DSV market runs out of ‘Greater Fools’… Keppel version…

It might have been supposed that competition between expert professionals, possessing judgment and knowledge beyond that of the average private investor, would correct the vagaries of the ignorant individual left to himself. It happens, however, that the energies and skill of the professional investor and speculator are mainly occupied otherwise. For most of these persons are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public. They are concerned, not with what an investment is really worth to a man who buys it for “keeps”, but with what the market will value it at, under the influence of mass psychology, three months or a year hence.

— John Maynard Keynes

If something cannot go on forever, it will stop.” (Stein’s Law)

— Herbert Stein

The greater fool investment theory is acribed to the Great Man, who in a famous passage noted that the stock market worked like a beauty parade and that picking a winner was not about backing one’s own judgement:

“It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.”

(Keynes, General Theory of Employment, Interest and Money, 1936)

This led to the ‘greater fool’ theory as it has been observed that assets trade not on an intrinsic value (i.e. the cash they can be assumed to generate) but on the basis of what people believe others will pay for them at some point in the future. The boom in DSV building is running into the wall of cash requirements and a shortage of fools willing to invest in them.

If the market scuttlebut is true, and I believe it is, somewhere in 31 Shipyard Road, if it hasn’t happened already, a terrible realisation is taking place: New Orient Marine Pte Ltd, a subsidiary of  Marine Construction Services Ltd (Luxembourg), has a financing issue with the new ICE Class DSV, and in reality isn’t going to take delivery as planned. SOR reported last week that they were seeking a charterer at rates of USD 80-100k a day, a number that if true is so absurd it is beyond satire. The vessel as you can see from the Keppel Q1 presentation is due to be delivered at some time this year.

You can write the script here I suspect: New Orient will be a thinly capitalised company that had sufficient funds to make the progress payments only. Unable to get work for the vessel they have now have no takeout financing, and will be unable to take delivery from Keppel. A frantic search is therefore underway to find someone, anyone, to try and take the vessel off their hands.

At the time the order was signed in 2015 (when the market was cooling significantly), Keppel issued this press release with the comment:

Mr Knut Reinertz, Director of Maritime Construction Services, said, “There is a demand for modern ice-class multi-purpose vessels in the market and we believe this new state-of-the art vessel we are building with Keppel Singmarine is ideally suited to meet this need.

The problem I have with this statement is that how much demand there was/is? And how you split the risk? And even more importantly what is the supply side looking like? MCS/MRTS have used the Toisa Paladin in the region and it has never been on a 365 basis, and they certainly never had the forward order book to justify going long on a vessel of this complexity and cost. So they were either completely mad, or wildly optimistic as to their prospects to resell or recharter the vessel prior to delivery (and they aren’t the only people doing this in the DSV space). Unfortunately the timing is spectacularly bad. I don’t know what the payment profile was for this asset but I can guess it was something like 5% down with 10% later, and if Keppel were lucky, another 10% further on. But apart from that I don’t see them getting any more for this.

I actually believe this vessel, with a reported build costs of USD 200m, or SGD 265m, is valueless. I say this not to be controversial but a cold examination of the market and the asset.

Firstly, and most importantly, the vessel is being classed by Bureau Veritas. That wasn’t a joke, I’m serious. You can read the BV press release and documentation here. Those who have worked for a saturation diving company will appreciate the significance of this, while others may wonder where I am going with it? Saturation diving isn’t rocket science, but not everyone can do it either, you need a certain number of systems, and processes, and high quality people to be there to create a certain institutional knowledge base to do it safely and efficiently (particularly North Sea/ ICE work). Small things can cost you a lot of money and this is a classic example where cutting corners, is I believe, going to render this hull worthless. For those still here, there is no other DSV in the world classed by BV, it is just not a classification society recognised to give a vessel SAT notation. The only reason you would use them, and not DNV or Lloyds (and maybe ABS at a push), is to save money, and anyone looking at buying this vessel at anything close to its construction cost would know the original purchaser did this to be cheap. Very cheap.

Secondly, the chambers and other equipment are not NORSOK compliant. I don’t even think a BV system could be NORSOK compliant without a vast amount of bridging documentation and ancillary work (I am happy to be proven wrong on this). The only market in the world where you can get day rates that would cover that build cost is Norway, and they already have two NORSOK DSVs for a total market of 550-600 DSV days on a good year.

Thirdly, the dive system is a Lexmar, and has had known installation problems throughout the build. No one spends USD 200m on a dive vessel with a Lexmar system. Again it was done to be cheap and it will in all likelihood render the vessel unsellable.

Although I am a paid consultant I have therefore done Keppel a favour and compiled a list of all the possible buyers for this asset (who says consultants ask for your watch and then tell you the time?):

 

 

 

Unfortunately, as you can see, it’s quite a small list. But the number of people needing a USD 200m DSV at the moment is 0. The largest owner of high class DSVs is rapidly beoming Yard Inc. Lichtenstein is still in Shenzhen, Vard has the Haldane, and now Keppel has the New Orient DSV. And that is without getting into idle tonnage and the DSVs still to be delivered. If you speak to people associated with these assets they all assure you that they are close to selling them, yet if these vessels are not used in the North Sea they are only worth the Asian/African DSV price, where you are competing with modular systems on a PSV, and all the North Sea contractors have too much tonnage, as the Nor vessels prove. Find me a CFO from one of the big 6 who could take one of these DSVs at anything like book value, and who is willing to go to the stockmarket, with backlog collapsing, and say he has paid anything less than a steal for one of these? No one outside of these companies could get the vessel into a region where they could hope to recover that sort of cost – and even then not in the current market.

New Orient Marine Pte Ltd , are in turn linked with MRTS, a Russian owned contractor focused on the Sakhalin region (although I think they have done other work in the Caspian).  It’s worthwhile having a look at their fleet to see the sophistication of vessel they are normally used to dealing with here and the risk Keppel took in this contract given this. MCS have hired DSVs on a time charter basis, but have never owned a DSV; you therefore have to admire their… courage?… in striking out to build one of the most advanced DSVs in the world.

Clearly they were hoping to sell something well above it’s intrinsic value by being bold. The payoff was an asymetric one to MCS though, who stood to benefit enormously while Keppel are going to be stuck with this eccentric design for a long time prior to reality setting in I suspect. Keppel are a big company with a multi-billion market cap so this isn’t a “farmburner” for them, but they could realistically have to writeoff USD 150-200m here which is going to be very painful all the same. The Chinese yards have decided to play for time, the Tasik DSV was yard financed and  UDS are the potential saviour for the Lichtenstein. Not everyone can be saved here because there is just insufficient demand until the DSVs return to construction work not maintenance, and that looks a long way off.

DSV Lichtenstein to Asia…Show me the money?

UDS announced today that the DSV Lichtenstein has floated and is off to Asia. No huge surprises there.

Just to be clear the vessel is the old Mermaid Ausana. UDS haven’t commissioned or paid for this (the IMO number still with the yard), the vessel is available because Mermaid and the yard cut a deal. That is: a major and experienced Asian DSV operator didn’t think they could get work for the vessel and therefore wrote off millions to extract itself from the contract. Now admittedly the vessel was ordered at close to the market peak, so it is probably true that at old pricing levels it would have been hard to get an economic return, but the yard paid those costs as well proportionately.

To be honest I don’t blame UDS, nobody at the moment needs to buy a DSV, you can charter one for substantially less than the economic cost of owning one. Which makes it all the more suprising that UDS seem committed to three more DSVs they have ordered as the keel laying ceremony for the DSV Andy Warhol was also revealed today.

There is no reason to believe that UDS haven’t cut some clever, risk-based, charter with the yard over Ausana/Lichtenstein (just as Bibby appear to have done with the Volstad (bondholder) owned Bibby Topaz). The yard wants some money from an unsellable asset and UDS have the skills to deliver the vessel and potentially find some work for it. V-Ships are clearly being paid and a load of kit to equip the vessel from the bell out appears to be arriving. So far so good.

But where is the vessel going to work? No won work has been announced? The market is so competitive at the moment that no one is sole awarding work? How much work if any have UDS got? How long can their working capital last while ostensibly having commitments to USD 500-700m in CapEx for the two SALT design DSVs and the Andy Warhol (also an MT design)? The sort of capital needed to fund that sort of expenditure is institutional and yet no one seems to have heard anything about a fundraising? It would be major news one would have thought because its the ultimate contrarian strategy: DSVs are the most overbuilt tonnage in the world with some of the highest relative running costs.

Who is taking the risk with this deal? Are they yard putting in for OpEx? The Nor vessels claim that it costs USD 370k per vessel per month on marine crew and USD 109k for the dive system (which seems outrageous to be honest for the dive system and must include spares etc), and this vessel is a near identical spec. That doesn’t include commissioning costs, wet bell run trials, etc. These are likely to be in the low millions for a new DSV. Much will go to the yard account I suspect (if not originally contractually simply as a reality now), but I would be stunned if they wrote a blank cheque for vessel operations? Even in this market you should only take risk you can control…

Kruez don’t want to take delivery of their new build DSV and rumour has it UDS have been trying to strike a deal with the yard there as well. A DSV consolidator at the right price has something going for it, but only with investors committed to extremely high OpEx until the market recovers – whenever that may be. The pool of institutions large enough, and committed enough, to such a play is limited to say the least. I would have thought getting take-out financing for the final yard payments would be near impossible without a long-term charter, and they don’t exist at the moment?

Just at a time when Toisa went bankrupt as one of the largest owners of DSV tonnage, outside SS7 and Technip, UDS has arrived on the scene. The scale of the committed funds means sooner or later details are going to come out about this. There are only two alternatives: either there are some large institutional investors who have made an extraordinary counter-cyclical investment, at peak build prices nearly; or, a vast amount of credit has been extended to a start-up with good technical skills and vision, but without a balance sheet appropriate for this degree of risk. Cash flows are always the hard financing constraint that cannot be hidden forever… I’ll put my impatience to one side because the final story is likely to be very interesting here.

Bourbon results offer no comfort or light

Bourbon released numbers this week that were bad, this isn’t an equity research site so I don’t intend to drill through them. Bourbon is a well-managed company and there is little it can do given the oversupply. But I can’t look at these stats without feeling like the HugeStadSea merger was too early. And quite how NAO, with 10 PSVs, raised money at USD 15m per vessel when the industry is at this level also looks like a triumph of hope over data. Subsea looks just as bad.

First, I think the graph below (from the Bourbon presentation) is telling and worrying for offshore. One of my constant themes is productivity. Shale is generating increasing productivity (i.e. constantly reducing unit costs) from all this investment, offshore fundamentally isn’t. The cost reductions from offshore are the result of financial losses, not more outputs from unit inputs.

Capital Investment Forecast: Shale versus Offshore

Capital Outlook

Clearly, the capital increase is good for vessel owners, but as this graph shows, the fleet was built for much better times.

Global E&P Spending

Global E&P Spending

And as the Bourbon numbers show, demand isn’t going to save offshore because the supply side of the market is too overbuilt.

Stacked vessels

The subsea fleet globally looks just as bad. Rates are only just above OPEX if you are lucky and nowhere near enough to cover financing or drydocking costs. The hard five-year dry-dock is the real killer from a cash flow perspective.

In order for this market to normalise not only vessels, but also capital, needs to leave the industry. I was, therefore, surprised that NAO raised USD 47m to keep going. NAO have 10 vessels, and are clearly subscale by any relevant industry size measure, are operating well below cash breakeven including financing costs (USD 11 500 per day), and still, they plow on. I understand it’s rational if you think the market is coming back (and the family/management put real money into this capital raise), but if everyone thinks like this then the market will never normalise. And when Fletcher/Standard Drilling can keep bringing PSVs back into the market at USD 8-10m, that do pretty much the same thing as your 2016 build, and 1/3 of the fleet can be recommissioned, the scale of a spending increase needed to credibly restore financial health to operators looks a long way off. Someone is going to have to start accepting capital losses or the industry as a whole will keep burning through new infusions of cash on OPEX. ( I know PSV rates, in particular, have increased this week but this looks like a short-run demand as summer comes and vessels come out of lay-up than a recovery.)

Specialty tonnage, such as DSVs, are in a worse position because as Nor/Harkand are showing people are reluctant to cold-stack due to the uncertainty of re-commissioning costs. Project work simply isn’t returning to at anything like the levels needed to get vessels and engineers working. Subsea construction work significantly lacks rig work, and companies are delaying maintenance longer than people ever thought possible.

Rig Demand

I think restructuring, consolidation, and capital raising are clearly the answer don’t get me wrong. I just think some falling knives have been caught recently (the Nor/Harkand bondholders being the best example) and the industry seems reluctant to admit the scale of the upcoming challenge. And again I am perplexed why the Solstad shareholders allowed themselves to dilute their OSV fleet with greater exposure to supply, when the dynamics are clearly so bad? The subsea and offshore industries appear to be facing structurally lower profits for a long time, and more restructurings, or a second round for some, seem far more likely than an uptick this year and next.

 

Whaam… Lichtenstein meets the market

“I’m interested in portraying a sort of antisensibility that pervades society”

Roy Lichtenstein

Roy Lichtenstein was known for his themes on parody. I’m going to file that under irony. I’m also going to be honest here and ask the questions everyone in the industry is asking but no one is saying out loud:

  1. Where on earth (and I mean that literally) is the UDS Lichtenstein, and the other new builds, going?
  2. Who is funding this?

The newbuild DSV UDS Lichtenstein, if the build quality matches the specification, will be one of the best DSVs in the world. Maybe not as good as the Deep Explorer or Seven Kestrel, as these have been commissioned by organisations with a strong track record of complex vessel delivery, but certainly a fine vessel. And at DP 3, and other specs, the vessels are well suited to the North Sea market… er… apart from any sort of demand or market need for them that is.

In order for the North Sea market for DSVs to return to healthy days for offshore contractors the construction market needs to return, and actually its really a sub segment of that: the shallow water, small field development, with flexible flowlines. Technip (Apache II) and Subsea 7 (Seven Navica) have the rigid reel construction market all to themselves and this is traditionally 80% of the total construction market. As the market has softened they have taken the lions share of the work available and made rigid reel cost effective over shorter distances. Bibby and DOF are hurting in the DSV market because the smaller jobs, which require longer flexibles, and therefore more diver days, are simply not being done. The market has ample DSVs for IRM work and Subsea 7 and Technip continue to redefine their position in this space as IRM contractors (until the construction market comes back). The thesis, that I used to subscribe to as much as anyone and maybe more, that maintenance work would keep everyone at OPEX neutral levels, was quite simply, wrong.

Day rates in the North Sea are still only just above OPEX once the divers and project crews have been stripped out, although this is likely to be higher for the peak summer months. UDS could be arriving in 4-8 weeks but without any infrastructure or project crew. The ex-Harkand DSVs provide a rare natural experiment in economics of complete financial irrationality, having sat in Blyth for nearly a year with no work (and now trying to win 100 days in the UAE), there is no reason to believe UDS would fare any differently. In order to have any hope of work UDS would need companies like Ocean Installer to start winning large scale construction projects in the UKCS that need DSVs, and there is no sign of that happening, and even then would they subcontract that to a newcomer?

For the rest of the world the UDS new-build DSVs are over specified (and therefore over capitalised) to an extraordinary degree, and this would not be reflected in the day rates. The UDS Lichtenstein would compete against anything with a modular system or above. The exception is Canada, but there is a reason no one dedicates a DSV to the region, apart from cabotage regulations… there isn’t much work. Certainly not enough to keep an investor interested or a bank happy… even a German shipping bank.

In short: DSVs globally are some of the most overbuilt offshore tonnage, that will rely on the ultimate bull-market scenario to come back to historically depreciated values. Relatively shallow water, capital and engineering intensive projects, with short production life, are some of the most economically unattractive ways of increasing oil and gas output at the moment. Yet these form the basis for a DSV recovery story… Especially now the domestic stability of the North Sea counts for little as the US ramps up production. Many of these developments were funded by raising capital on the London Aim, yet just £192m was raised for oil and gas companies in 2016 from this market, and most of that for exploration, and only two projects are currently sanctioned.

This is an industry that overbuilt DSV tonnage in a boom and the issue is that these assets last 25-30 years. The only economically rational adjustment here is one on pricing expectations for the assets unless there is a sudden, and dramatic, increase in demand.

Maybe the UDS investors are betting on a cyclical recovery with a scrapping of the old DSV fleet? The problem with this is the running costs. When Nor/Harkand did their USD 15m (“super senior”) capital raise  (nov 2017) they put the running costs per vessel at USD 370k per month (vessel) + USD 109k per moth (dive system) , and there is no reason to believe the UDS Lichtenstein will be any different. Incidentally, Nor listed their “low case” as no work for either vessel for the year ending Dec 2017, this would require USD 15.9m in funding, a situation that must seem ominously real now, and certainly more likely than their “base case” which had one vessel starting a charter at USD 15k per day in March.

Who is funding that sort of open ended commitment for UDS? In order to set up diving operations they face another quantum of costs for management systems, vessel audits, trial bell runs, business development, tendering etc. When people are making 60% operating margin on 350 days utilisation that seems logical, but at the moment the leading independent North Sea company, Bibby Offshore, looks set to report yet another serious loss on March 23, driven by poor utilisation and potentially a USD 15m write-off on EMAS.

I can find no details of the takeout financing from the yard or any other capital raising for UDS or the vessel. Rumours abound of Chinese money, but from who and on what terms? What is the strategic rationale here? Will UDS be another Toisa and just charter these vessels, or an integrated offshore contractor with a diving capability? Both are markets in chronic oversupply. UDS’ shareholders have sufficient personal wealth I believe to fund the working capital of one vessel, but not indefinitely. And more to the point: why would you? This is at a time when I believe the Tasik Subsea DSV financing to be in real trouble, and this has a contract with Fugro! Vard cannot give the Haldane away at a good (or any) price, and Mermaid have commenced operations with some good new Asian tonnage. I could go on…

Maybe I have missed something, as has everyone I have talked to. Maybe companies like Bibby, Technip, and Subsea 7, have been sitting around missing a large number of diving days that were there for the taking. I’d love to be wrong, But you need more than a degree of optimism when you start delivering USD 135m vessels: you need cash flow sooner or later. I really admire the optimism and verve to get these vessels built, but ultimately being a glass half-empty kind of guy I just really want some details?

Good luck UDS. If you can pull this off Roy Lichtenstein himself would be proud.

 

Morton’s Fork, Nor Offshore, and the North Sea DSV market

John Morton was my kind of optimist (and economist actually): as the Archbishop of Canterbury (1486-1500) he devised the logic for imposing forced loans on people that those who were rich could obviously afford to pay, and those whom lived frugally obviously had savings buried away somewhere (and could therefore afford to pay). This somewhat quaint logic is the origin of Morton’s Fork, a bifurcation that leads to no good options.

An article in the FT today on the increasing free cash flow of North Sea oil producers highlights the Morton’s Fork for the Nor bond holders. In November last year, after raising money again they had the decision to make of continuing the spectacularly unsuccessful strategy of sitting in Blyth, with no diving contractor,. waiting for work when all the dive contractors had excess DSV capacity, or changing. Admittedly the decision was a Morton’s Fork, work anywherre is hard and there is excess capacity everywhere. But serious work in the North Sea, given the industry structure and regulations, was never possible. Suddenly the USD 15m liquidity issue, having been depleted roughly a third, without a day of work and absolutely none in the schedule, just on OPEX, doesn’t seem like such a big number (and there appear to be valid questions about the technical condition of the Atlantis where the crane for example has been downrated to 50t).

However, the bond holders decided they would wait for the mountain to come to them. After a recent fiasco where the Contracts Department/ Nor were awarded a five day job, and then couldn’t close it commerically, the mountain is looking strangely distant, and the FT article shows why:

Alongside cuts to operating expenses, North Sea operators reduced project investments during the downturn — last year only two relatively modest field development plans were approved, involving BP and Apache. Up to six new projects could get final approval from operators this year, and a further eight in 2018, said Oil & Gas UK, but it warned in a report published on Tuesday that these are “not certain to be delivered and may be subject to delay or cancellation”.

As I have stated before until the construction work returns the maintenance market will not save these vessels. It’s worth pointing out that Clair Ridge, the BP project above, used no DSV days, nor will any West of Shetland (except for potentially some minor riser hook-up work).

Subsea 7 recently reactivated the DSV Seven Pelican, currently off to do 200 days for Apache, and the Seven Osprey, which is having a new thruster installed in Gdansk and then heading East. Subsea 7 and Technip are recommitting to diving because the work is there and they can. With huge engineering and tendering teams they can move old assets back into the market to take advantage of what little work there is. I have been told, but I have no idea of the veracity, that market rates are GBP 65-75k, strip out GBP 50k for divers/project crew and no one is making much money here, but neither are they losing it tied up. But the North Sea DSV fleet will not face a demand driven recovery until the tie-backs/tie-in market, which soak up huge amounts of DSV days return.

Any serious hope the bondholders had that a mild uptick in maintenance work would lead to a charter in the North Sea must now have vanished to all but the most die-hard optimists. Setting up a tin-shed operation in the most regulated market in the work (bar Norway) was simply a bad idea, even had the market returned, but looks even worse in a poor market. The Nor vessels will move before the mountain one would assume.

Toisa, Emas Chiyoda, and Bibby… oversupply meets a wall of debt.

News that Toisa had gone into Chap 11 felt significant across the industry today I think because of their DSV exposure. On the face of it Toisa was just another mid-sezed operator, subscale in any one asset class, apart from dive vessels. Like a small Norwegian fishing boat owner the company had ridden the boom of offshore to end up with an enormous asset base exceeded only by its debts. This story also increasing the noteriety of the somewhat enigmatic owner.

Having been involved in negotiating a charter and purchase of a Toisa DSV I stuggle to feel sympathy for their collapse (as opposed to the Sealion team who were always extremely professional and nice guys). Times have changed since then, the bidding for the Polaris so hot betwen us and another party we each had 30 minutes to approve each round of day rate increases until the other side pulled out, this at 2200 at night UK time with each number feeling uncomfortably large. Callminopolous from NYC calling the shots and demanding we work on NY time. Such was the shortage of North Sea class DSVs, and the lack of spot market, we had no option. How times have changed…

 

In one of the great ironies of the “new normal” of offshore the only people who don’t seem to know there is no spot market for North Sea class DSVs own two and are keeping them tied up, fuly crewed, in Blyth in the hope of creating one! I digress… Toisa is big news because they went long, and were known for DSVs, and by going under they have shown that we are in unchartered territory for DSV ownership.

Which leads nicely on to Bibby/ EMAS. If there was any doubt that EMAS has a solvency problem, as opposed to a liquidity problem, the news today that Bibby was taking them to court for unpaid work and seeking to seize vessels for unpaid bills should put the question to rest. Bibby appears to have done  USD 18m of diving and has only been paid for USD 3.5m. Let’s be clear what happened here: EMAS Chiyoda (“EMASC”) has taken lump sum construction risk on the Angostura development and this had a diving element. EMASC have contracted Bibby to do the diving, in all likelihood on a day-rate basis, and EMASC have underestimated how long it would take to do. You can take 10 or 15% off a dive contractor for some spurious reason, say the bell-runs were slow for example, but you can’t credibly claim an 80% reduction from your dive contractor. EMASC aren’t paying because they don’t have the money. You only take risk you can control in offshore, and lump sum exposure to dive time, when you don’t have the correct DSV for the weather and tidal flows (it needed the Bibby Sapphire not a modular system like the one on the Lewek Toucan) is risky, some might say crazy, but whatever it was they miscalculated and lost.

Its a sign of the current market that people are taking extraordinary commercial risk to win backlog and when this goes wrong, which it inevitably will sometimes, the already razor-thin margins are gone. The EMASC shareholders will surely be looking at the Angostura project in detail before they advance further funds.

And as we all know this comes right in the middle of an attempted refinancing. Chiyoda issued this statement today:

EMAS CHIYODA Subsea Limited (“ECS” registered in the U.K.; Chiyoda Share 35%) is engaged in subsea construction work and due to the current harsh business environment has been conducting a detailed review of its operating strategy. It is anticipated that current and future profitability of this affiliate will be much lower than planned.

If you buy a business in June and have to issue this in January I think you need to revisit the due diligence report. My contacts in Chiyoda tell me the mistake occured because the Japanese thought that there was a mistake in the DD report and the forecast losses were in Yen not dollars, the realisation of this not being the case coming as somewhat of a shock (that was a geeky finance joke but hey its my blog). But I seriously read this statement, acknowledging a USD 336m writeoff, as some form of corporate acceptance that they are not continuing with this. I love the dry PR speak “profitability… much lower than planned”… You think? I’d be interested in the variance analysis in the DD report of what was planned… It would make a smashing waterfall chart (maybe on a logarithmic scale?)

Paying Bibby USD 15m is material when you only paid USD 180m for 50% of the business. I think on any reasonable basis EMASC could have lost somewhere between USD 30-50m just on Angostura alone. If that is right then any hope of a major financial rescue for the company looks nigh on farcical as Chiyoda appears to be accepting.

Splash 247 appear to have spoken to EMAS Chiyoda regarding the vessel arrests and they issued an anodyne response but accepting this action was taking place to seize the vessels. I am no expert on maritime law but if this is the case it strikes me as a clever move on Bibby’s part: I think the mortgage holders on the vessels will have to assert their rights (who are the banks behind EMAS) and then clear Bibby out before they get the vessels back lien free (but this will very much depend on where they are seized).  This will really throw a hand greande into the restructuring talks because if the banks won’t release the funds to Bibby they may have a problem getting clear title to the vessels, but if they do they will be preferring one  creditor over another which is a big issue in administration.

Whatever the answer the game is surely nearly up here for EMAS. Its almost sad to watch. Like an elephant being downed leg-by-leg, slowly falling to the ground. EMAS and its affiliates are just not economically viable in this market. Seriously who is going to sign a major offshore construction project with this company?

Bibby simply cannot afford to write off USD 15m. I expect the majority of this cost had been taken when they released their cash figures for Sep 30 2016, although looking at schedule timings there may still have been another 30% to be made, say USD 5m. If so it only highlights what I have been saying for a while that a restructuring here is inevitable. Some sort of structural solution to getting out of their expensive US offices and the Borderlon dispute make this virtually a neccessity. The EMAS claim will be in the name of the US entity (Bibby Subsea Inc), I have no idea if it can be assigned but I suspect not, so Bibby need this resolved now.

Bibby have had to pay for divers and other project crew and given current vessel rates I would say that USD 18m was all cost (i.e. the vessel was bid at cost). The accounts for last year will have to be restated even if a majority of the costs were taken last year. Given Bibby was down to GBP 53m cash at Sep 30 last year, is probably going back c. GBP 4m per month over the winter, a c. GBP 12m writeoff for EMASC is going to hit hard. A business Bibby’s current size needs c. GBP 20m in working capital so we are not far off a change in the capital structure and corporate form here.

Quite how Bibby allowed EMASC to rack up such a debt is nearly beyond my comprehension, but unfortunately well within it. You have the most leverage when the DSV is in the field and you threaten to pull unless you are paid. The problem with that is it’s a nuclear option which makes a legal outcome virtually inevitable. You need to the judgement of Solomon to really order the vessel to leave the worksite, but for a company with GBP 53m in cash and going backwards rapidly, to lose GBP 12m to a single creditor needs a decent explanation. Barring some magic with this latest legal move I think that is the position they are in unfortunately because I don’t think EMASC have the money to pay them even if they want to (which they clearly don’t).

Toisa, EMAS, and Bibby share a common problem: too much debt. EMAS have compounded that by buying backlog in-order to get cash flow with poor contractual terms as well as low-prices. It’s a stunningly unattractive investment proposition for the Japanese or anyone else wanting an entry point into offshore.