It is very likely that the North Sea starts next summer without Ocean Installer, M2 Subsea, and Bibby Offshore. In fact I am going for probable rather than possible. Private equity owners are looking at having to inject real cash resources into these businesses and they are not happy given the prospects of getting it back.
Another minor sign: more changing of the guard in the tier two contractors with Bibby Offshore now parting company with their CEO today. This looks stage managed coming almost 6 months to day after York Capital took control (6 months is a standard BOHL executive notice period). Although there are clearly some specific circumstances in play here the driving force at Bibby Offshore is the same as at the other tier two contractors: the cash crunch (see here). As business plans are developed for next year, and the poor summer season continues, Boards are facing up to the fact they will need new funding for next year.
Just as the Board of Ocean Installer demanded a plan that saw HitecVision sever the cash umbilical this year, so Bibby Offshore had to go through the farce of a “recapitalisation” late last year (which was more Rabelais than reason). It was frankly an embarrasment (and here) although it has led to a severe dispute between York (who fell for it) and its authors EY.
Now in 2018 York are having to do it again with Bibby who have no path to cash flow profitability. Bibby Offshore is very vulnerable: In financial terms they are likely to consume £10-15m in cash this calender year, then start next year needing to put Polaris through a 4th special survey (£2-3m?) and Sapphire through an intermediate (£1m?). At current run rate they may need £10m more in cash before next April. It’s grim.
I don’t believe a sale of the business is realistic now it has this trading history behind it (see here). A potential buyer is now gets a business locked in a battle with Boskalis at the low-end and TechnipFMC and Subsea 7 at the top-end. Without a sustained improvement in market conditions, which now will not come at the earliest until summer 2019, the shareholders face another hefty cash call. And all to fund more of the same: a subscale business battling giants and losing cash with an increasingly aging asset base. It’s a hard pitchbook for investment bankers to write. There is no upside here in terms of expansion potential or margin expansion. And it’s very risky. Why not leave your money in the bank?
It’s sad for me to see but the honest truth is it was Bibby Line Group that killed the business: a 50% dividend policy in a capital intensive business like offshore simply cannot work long-term. The GBP 175m bond, the only real money Bibby Offshore ever had, was used to pay off SCB (USD 110m) and then a dividend recap to group of ~£35m. There were never funds to grow the business when the market boomed and no equity as a cushion when the market tanked. We are in the final stages of a tragic denouement now.
York are in a terrible position now with no realistic course of recovering their investment and no logical argument to keep putting money in. A dispute with EY over the “missing £50m” is apparently causing some tension between the two firms. The story as I have heard it (from a person directly involved in the deal) was that EY had their numbers wrong and had miscalculated the financial runway Bibby had. York realised too late and “had” to follow through not seeing how bad the current downside could be. On current performance the bondholders would be better off with the EY liquidation assumptions than current exit strategies would imply.
Quite how a self-professed set of financial geniuses and a Big 4 missed the obvious fact that a firm losing £1m in cash a week would run out of money quickly is being kept quiet for obvious reasons (see here June 2017). York blame EY but really it was obvious to any outside observer with a basic knowledge of offshore economics that this would happen and it’s just embarrassing for both parties.
The new management have strong experience with Songa and are in all likelihood extremely capable and talented individuals. They are unfortunately not alchemists and the fact is that the North Sea DSV and small projects market has not had a rebound of the scale needed to help firms of this size and it suffers from chronic overcapacity. Until the CapEx market comes back, and we know from field development plans it cannot in the short-term for the UKCS, then this situation will not change. It is a commitment battle and the firm with the highest cost of capital and smallest balance sheet will lose.
Throughout the supply chain this continues: Olympic Subsea came out with numbers last week and it shows again that this continues to be a broad, deep, structural market contraction. Have a look at the cash flow because at the moment nothing else matters:
Olympic spent more on financial repayments in Q1 2018 than they received net from operating the vessels. And despite talk of a market improvement they have 3 CSVs for fairly close delivery available by the end of August. Olympic look like the will make it to their 2020 runway with the cash they have on hand, but then what? This summer isn’t going to save them only slow the cash burn.
For those without the cash the decisions are starting to get ominiously close.The North Sea summer next year is likely to have a very different economic ecosystem from the one currently exists.