MPV Everest and DSV business models….

So it appears the Russians have paid equity and have fully taken delivery of the MPV Everest. Well done Keppel on getting paid the full contract value for such specialised tonnage in this market. I was wrong to cast aspersions on the soundness of the contract. And well done MCS for following through and taking full asset risk on this. I am not sure anyone esle can claim such a credit across most offshore asset classes?

The vessel looks close to signing some short-term work in Asia and will have the dive system commissioned as part of this. But…

The problem is the day rate… particularly as this is a vessel that looks set to operate at not that much more than cash breakeven on the first job and it has an empty schedule beyond that. The fact is the entirely speculative strategy of building high-quality DSV assets and thinking they would get a premium day rate, while displacing older tonnage, is having an extremely expensive initial experiment and proving its instigators both wrong and right…

Right in the fact there is a premium, but wrong in total economic terms because it is nowhere near enough for people to cover their cost of capital or hope to recover the builkd cost. The Everest was always a rescue job, having been built for a terminated contract, but others are not. UDS is rumoured to be getting USD 50k a day from McDermott for the Qatar job, but sitting in Singapore waiting for someone else’s boat to break is a high-risk strategy and unlikely to be profitable in the long run. The Everest looks like commanding a 10-15% premium to competitor vessels in the spot market but would need a ~400% premium to have any hope of recovering the build cost. This reflects the overspecification of the vessel, the fact it cannot command ice/polar rates, and the oversupply in the DSV market.

My only point on this has been that when a wall of oversupply meets a very weak market then economic returns will be substantially below economic costs. Continuing to deliver high quality tonnage to undercapitalised operators and chartering parties will just prolong any downturn for the existing fleet owners. But if initial indications are anything to go by MCS are in this for the long run, they have been burning c.10-15k per day Opex with Fox since delivery and purchased some second hand ROVs (from M2 I understand); and having put USD 200m into the vessel are unlikely to walk away quickly. Unfortunately the most logical, and likely, reaction from competing owners is simply to drop prices even more.

MPV Everest for sale…

If you had been paid the contracted SGD 265m for the MPV Everest I am not sure it would appear on LinkedIn as in the recent photo above? I love this statement:

MPV Everest can carry out subsea repair and construction activities at 3000 metres of water depth, well intervention, diving support services with an 18-men twin-bell system, fire-fighting and emergency rescue operations, as well as towing and the provision of supplies in Arctic terrain.

Having a DSV that can operate at 3000m is like having an aeroplane that can also fly to the moon, interesting but dramatically over-specified, given that divers are limited to 300m (and more commonly 200m now)? Yes, I get the crane and ROVs can be used at that depth… but why hire a DSV then? And quite why you would need an 18 man SAT system for the provision of supplies to the Arctic is beyond me?

Incidentially, if I had paid SGD 265m for a vessel I also would want it to be slightly better looking? Personal taste I guess…

But then again I am pretty sure no one has paid more than the progress payments for this vessel yet… If they get half the contract value I will be impressed (see here).

These types of assets that were ordered in the boom to do everything seem the most exposed in value terms while the market remains chronically oversupplied. If Keppel cannot get rid of this, and there are a very limited number of buyers, before the UDS vessels start arriving next year then all that beckons is a race to the bottom in day rates as supply  continues to outpace even a modest recovery in demand.

Looks a lot like this:

White Elephant

I still remain surprised at the lack of public comment on this from Keppel. The relevant SGX continuous disclosure requirements would appear clear:

SGX Cont Disc.png

Not getting paid for a SGD 265m asset, that is in all reality worth significantly less, would appear to “materially affect the price or value”? Nine figure write-offs, even for a company the size of Keppel, tend to have that effect?

Who knows? Maybe PWC as auditors for Vard and Keppel could ask them to park the DSVs at the same location? That way they could save money as once a year an audit junior could go out, inspect the DSVs, confirm they were there and in good condition, hadn’t worked for a another year, but were still worth nearly exactly what someone had agreed to pay for them before they went bankrupt, and despite day rates for comparable vessel dropping somewhere between 40-60%?

Given it is now April this vessel will have no regular work, of any of substance, in  the 2018 calender year as the schedules are now effectively secured. Combined with the fact that this is by an order of magnitude the most expensive DSV in Asia (in cost terms) things are not looking good for Keppel here. The strategy of building the most expensive DSV in the world and seeing if it will force companies to upgrade their tonnage is getting a  pure natural experiment here before more similar vessels arrive. Serious buyers can be very patient here… the sellers? Maybe not so much.

Random DSV write-off Friday …

The map above, in the yellow circle, shows the MPV Everest parked right outside Keppel in Singapore (this morning)… which is an odd place to park a SGD 265m vessel you have “delivered”. I mean you have literally delivered it, but normally in shipping terms it means to someone who has paid for it. Sooner or later Keppel is going to have to front up and admit they haven’t been paid for this. I am surprised that as a listed company they haven’t had to already, but they will also need to come up with a realistic impairment value here which will be interesting?

Because according to AIS the two UDS DSVs (Lichtenstein and Picasso) are also in lay-up effectively in Singapore. With three more being built having 0% utilisation on the first two in the fleet must be a minor concern?

Jumeirah Offshore ST.jpg

And now into the mix comes the Jumeirah Offshore DSV being built at Huangpu… At least the yard here is being honest and admitting that the buyers have defaulted. But in the next breath you are told they will only sell at 100% of book value… And the vessel is c. 80% complete apparently: just enough to have purchased all the expensive long lead items but not enough to recover their value. This is a nice vessel on paper, 24 man Drass system, ST design, 250t crane, and a fairly generous power capacity etc.

In fact it is possibly as nice as the Vard DSV, speaking of unsold DSVs (although without the build quality one suspects), that will also only be sold at book value. So when looking at the size of the financial write down that these yards will have to take why not look there given Vard have just published their accounts? It is not completely clear how much value Vard are acribing to the vessel as they hold it in inventory with another vessel, but amazingly the write-off for all their vessels is only NOK 54m, or around $7m!

Given the discounts going around in offshore at the moment for completed offshore vessels, and the price Boskalis recently paid for the Nor vessels, to pretend that the Vard 801 only lost a maximum of $7m on it’s build cost (Vard use realisable value) is really unbelievable. Preposterous in fact. Surely a discount of 50% to cost would be needed to actually sell the vessel in this market? The scale of the loss here is massive for Vard, not quite a solvency event but not that far off and hence their desperation to hold an unrealistic value, but this is really a case where it is hard to see how the auditor has been objective here? There is enough market intelligence to suggest that a North Sea Class DSV that cost c. $150m to build would need to be marked down more than 5% to sell in this market? Good news for Keppel because they are audited by PWC as well I guess?

The fact is there are a host of very high-end DSVs mounting up in yards now with no realistic buyers and yet somehow we are meant to believe these vessels are worth close to what they cost to build? This despite the fact that UDS has made a business out of offering to commercially market very similar vessels and apart from a small job in Iran, and short-lived contract with a company without an office or phone, has managed to get close to zero utilisation. I am going to share with you an extremely insightful piece of economic thinking: if a boat isn’t being paid to work then it it isn’t worth a lot of money (generally speaking).

And still they come… three more from UDS alone… will they really be finished or cancelled like the Toisa vessel in China?

Quite where all these vessels end up is a great unkown. Only a maximum of 2 could ever end up in the North Sea given current demand levels and replacement requirements, and more likely one, and just as likely Technip and Subsea 7 just decide to replicate their last DSV new builds with export financing and attractive delivery terms… in which case none are worth the North Sea premium.

That means these vessels are likely to end up in the Middle East and Asia where day rates have never supported North Sea class DSVs for a host of very good economic and environmental reasons. So either there are a whole pile of USD 150m DSVs sitting around idle, with no buyers, that are all worth nearly exactly what they cost indefinitely, or someone is going to start losing some real money soon, even if the auditors allow them to pretend they won’t for a while longer.

Changing of the North Sea guard in Leith…

Pictured this week are two stalwarts of the North Sea subsea market in Leith on their way to be scrapped.

The Seven Navica above has arguably gone earlier than envisaged when she was upgraded in 2014, but her replacement is a global asset for longer tiebacks and pipe-in-pipe projects and it reflects how much offshore development types have changed in a few short years. Not that long ago there were only two options for rigid-reel pipelay in the North Sea (excluding the s-lay Falcon) and that guaranteed Technip and Subsea 7 a substantial business where on they could integrate DSVs and rigid reel, which was the development methodology of choice. Now there are at least five options I can think of, flexibles technology has improved, and UKCS CapEx has shrunk so much the market doesn’t need dedicated assets but rather more flexible global ones.

Whereas this old girl below, caught on the same day, has more than paid for herself over the years and marks the end of what has been a very profitable investment for her owners. Rockwater shows you need to do a lot more than paint a DSV red to make money from it.

Rocky Scrap.JPG

End of an era… goodbye to Orelia…

The end of an era as the DSV Orelia is scrapped (above). I would wager she has been one of the most profitable offshore assets in an economic sense over her life. With a build cost much lower in real terms than new build tonnage, and in a market with a much lower number of competitors, this asset would have paid for her keep many times over.

As she goes it is worthwhile considering that the huge margins Orelia generated were a signal for other players to try and replicate this formula and build competitive assets and businesses. Such is the long run nature of the supply curve these new assets continue to arrive long after the margins have vanished, and despite some new-builds costing vastly more in a nominal and real sense, it is not clear, beyond being more fuel efficient, that they are superior economic assets. It is notable that Technip has sold off a large potion of her diving businesses and assets and is only really present in the North Sea now, which is a clear signal how profitable they think the SAT business will be in the coming years. The unwillingness of Technip to commit to specialised replacement tonnage for the North Sea market I also thinks signals their view, and mine, that there has been a structural change in the North Sea SAT diving market and anyone going long on it should have a very robust business case, because without a rebound in construction work, the market looks oversupplied for years. Soon the well Wellservicer will join her and a new generation of assets moves to the fore.

The latest rumour I heard regarding replacement tonnage was that the Vard new build had been sold to Middle Eastern interests (specifically Bahrain) who were going to charter the vessel back to Technip. Given that this is the third version of this story I have heard (although from two sources now) I treat it with a degree of scepticism (linked to JMT!): surely with TechnipFMC’s balance sheet the best option would be just to make Vard a take-it or leave-it cash offer? Vard have always insisted on a clean sale, maybe time and reality have intruded on this wish.

Bibby Offshore restructuring: Latham and Watkins, York Capital, and DeepOcean/Triton…

Latham and Watkins, legal advisers to Bibby Offshore Holdings Limited in their restructuring, recently published a ‘thought leadership’ article on the transaction. It is a short read, and as an exercise in varying perceptions, well worthwhile if you followed the relatively shambolic proceeds that allowed the company to reach it’s current state.

I liked this line:

In early 2017, Bibby Offshore’s directors determined that the company’s capital structure had to be right-sized and that additional liquidity was required to meet the challenging market conditions facing the business.

This is a business that lost £1m a week in 2016 of actual cash. How early in 2017 did the directors determine the need for a change in the capital structure? As I noted in June 2017 paying the interest payment was irresponsible when the business needed new funding within the next few months. The fact is this transaction only started seriously in August, as testified by York claiming £200k per month for their efforts from that point (and public announcements by Bibby at that time), but by which time the business was insolvent in an accounting sense, only a going concern because they were in discussions about a transaction, and the restruucturing plan itself presented when the business was literally days away from administration as they were down to ~£2m cash.

The fact that Moodys downgraded Bibby Offshore Holdings Ltd in Nov 2016 could also have been a hint?

In fact in March 2017 the Chairman of BOHL (who later lost his job in part because of this fiasco) made this statement :

Mike Brown 23 March 2017

I guess it wasn’t that early in 2017 the Directors came to that realisation then? Like, “well positioned” apart from the fact they were running out of money? Or did they just decide to print something blatantly untrue in their statutory accounts?

Maybe this line from the CEO (25 March 2017):

CEO Bibby 25 March

This disclaimer “apart from losing £1m per week at operating cash flow level and we will therefore need to right-size the capital structure” should really have been added to make the Latham and Watkins story credible. Or maybe this one:

Bibby CEO March 2017

In case orders should increase rapidly?!!! Turnover in 2017 dropped 50% over the previous year and they obviously had to drawdown on the revolver! Surely this was obvious by the end of March (which most people calculate as nearly 25% of the way through the year)? The Bibby directors don’t sound like a group of proactively looking at a restructuring “early” in the year here. Reference to the Bibby shareholders putting money in is comedically short given the known financial position of the Group and how far underwater the equity was.

You literally cannot make this up (unless you are a lawyer I guess?).

Look, I get this is essentially a small marketing piece for Latham and Watkins (the vessel on pictured on their website isn’t even an offshore vessel, yet alone a Bibby Offshore one), and they are being diplomatic. But the truth is the Bibby restructuring was a highly uncontrolled event by a management team out of their depth and a shareholder unwilling to accept the reality of his financial situation. All the documents (since taken down) relating to the transaction were clearly drafted late in the process and reflected the power, and weakness, of York at that stage who was committed to a deal. The restructuring agreement contained wide ranging clauses designed in lieu of actual execution documents that would be drafted when more time was available. This is not a criticism of Latham and Watkins, to get a deal over the line at that stage, when it appears that Barclays had refused to extend the revolving credit facility and the much vaunted “supportive shareholder” was unwilling to put anything in, was creating a situation that would have led to an immediate administration, it is therefore a considerable achievement. But it was that close.

The reason I am going on about the past is that it is impossible to understand the dire current position of Bibby Offshore without understanding the context. I guess if you buy companies with zero due diligence you have to expect the occassional dud, and it is clear this is a bomb that has blown up in the investors face.

The crucial point is this say Latham and Watkins:

As echoed by Bloomberg’s comment on the transaction: “(….) this is about as fair of a deal for all creditors as I have seen. Parties may differ on what the future holds, but the terms of the restructuring are clear and equitable. This is a text-book restructuring (…)”.

The reason for this is clear: York and their co-investors dramatically overpaid. The rest of the creditors were happy because they couldn’t believe the terms that someone was putting money in at! The old saying that “if you don’t know who is getting screwed on a deal it’s you” is apt here. The only question now is how much money the Bibby investors lose and how quickly?

One of the great mysteries of this deal is why York, charging £200k per month for their competence and skill, allowed the business not to go through an administration process (which they would have controlled as the largest creditor), and emerge via a pre-pack debt free. The business had virtually no backlog, and as has happened in the Norwegian restructurings, trade creditors can be protected. By not doing this the business has been saddled with many of the historic obligations that now call into question the viability of the business. In particular the office space in Aberdeen and the US (both entered into at the peak of the market), residual liabilities to Olympic (the Ares redelivery costs are owing and the Olympic Bibby charter), and ROV leases and hangers, redundancy costs, Trinidad tax etc, all these costs must be paid for from current market revenues and rates which are significantly below levels when the contracts were entered into, by a business that is dramatically smaller in scale.

A quick look at the uses of the £50m rights issue shows Bibby Offshore to have solved its immediate financial problems but it has not solved the issues with its economic model. Without a substantial change in market conditions the business will require a further capital injection, potentially as early as later this year. This is a rough guide to how much cash Bibby Offshore currently has available:

Bibby 50m.png

I have made aload of assumptions here, I have, for example, no idea what the Latham and Watkins fee or EY fee is, but have made an esitmation based on London Big 4 rates. If anything I could have underplayed these, but the overall number will be correct within a few million, especially as trading losses are likely to have been higher. I haven’t included rebranding costs as York are hoping to flip this prior to dropping a 6 figure number on these. The point is this though: it is not exactly an impregnable balance sheet and unless market rates for DSVs rise substantially, and there is no indication they are doing so, it will not be enough to get to this time next year as a credible going concern. Bibby/ York realistically require victory in the (highly speculative) EMAS case for the business to have a viable financing strategy that can absorb trading losses for longer than the ~£20m they realistically have available.

I believe York confused a liquidity crisis for a solvency crisis and therefore acted as if all the business needed was a short-term cash facility. York appear desperate now to offload the business quickly to Triton/ DeepOcean. There are few other logical buyers and yet there are huge challenges if Triton/DeepOcean take on this risk. DeepOcean appear to be keeping the diving personnel on to give them some options in this area.

One challenge is contractual risk: Bibby Offshore recently won a large decomissioning job for Fairfield. I haven’t seen the exact specs, but it is probably ~30 days DSV work and ~120 days ROV work. Which is good… but … to win they have taken all weather risk, which is just gambling. They may have needed to in order to win the work, but that is taking an active decision to take risk that you cannot mitigate. It may all work out well and they could make a profit, but a bad summer and the boats will be bobbing around unpaid while they finish the work, and all to Bibby’s account. For a small loss-making, undercapitalised, contractor that is a disaster scenario. Anyone buying the company would be mad to take on this, literally, incalculable risk. Why not just wait and see what happens?

The problem for the seller is the longer the cash burn continues the weaker their position becomes and the harder raising, or justifying raising, capital will be. Bibby’s competitive position is significantly weaker than a year ago with Boskalis buying the Nor vessels. Bibby faces three very well capitalised companies who are clearly committed to the market. Any further fundraising for the company would recognise this, and the fact is that the Bibby fleet is older than comparative fleets.

There are very few investors who will continually inject new money into a micro-scale, loss making, niche business, competing against three global players with strong balance sheets, in an industry that requires vast quantities of CapEx , has over capacity issues on the supply side, with weak demand growth forecast, and a realistic chance of dropping from the #3 player to number #4. And that is exactly the scenario facing Triton/DeepOcean as well (they can capture some cost savings but how much do you pay for those when the order book is less than a year and your newest competitor has €1bn cash?).

The whole economic and market environment has changed. DSV rates look to be settling at £100-130k for the Boskalis/Bibby fleets (slightly higher for the Technip/SS7 new builds) and at that level I don’t think the business model, especially with historic obligations, works. Is there really room for four DSV companies in the North Sea market? in 2014 the Harkand boats worked in Africa to get utilisation. If not, do Bibby, currently operating at a trading loss, have a real plan to battle it out against 3 publicly listed giants, with no other plan than a market turnaround in day rates? Without CapEx work picking up the IRM space will be competitive for years.

The big surprise is how slow the inevitable restructuring has been. The US and Norwegian offices were closed within weeks (despite L&W claiming ” that it has a strong consolidated position from which to expand in the markets in which it operates”) but there are well over 200 people in Aberdeen! 3 vessels working have to cover not only the crew onboard but nearly 70 people onshore per vessel as well (and some very expensive consultants to boot at the moment). That is totally unsustainable and it is causing the company to burn through its much vaunted cash pile. The DOF Subsea ratio is 1 boat to 42 people.

Scale and legacy cost issues pervade the business: the Bibby office in Aberdeen, for example, must be at least £3.5m per annum, that means even with three vessels working 270 days each one needs earn £4.4k per day just to pay for a proportionate share of it. And these three vessels still have to pay for the US office until they can get out of the ten year lease. The same for the ROV hanger. The same for the upcoming restructuring and redundancy costs. There are simply too few boats working to cover proportionately the expenses being incurred.

In addition Bibby Offshore has the least competitive asset base of any North Sea DSV contractor. The Bibby Polaris needs a fourth special survey next year. At 20 years old she is two generations behind the newer vessels (the Bibby ST and Tecnhip/SS7 newbuilds), the forward bell arrangement is awkward, and the carousel is not efficient. So even if someone paid the equivalent of £20m for the vessel, and assuming you got ten years of life out of it that means c.£7500 per day in depreciation if the vessel works 270 days a year, over and above running and financing cash costs. If the drydocks come in over budget you would be lucky to achieve even cash breakeven at current market rates. PE investors, like York, mainly talk cash, which is fine until you run into an asset with a finite life. Sell the vessel out of the North Sea and you would be lucky to get £10m, and it would cost you six months running costs to get that.

The Bibby Sapphire looks to have temporarily avoided the fate of layup and is currently at anchor in Aberdeen. Sapphire will dive some days this summer, but having an asset that is needed only 90-100 days a year, at £100-120k per day (less 50k for project crew), is not economic at more than a de minimus price when the full 365 costs are taken into account and dry-docks/surveys are needed. Yes, she can work as an ROV vessel as well, but in-case no one noticed the reason that companies like Reach, M2, and ROVOP are making money at the moment is that they get the boat for free (in an economic sense).

I get how the spreadsheet added up to £115m Bibby valuation that York led the investment at… it’s just the assumptions required to get there that I think are erroneous.

York don’t have a good track record in offshore. Cecon, which York gained control of via distressed bonds, was a disaster, and for many of the same reasons the Bibby Offshore: a fundamental misunderstanding of the asset base and business model of the acquisition. The rump of Cecon is Rever Offshore, which mainly consists of a rusting hulk in Romania (ironically named the Cecon Excellence originally), rapidly going nowhere. York may have made some money off the one  Cecon vessel sold to Fortress at the peak of the market… But transactions such as this saw York Capital Management lose a significant portion of assets under management in 2017:

…funds to see withdrawals included York Capital Management, which lost $6.10 billion [from $22.3bn to 16.2bn]. The fund posted negative 2015 performance of 14% and was flat in 2016, a year in which The Wall Street Journalreported fund CEO Jamie Dinan said he experienced “his most intense client interactions in years.” That can happen when dramatically underperforming benchmarks.

York must be hoping there is a hoping there is another financial buyer who knows even less about subsea than they do.  Triton/DeepOcean want to make sure that York’s one good investment in offshore, their minority position in DeepOcean, doesn’t go the way of their other investments in the sector by trying to take advantage of York’s … er … skills…

Fox Offshore managing MPV Everest…. How much have Keppel been paid?

So Fox Offshore are managing the MPV/ DSV Everest. (hat-tip: RD).

My only real point with this is that I don’t believe Keppel have been paid anything like the SGD 265m contracted build price. Fox may well do a good job of managing the vessel but they clearly don’t have the resources to pay for it. So are Keppel paying for the OpEx as well?

This is a material transaction for Keppel Oil and Gas given the size. It will be interesting to see from a disclosure point-of-view how long they can simply not update the market on their financial exposure here.