you are paying for a vessel to finish the job at a rate that quickly wipes out any potential profit from the original job.

All “boatless” contractors, and the majority of ROV operators taking contract risk, have a strategy that is the equivalent of trying to pick up pennies from in front of a steamroller: the risk reward is totally disproportionate now.

The maximum price anyone would be prepared to pay for OI should really be capped at what is would cost to replicate the company. The major assets are its relationship with Statoil and …. Anyway it has a good relationship with Statoil. All the other aspects of the business: access to vessels, an engineering pool that cannot cover it’s fully loaded costs, its international network with no economies of scale etc can all be replicated for minimal costs. This is an easier business to get into than get out of.

Solstad Farstad also announced a small extension to their situation today and they have the same problem as OI: the business plan simply isn’t real. I have no wish to repeat ad infinitum my constant critique of Solstad Farstad. The extension to the Deep Sea Supply fiascof***up unfortunate situation will now not be revealed until June 30. This is a very bad sign. There is clearly no agreement and probably no plan with apart from hope… which has worked badly so far.

The same problem infects it as with OI: the lack of credibility of a demand side recovery on which the entire Solstad Farstad plan was based on. I repeat: a major restructuring is needed if the company is to survive and 4 week extensions on one portion of the business in no way reflect the operational or financial reality of the company. Having taken on the operational responsibility of the Deep Sea Supply  fleet there is no credible way for the banks to do anything other than firesale the assets now or hand their lay-up over to another ship manager. Such a scenario would require a dramatic revision of the actual cost savings the merger had achieved, but a scenario where Solstad Farstad continue to spend time and money on the Deep Sea Supply fleet is also unsustainable and untenable under the current financial structure.

I would be amazed if a final solution is rolled out in four weeks. Expect major delays here as the banks face up to the scale of the losses. The new Solstad balance sheet is likely to look dramatically different to the 2017 final version published recently, and whether OI is a customer when they come to publish it is also a debatable question. Expect more of the same as a summer of weak demand in the North Sea rolls on unabated.

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