Der Schrei der Natur …

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 Cash Flow Q1 2018.png

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.

 

 

6 thoughts on “Der Schrei der Natur …

  1. Bibby Line Group didn’t didn’t quite ‘kill’ the business. They gave some unfettered egos access to cash and permitted very long-term investments to meet a short term spike in demand. It should have been obvious to anyone with a bit of industry experience that the rash of newbuildings after Topaz would cause oversupply, and that market demand couldn’t sustain its upward trajectory. The current industry meltdown has been inevitable for many years, but greed blinds so many people with eyes of vultures.

    If the BOL Board (including you) had tempered their desire for world domination, the company would be in a much more sustainable position. They’d probably be the dominant tier 2 contractor in their home market with a huge cash pile generated from trading their limited assets in the good times – even with the 50% dividend policy. They might even have been in the more recent position of driving consolidation instead of being a victim of it. They wouldn’t have had the statement office in Westhill, but that jewel is now a heavy millstone round their neck in any case.

    Of course they’d still be facing a challenge in the current market, but they’d have a more modest debt-free, structure sufficient to enable survival.., and the parent group balance sheet wouldn’t be facing such a trashing in 2017/18.

    The architect of this folly will doubtless be starting a new role at the parent group today. I wish them both the best of luck.

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      • I wasn’t referring to the time charters. I was talking about another DSV; a fleet of ROVs; setting up shop in Singapore, the USA, and to a lesser extent Norway; generally gearing up for an unsustainable level of turnover, and having delusions about laying pipe.

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      • This isn’t the place for this. The ROVs were leased, I was against the mythical DSV 5 and pipelay as you well know, and USA. But the offices were a minor sop to compensate for the lack of real investment. Take it off line if you want more in-depth.

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  2. Why do you seem to take pleasure in seeing Bibby failing?
    You where one of the architects in the Bibby bonds that have caused bibbys failures!
    From day one you have seemed to be happy that Bibby are in trouble and that hundreds of employees of Bibby are going to lose their jobs!

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    • I don’t actually if you read what I say instead of just assuming that. But I do believe very few, potentially none, small independent contractors can survive in the new environment. The risk/reward ratio has totally changed. I feel very sorry for everyone affected by this but it doesn’t change an economic reality.
      I had nothing to do with that bond issue. I was involved in 2011 in looking at doing something similar but it didn’t happen.

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