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 c.to 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.

MPV Everest at mooring

According to the Marine AIS the MPV/DSV Everest is currently moored in Singapore. It is now over 2 months since Keppel stated they had delivered the vessel. I have always taken delivered to mean “paid for” by the new owner? (Previous thoughts here).

I am pretty sure that hasn’t happened in this instance. But if anyone has any definitive information on it could you PM/email me?

I note with interests the auditors (PWC) made the following statement in 2016:

Downturn in the Oil and Gas industry

The downturn in the Oil and Gas industry has had a significant impact on the financial statements of the Group, in particular over the following areas:

i) Appropriateness of revenue recognition and recoverability of work-in progress balances in relation to Offshore and Marine construction contracts
(Refer to Note 13(a) to the financial statements)

We focused on this area because of the significant judgment required in:

  • assessing whether the Group’s customers will be able to fulfill their contractual obligations and take delivery of the rigs/vessels at the contracted or revised delivery dates; and
  • estimating the net realisable values of stocks for sale.

We reviewed management’s assessment of the risk of customers defaulting on the contracts, and corroborated management’s assessment against our understanding of the industry. We read public announcements and other externally available information that would be relevant to understanding the financial position of the major customers…

We reviewed the terms of each contract as well as the terms of the modifications to assess if management’s judgment on the continued recognition of revenue and associated margin was appropriate.

We also reviewed management’s assessment of the external valuation of each rig/vessel, to assess if the related work-in- progress balances of construction contracts and stocks would be recoverable through sale, in the event that any of the Group’s customers are unable to take delivery of the rigs/vessels at the contracted or revised delivery date.

And the conclusion (for year end 2016):

Based on our procedures, we found that management’s judgment around the recognition of revenue, including associated margin on the Group’s Offshore and Marine projects for the financial year was appropriate. We also found that the work-in-progress balances on construction contracts and stocks were appropriately assessed to be recoverable.

So I guess it would be embarrassing for all concerned if there was a major event of default here? You would think an SPV set up to purchase a SGD 250m vessel, with no underlying charter and pre-arranged take-out financing, would therefore have warranted some special attention from the auditors?

This is not a “farm burner” for a company the size of Keppel, but it is also pretty serious if the counterparty can’t pay, because there are a host of these high-class DSVs building up now. The Everest is BV classed which also surely limits her resale potential? I have no idea what would be required to get her DNV or Lloyds classed but surely any other buyer would expect this to be to Keppel’s account?

Frankly, I would have expected Keppel to provide slightly more information regarding this vessel. It is a material transaction for the Group and it is very hard to believe they have simply delivered the vessel, been paid for it, and the new buyers have left her at anchor in Singapore? And if the contracted buyer cannot fulfill their obligations then any value to Keppel of this assets will be tens of millions lower than the contracted build price.

Surely Vard are (even more) worried now? I heard again last week that their DSV had been sold (this time the rumour was to a smaller company), but this ship has a clearing price (as eventually do the UDS vessels). With Technip scrapping the Wellservicer they have a host of options on replacement tonnage should they choose to invest in what is turning into an oversupplied sector.


“Political language is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind.”

George Orwell

If you borrowed money off a bank to buy a car, and then couldn’t pay the bank back, and they repossessed your car, would you claim this as a relocation success? I personally would have used the word “recent” not “successful”.

Expect big changes.

Bibby Success 2.png


A market recovery? Not in the data…

Danish Ship Finance have just published their latest report. As usual it is thorough and measured, and frankly not uplifting if you are long on vessels or rigs. The graph above really covers a lot of things I have blogged about here, it’s all well and good coming up with graphs showing how offshore MUST get more investment, as if it were a divine economic law, but that isn’t what companies are ACTUALLY planning on spending.

Another great graph is this one:

DSV Charter Rates DSF.png

What the commentary in the report omits, and I think is very important, is the fact that the divers costs, which are c. £50k for a 15 man team, have not dropped. So for the vessel owner the rate hasn’t dropped 50% it has actually dropped 67% because the labour cost of the dive crew is fixed (again I have blogged about the Baumol effect here). This is probably more pronounced on DSVs than any other asset class but it is a real problem for offshore because the industry isn’t getting more productive (just cheaper which is different). Removing 67% of the revenue for any business is bad, in an industry that had binged on debt, as can be seen, it is beyond a disaster.

DSF also note that while spending on Subsea Production Systems is rising this because smaller step out developments are being done, which require less vessel days, than larger greenfield developments. Again I have discussed this before here.


Finally, it highlights again the scale of the pullback in offshore and why any recovery will not be a repeat of the past. The speed at which contractors are working through backlog is a real concern. Subsea 7 won work recently on the Johan Castberg field that was valued at c. USD 2.0 – 5.0m per well, a 75% decline from the peak. So even an increase in the volume of work awarded will not help the industry recover to previous levels.

Big Three Backlog.png

Subsea Contract Awards.png

This matters because offshore used so much leverage to purchase assets in the past. Now the companies revenues and profits are materially smaller and they are struggling to pay the banks back leading to a credit crisis in the industry. Debt is a fixed obligation that must be paid back for firms to have value and that is much harder to do when the industry is in a deflationary cycle. This is no different to a banking crisis without a central bank.  It is this credit crisis that when combined with the demand crisis makes this so serious. DVB Bank, a specialist lender to the sector, went bankrupt! Indeed I have discussed this many times and it is one my one recurring theme.

Last year probably was the low point in terms of demand. But as the first graph makes clear there is not a wave of investment coming here, just a long slow increase in spending.

Read the whole thing. Many business plans simply don’t reflect this reality yet. Not everyone will survive. 2018 promises to be another tough year for asset heavy companies.

When is a vessel delivered? Keppel version…

Show me the incentive and I’ll show you the outcome…

Charlie Munger

Keppel came out with a S$619m loss last Thursday, the result of a corruption fine and other related costs. The subsidiary Keppel Offshore and Marine are where most of the problems lie, mainly as the result of Brazilian exposure. There is a good article here on how provisioning for losses on the Sete contracts and other jack up exposure Keppel has.

But I am intrigued by the recently “delivered” MPV Everest. Keppel reports on a Jan – Dec financial year, and on Dec 18 2017, a relatively quiet time of the year, it announced it had delivered the MPV Everest… Just in time to book the associated revenue for 2017 which would help prop up what had been a dreadful financial year for the Group.

Now for those not in  the know, the MPV Everest is a strange beast, and one of the most expensive DSVs ever built (my previous thoughts on it are here). Marine Construction Services are taking the vessel, they are linked to Edison Capital who are linked to New Orient Marine Ltd, the legal purchaser, (an SPV formed to finance the vessel). MCS/ Edison have supplied their offshore tonnage to MRTS in Russia. Earlier in the year, about the time New Orient would need to have been organising take-out financing, shipbrokers I know were approached about marketing the vessel at an outrageously high day rates, seemingly desperate to back on to a financing deal. Now none can get Edison to tell them what is happening with the vessel.

The MPV Everest, at S$265m is by an order of magnitude more complicated and expensive than any vessel these companies have experience in. Admittedly, MRTS have taken the Toisa Paladin to Russia on a time charter previously, but this is on a different scale. And it is very hard to see without a long term charter, at significantly above current market rates, from an extremely creditworthy counterparty, any bank backing an SPV to provide takeout financing for New Orient Marine Ltd to pay Keppel? People who have been on the vessel have told me there have been some real problems in commissioning the dive system (although that would have been pushed to JFD).

I have also worked with an Eastern European contractor looking to get a vessel to MRTS, and if you think Indian companies don’t like to pay for boats wait until you get feedback from a Russian company… so paying for this?

As I said before I have real doubts about the value and economic credibility of this vessel: it is ICE class but not NORSOK? And it is a BV classed DSV? The dive system is Lexmar? These characteristics make the resale value of the vessel, should there be an event of default, extremely hard to gauge but must point towards the extreme downside in value and in length of time taken to even get a sale. The DSV  market itself is replete with lay-ups and loss making companies and this asset, unless it goes to Russia, has extraordinarily poor prospects for economic work in the short-to-medium term.

It is very strange that MCS, Edison, and MRTS (for whom the vessel was surely destined) have remained extremely quiet and their websites fail to reflect the enormity of the task they have completed? Verging on a world first? Announcing some work and plans maybe? A photo of the naming ceremony perhaps?

The vessel according to AIS has not left Keppel since delivery and here we are are six weeks later? It is not unusual for a vessel of this complexity to face sea trials, commissioning issues etc. But I have real doubts this is the case here. I look forward to the annual report with interest because there are only a few scenarios that would make sense here:

  1. Keppel have been paid and the vessel is merely undergoing the final few stages of fitout and sea trials;
  2. There is a handover issue between the “owner” and the yard, and actually New Orient Marine Ltd have not accepted delivery (and in all likelihood can neither pay for the vessel,  nor in this market even want it);
  3. A nuclear scenario where Keppel have booked a sale of the vessel and moved the debt to the balance sheet and/or another entity. I hasten to add I have no proof of this, but it seems so extraordinary that New Orient Marine Ltd could actually have paid S$265m for this vessel that they have no work for? Maybe some of the S$54m of other unexplained writedowns was the start of a slow series of writedowns on this vessel? All the rig owners at Keppel are paying for delayed delivery because they have no work but this vessel, in the middle of the greatest ever OSV downturn, is simply going to float away and make money? I don’t see it.

We will see. Russia is involved so you can never rule anything out here. Maybe I am being harsh given the Sete scandal, but Keppel just doesn’t strike me as a yard that did a lot of due diligence on customers in the offshore oil boom when this vessel was ordered, and so the chances of them collecting hefty upfront contributions strike me as remote.

The one thing I defintiely know is that no serious saturation diving contractor has chartered this vessel and no one in the industry knows anything about where she is going. It strikes me as very binary, either a) in the immediate future we are going to hear of a long-term charter of the vessel by a Russian company to operate the vessel in Sakhalin, at way above market rates; or b) Keppel have a massive credit issue.

I await with interest…