Common knowledge in offshore and shale…

“With every grant of complete security to one group the insecurity of the rest necessarily increases.”

Friedrich Hayek

Common knowledge is something that we all believe everyone else believes. 

We don’t have to believe it ourselves, and it doesn’t even have to be public knowledge. But whether or not you personally believe something to be true, if you believe that everyone else believes something to be true, then the rational behavior is for you to act AS IF you believe it, too. Or at least that’s the rational behavior if you want to make money.

Common knowledge is rarer than you think, at least for most investment theses. That is, there’s almost always a bear case and a bull case for a stock or a sector or a geography, and god knows there are plenty of forums for bulls and bears to argue their respective cases.

What can change this normal state of affairs … what can create common knowledge out of competing opinions … are the words of a Missionary. In game theory terms, the Missionary is someone who can speak to everyone AND who everyone takes seriously. Or at least each of us believes that everyone else hears the Missionary’s words and takes them seriously.

When a Missionary takes sides in a bull vs. bear argument, then depending on the unexpectedness of the words and the prestige of the Missionary, more or less powerful common knowledge is created. Sometimes the original Missionary’s words are talked down by a competing Missionary, and the common knowledge is dissipated. Often, however, the original Missionary’s words are repeated by other, lesser Missionaries, and the common knowledge is amplified.

When powerful common knowledge is created in favor of either the bull or bear story, then the other side’s story is broken. And broken stories take a looooong time to heal, if they ever do. Again, it’s not that the bulls or the bears on the wrong side of the common knowledge are convinced that they were wrong. It’s not that the bulls or the bears on the wrong side of the common knowledge necessarily believe the Missionary’s statements. But the bulls or the bears on the wrong side of the common knowledge believe that everyone ELSE believes the Missionary’s statements, includingeveryone who used to be on their side. And so the bulls or the bears on the wrong side of the common knowledge get out of their position. They sell if they’re long. They cover if they’re short.

Ben Hunt, Epsilon Theory

Oil and offshore has a lot of missionaries. In cyclical industries separating out industry firm effects from market effects is nigh on impossible. Be on the right side of a bull market and you make enough money to be a missionary respected by the crowd.

I thought of this when I read this extract from Saudi America in the Guardian. I won’t be buying the book (KirkusReviews panned it here) but the parts on Aubrey McLendon of Cheasapeake fame are interesting. However, what is really interesting is that in 2016 when the research for the book was being done there was a strong strain of  the “shale isn’t economic” narrative:

Because so few fracking companies actually make money, the most vital ingredient in fracking isn’t chemicals, but capital, with companies relying on Wall Street’s willingness to fund them. If it weren’t for historically low interest rates, it’s not clear there would even have been a fracking boom at all…

You can make an argument that the Federal Reserve is entirely responsible for the fracking boom,” one private-equity titan told me. That view is echoed by Amir Azar, a fellow at Columbia University’s Center on Global EnergyPolicy…

John Hempton, who runs the Australia-based hedge fund Bronte Capital, recalls having debates with his partner as the boom was just getting going. “The oil and gas are real,” his partner would say. “Yes,” Hempton would respond, “but the economics don’t work.”…

In a report released in the fall of 2016, credit rating agency Moody’s called the corporate casualties “catastrophic”. “When all the data is in, including 2016 bankruptcies, it may very well turn out that this oil and gas industry crisis has created a segment-wide bust of historic proportions,” said David Keisman, a Moody’s senior vice-president.

Many of the offshore “recovery plays” were financed when this was the investment narrative. The “common knowledge” was that there was going to be an offshore recovery, it was simply a case of when not if. The staggering increase in shale productivity was not part of the common knowledge and didn’t form part of the narrative. Go long on assets said the common knowledge… they are cheap… this is a funding issue only… what could go wrong? As the oil price inevitably rose demand for offshore assets would quickly recover right?

As the graph at the top of this article highlights, just as the common knowledge was being formed that allowed a range of offshore companies to raise more capital to get them through to the inevitable recovery, and clearly the demise of shale would occur by simple economics alone, in fact the shale industry was just cranking up.

The results of most of the offshore companies for the supposedly busy summer season show that at best a slight EBITDA positive is the most that can be hoped for. Rig, jack-up, and vessel rates remain extremely depressed and most companies are struggling to even cover interest payments. A few larger SURF contractors are covering their cost of capital but most companies are simply doing more for less. Companies might be covering their cash costs but there is a massive issue still with oversupply, and judging from the comments everyone continues to tender for work they have no hope of getting as everyone is doing more tendering. The cash flow is rapidly approaching for a number of companies and Q2 results have shown the market is unlikely to save them.

The missionaries for the shale industry are currently in the ascendant in creating a new common knowledge. The new common knowledge for offshore will be extremely interesting.

(P.S. If I was the publishers I’d rush the paperback edition of the book out).

Demand at the margin…

“We’ve indicated we’re going to keep capital spending flat. We’re in a higher price environment, [but] we haven’t changed our capital budget, and I don’t expect that we will,” Mr Wirth said. “We will not fund every project. We will have projects that meet our economic hurdles, but we’ll choose not to fund, because we’ll have better options.”…

“Frontier-type projects, the riskier investments, are now . . . not as necessary,” he said. “And I think that has implications for everyone.”

For Chevron, that meant every project it invested in would have to be “best in class”, he said. “It can’t just be the kind of project you might have funded historically, because we’ve got better options.” [Emphasis added].

Mike Wirth, CEO, Chevron, Financial Times, July 18, 2018

Image above from Chevron.

Those statements are in essence why the next upswing in offshore will be fundamentally different to the cyclical nature of the industry between 1999 to 2014: in those periods, devoid of shale in a meaningful sense, every offshore project was approved, and the industry built an asset-delivery base accordingly.  As an example Exxon Mobil used to take it’s PSVs and AHTS up to the Arctic in March and wait for the ice to melt so they could start work immediately. That work simply doesn’t exist now. There were a large number of frontier and marginal projects deemed economic that are unlikely to ever be seen that way again (on a risk-weighted basis not just cost per recoverable barrel).

I am a big believer in offshore energy nand believe it will be a significant part of the value chain for a long while to come. The industry is clearly improving from a demand perspective, and if you are a manufacturing or engineering business (for example) then next year will be better than this year. But it isn’t the same for those long on rigs and boats because of the oversupply situation and the fact that the high fixed cost structure makes it hard to reduce costs (i.e. the asset opex is a lot higher than SG&A overhead) in a meaningful sense. The asset based industries face years of structurally lower profitability.

The reason I don’t believe there will be a comeback in offshore demand in terms of the timing and day-rate increases seen in previous cycles is because a significant number of E&P  companies are following the same strategy as Chevron. It is taken as a given in offshore that oil prices and will always come back up, and maybe they will (although the relationship between oil prices and offshore demand has changed), but the optionality of shale has a real value as well for E&P companies and they have fundamentally changed the project approval process. The industry cannot boom on maintenance and decommissioning work, the offshore fleet is so big now it requires a CapEx boom in order to have a cyclical upswing, and there are no signs of that appearing. Project approvals are up but nothing like the levels of of 2013/2014 and it is CapEx projects that will create demand at the margin to meaningfully lift day rates and utilisation levels.

E&P shareholders didn’t see that much of the last boom where high prices were given to the supply chain to expand capacity and you get the feeling they aren’t making the same mistake twice. The offshore supply chain needs to digest the implications that while ‘lower for longer‘ may not have held for oil prices it appears to be an apt description of demand for offshore services.

“Preparing for the recovery”… Whatever…

The IEA has recently published it’s new World Energy Review and if you have been reading this blog this comment will come as no surprise:

One notable trend concerns the relationship between oil prices and upstream costs. In the past, there has been a roughly linear relationship between upstream costs and oil prices. When price spiked, so did costs, and vice versa. What we are noting now is a decoupling. While prices have more than doubled since 2016, global upstream costs have remained substantially flat and for 2018 we estimate those increasing very modestly, by just 3%. Companies appear to have learned to do more with less.

Too many business models in the offshore supply chain are simply ignoring this. If you are going long on Borr Drilling shares (for example), as anything other than a momentum trade, then you need to look at data driven forecasts like this, which in statistical terms are called a structural break. Look at the cost deflator in the graph above! In an industry with high fixed costs (both original and operating) that is a straight financial gain for E&P companies and with the volatility in the oil prices they will not give that up easily… and in a world of oversupply they won’t have to.

The future will be different. Some vast market snapback where the Deamnd Fairy appears, and everyone brave enough to have paid OpEx in the offshore supply chain has found a clever get rich quick scheme, is an extremely unlikely event.

More data points like this should make you think as well:

IEA Source.png

Yes, I get the volume in absolute terms is growing, but it is change at the margin that defines industry profitability.

There is still too much liquidity and too many business plans talking as if a return to 2013/14 is a certainty when in reality such a scenario would be an outlier.

Greece, Solstad Farstad, and other restructurings…

The recent Greek debt deal is proof that when no other option exists lenders will sometimes do the right thing. Greece it should be remembered was a banking crisis as well as a sovereign debt crisis, and although the Greek banks are recovering five years after the first major ructions they are still on life support from the ECB. This should provide both some degree of hope and reality for Solsatd Farstad when they announce where they are on the latest restructuring this week. I understand that as part of the process the Farstad name will be dropped in October/ November and the Farstad’s will sell out and not be associated with the company.

The banks and investors now seem to be aware of the scale of the problem here and realize that a booming market isn’t coming and isn’t going to save anyone. The high-end AHTS have even had disappointing day rates relative to expectations (hopes?) and the Q2 numbers will simply not bank enough for a long idle winter to give anyone real comfort. And all the while the Deep Sea Supply fleet festers like a cancer on what healthy tissue remains in the body. Now only an agreement with the banks can  provide any long term solution.

Offshore companies remind me of banks in a funding sense, hence why I mention Greece, as the debt dynamics and issues are broadly similar. Offshore vessel operators fund themselves in charter markets that are significantly shorter than the economic life of the assets they buy. Charter periods dropped from 5-8 years in the early 2000s to complete spot market/ at risk vessels by 2013/14. That is complete market risk funding the purchase of a 25 year asset.

Banks also borrow-short and lend-long, in simplistic terms they borrow money as deposits and lend them to businesses for significantly longer periods of time, and while the deposits can be drawn down as requested the loans cannot. There is in effect a funding mismatch called “maturity transformation” which creates value.

This same sort of duration mis-match between the vessels owned and the charter market created huge value for offshore vessel and rig companies in a booming market. Vessel owners committed to 25 year assets, with 10 year loans on 12-15 year repayment profiles, and funded this in some cases purely in the spot market. In trading terms it was a carry-trade with the high yield short term market being funded by a long term lending market. This was a totally procyclical financial phenomenon that meant the short-term market had a pricing premium compared to the long term cost to anyone who took the risk to commit assets to the short-term market. Now, just like a banking crisis, there has been a freeze in the short-end of the market and this is impacting their ability to meet long term commitments. As Paul Krugman stated “if you borrow short and lend long you are a hedge fund and should be regulated like one”, and that is in effect the embedded funding profile of many offshore operators prior to 2014.

That model is now dead, although not completely, but I think this is the most important, and maybe the least discussed, part of the industry change. And there will be change, not through any grand initiative, but eventually as the market recovers and banks lend on offshore assets again they will force the counterparty to have a longer term contract, and gradually the time/duration risk will be more equitably split than it currently is in an oversupplied market. But I think that is going to take a long time.

It will also mean for smaller E&P operators, marginal producers, their costs could increase significantly for assets on the spot market… and they should! Building assets in the tens-to-hundreds of millions and relying on the spot market to clear them just isn’t rational, as is currently being shown. Being able to call up a jack-up PSV, AHTS, CSV or whatever at a moment’s notce and get it delivered in a few hours or days is currently proving to be a terrible business model for asset owners. Longer term the industry should move to larger operators with a series of longer contracts that roll off in a time efficient way rather than everyone thinking they can clear excess capacity in a short-term market. Larger E&P companies will commit to longer contracts and get a much lower margin as a result. Those providing short term assets will have to charge a substantial premium for this given the risk involved but it will be a smaller, risker part of the market, with substantial amounts of equity to cushion the cyclicality required. It is this factor that I think will drive consolidation far more than any cost savings: how much idle time can your business model handle?

The solution is therefore going to look like banking resolutions in Europe. Traditionally that has meant either a) bankruptcy/insolvency (and there is still more of this to come), or; b) a good bank/ bad bank split (e.g. Novo Banco). Solstad I think could eventually go this way: Solship 3/ Deep Sea Supply was an early attempt at this but failed. More radical solutions are needed now but the final solution will end up more like this. In order to compete with Standard Drilling and others in the North Sea the banks behind Solstad would need to equitise their entire expsoure to the PSV fleet and the most likely new “bad bank” starts here. The “bad bank” they already own, Deep Sea Supply, needs to be cauterised. All the banks have with these assets anyway is a claim to some future value when the market recovers and they want someone else to pay the OpEx to get there. It might have worked in 2016 but the investment narrative has changed since then.

These are moves that take months not weeks and not all the stakeholders are in the same place. A cold winter with lots of tied up vessels is likely to bring these groups closer together. Resolution is some way off. Eventually, when all the other options have been exhausted, the banks are likely to do the right thing here.

Investment will be sufficient…

I think this is very big news for offshore energy:

“Over the next 10 years, we see that supply will continue to keep up with demand growth,” said Espen Erlingsen, an analyst at Oslo-based consultant Rystad. “The surge in North American shale activity and start up of new fields are the main drivers for this growth.”…

The upshot is that it costs less to expand global oil production today than it did back in 2014. Rystad said industry spending in recent years will deliver the necessary 7 percent growth in global oil production to just over 103 million barrels a day by the end of the decade. That trend will continue over the next 10 years if oil remains between $60 and $70 a barrel, it said.

For as long as the downturn in offshore has been going on the Demand Fairy of recovery has been posited on the seemingly axiomatic logic that insufficient investment now would bring a boom in demand in later years and only offshore could supply this capacity. Indeed almost every restructuring presentation or positive talking up on the sector seemed to have a variation on this theme, it was the meme that made a quick recovery believable to those determined to try.

Rystad appear to have re-run their models with the structural break I referred to earlier, where altering the volume of output to the value of input, produces much higher output levels than previously assumed. Rystad aren’t saying there won’t be growth, but it will not be exponential driven by a supply shortage, in the next three years anyway, and maybe not for the next ten years. ‘Lower for longer’ might not be strictly accurate for the oil price but it is likely to be for rig and vessel rates. And magically supply will equal demand. Just as the shale pessimists always had a mind numbingly boggling theory about how it could never work in the long run, so the offshore bulls have always stuck to their theory that the market was being irrational in the short-term and would eventually see sense. The longer the downturn has gone on the more unsustainable that argument has become.

Interestingly offshore global investment (not defined) rises from $164bn in 2018 and 31% of total spend ($345bn/39% in 2014!) to $189bn and 32% of total investment spend in 2020 (a compound growth of ~7%). Shale goes from 12% in 2016 to 24% in 2020. Total upstream CapEx drops from $890bn to $584bn from 2014 to 2020 in the Rystad forecast. If that is correct (even directionally) it is a severely deflationary market environment with huge implications for asset values and solvency going forward.

The IEA says spending dropped about $338 billion, or 44 percent, between 2014 and 2017.

The shale revolution is real and here to stay and it is completely unrealistic for the offshore supply chain not to accept the scale of change required to adapt to this new environment. If you see a “recovery play” that doesn’t explain how it works within this macro context, or how this is wrong, then it isn’t realistic. Expect to hear the phrase “we are doing a lot more tendering” instead of an intelligent response.

The oil market was previously very cyclical because there was no short-cycle marginal prodcuer who could respond quickly to changes in demand. Investment was hugely cyclical because of this. Supply was met with a series of large and lumpy projects planned years in advance and oil companies erred on the side of caution in doing so. Marginal production was supplied by smaller tier two producers who were predominantly offshore. The price change-to-output response time was slow but could be brutal as the downturn in oil price in 2009 showed where a host of small high cost producers went bankrupt. [Read Spencer Dale!].

Now US shale producers are very responsive to price trends and production increases as price does. This is the major change to the market and it is such a significant change that this is why it is (rightly) called “the shale revolution”. It was a price-output feedback meachanism that simply didn’t exist before. Yes, shale might be more expensive, but it is an immediate dollar of revenue, lower risk and lower margin because of it, and that is what the marginal barrel, the next barrel of oil required for the market to balance, should be priced at. Oil as a spot market will be less cyclical going forward as the market responds more incrementally to price changes, a point that Rystad effectively make above.

In a more rational market, with smaller supply/demand imbalance the logical solution would be for larger vessel and rig companies to get into a series of longer term contracts with E&P companies for the provision of assets. This would reduce the cost of ownership (and finance) and therefore the day rate, and also reduce the risk of oversupply. Over time the market may well go this way and this will drive real consolidation, particularly in the offshore supply market, smaller operators of high-end OSVs will become a relic. But for the moment the E&P companies will simply take advantage of the over-supply to gain access to an asset at below it’s economic cost.

State of the nation…a slow trip towards equilibrium…

Loads of news happening that seems to sum up to me the state of where the offshore and subsea industry is at the moment. Dare I say it but we appear to be approaching a sort of equilibrium point where demand and supply are converging around more stable levels.

The FT reported on Monday that:

The US shale oil revolution has reached a landmark moment, with the sector’s top companies for the first time earning enough cash to cover the cost of new wells…

From the time the first shale oil test wells were drilled in the US in 2008-09, the industry’s capital expenditure has exceeded its cash from operations, with producers only able to stay in business by attracting hundreds of billions of dollars in financing from bond and share sales and bank loans. From 2008 to 2017, US exploration and production companies raised $293bn from bond sales, according to Dealogic.

That is what should happen to a marginal producer: they must become profitable at a cash flow (and economic) level so there is an incentive for them to supply the next barrel of oil required. The great hope for some in offshore that shale was an ephemeral phenomenon can be firmly put aside.  To put that bond number into perspective the UKCS spent £14bn offshore in 2014, its best year ever! Efficient US capital markets have channelled the funds into an industry where the long term prize was clear.  And as I constantly say here it wasn’t just a capital story it is a productivity story:

Scott Sheffield, chairman of Pioneer Natural Resources, said its wells in the Permian Basin of Texas and New Mexico were now 300 per cent more productive than four years ago, driving down the oil price needed for them to make a profit.

“In 2014 our break-even price in the Permian Basin was probably $55 or $60 a barrel,” he told the Columbia Global Energy Summit last week. “I would never have thought that the Permian Basin could drive down the break-even price to the low $20s. And we did it.”

So it is hardly surprising that today Heerema announced they are pulling out of pipe-lay, converting the Aegir to a heavy lift vessel that will also work on renewables, and laying off 350 people. The Aegir was only added to the fleet in 2013, yet a mere 5 years later the market has changed so much that a premium asset must now be re-engineered as a completely different economic proposition. I have statistical issues with microcosms but this struck me as one.

Heerema have called it right in my opinion: the deepwater lay market, and pipe-lay in general, is now totally over supplied. Some companies and assets will have to leave the industry in order for it to rebalance. Heerema simply doesn’t have the  financial resources or integrated solution of the “Big Three” (TechnipFMC, Subsea 7, Saipem).  Heerema were annoyed when EMAS seemed to copy many of the unique features of the Aegir for the Constellation (which is of course now in the Saipem fleet), but the economist in me says that only reflects how high returns have to be in this industry to reflect the risks. Saipem have arguably appropriated some of the value from the Aegir and Heerem’s IP…. although the trade-off was an asset built in TriYards Vietnam so maybe it will all even out… Quite what move Allseas makes next remains to be seen but they must be starting to feel lonely.

Maintenance spend will increase as higher prices make it economic to refurbish older wells or those shut in now. But the installed base on which future demand predictions were made will be permanently smaller. Prices for E&P companies will eventually have to rise to recognise that someone building a $600-700m construction vessel, with no forward order book, is a very risky business model and investors need to be compensated for this. Especially when the downside can be at least a 50% discount to build cost in a managed sale.

But this time as the oil price has crept up E&P companies have failed to shine as in previous eras of rising prices as they are burdended with excessive debts and sceptical investors who want to share more of the upside in a boom. There is a very good article from Bloomberg here:

At fault, a toxic troika that combines gushing supply with fears that long-term demand will flat-line as electric vehicles and renewable energies grow, and climate change policies proliferate. And while cash flow for oil’s majors in 2018 is likely to be the highest in 12 years, investors are largely unmoved…

Oil executives acknowledge that it’s too soon to win back investors. Shell CEO Ben van Beurden has openly talked about a “credibility and track record gap” between the major oil companies and its shareholder base.

“We need to show a little bit longer we mean what we say in terms of capital discipline,” he told reporters last week. “This newfound religion and confidence is, to say the least, fragile.”…

“The investment community still is not sure we’re going to handle these higher prices with discipline,” BP Plc Chief Executive Officer Bob Dudley said Tuesday. “Then there’s a section of the investment community that wonders why we’re not investing more in batteries and cars and renewables.”

E&P versus market.JPG

You can see above that higher oil prices haven’t meant much for E&P companies. One central issue is CapEx spend where large companies are making a promise to investors not to spend on mega projects in an era of rising prices. Smaller companies, offshore companies, are struggling to get finance at all. If you want it set out explicitly here it is:

Big Oil’s first quarter results are “a chance at redemption” after a poor fourth quarter of 2017, Biraj Borkhataria, a London-based analyst at RBC Capital Markets wrote in a note. Investors will reward companies whose cash generation rises at the same rate as oil prices in the period, and no new plans to raise capital spending, he said.

Get that…? An increase in oil price goes out in debt reduction, dividends, and stock buy-back not offshore projects to increase supply. No to hitting the supply chain with massive orders that cause a spike in prices as the spot oil price increases.  E&P companies are going to make money in an  era of rising oil prices from higher prices, not from taking the money from rising prices and putting it into more production to take advantage of potentially higher prices in the future. It is a very different investment dynamic. It might change in the future, but it will take a long time to be felt in the offshore supply chain, and there is no guarantee it will.

And by the way it doesn’t matter if you believe the “toxic troika” theory or not… the people who buy the shares in E&P companies, and therefore ultimately fund large projects, do. And collectively they are making it harder for these projects to be funded by insisting on higher cash payments from E&P companies. So perception has become reality.

This is an environment that favours offshore field developments to supply a baseload of high volume/low lift cost supply while using shale for marginal demand. Some smaller field developments will of course happen, TechnipFMC has an good video here about how standardised they will be in shallow water for example, but it is harder not to see offshore developments being marked by larger projects or infield work.

This is a market heading for equilibrium, yes there will be rising oil prices, but no one, not even the E&P companies, feel like this is a boom. Yes, it is better for E&P companies than the offshore supply chain, although the onshore supply chain is booming in US onshore. A number of offshore contractors are making money, they are more than cash flow positive, but the order book is weak and few points utilisation either way is the difference between a breakeven and a loss. The supply side will still face a contraction, sensible M&A will occur, services will be more profitable than owning tonnage, and companies will make money. But returns in excess of the cost-of-capital look a long way off for the offshore industry given that the last boom showed how expensive the cost-of-capital should really be on a cyclically adjusted basis.

A really big boat, asset specificity, and Chinese finance….

The picture above is a purpose built vessel, a deepsea mining unit for Nautalis Minerals, currently being built in China at the Mawei yard. It is undoubtedly an amazing piece of engineering, enormous as can been seen: 227m x 40m . A few more shots here:

The problem of course is who is going to pay for it. This is a deal that has been kicking around the market for years, a complex vessel, with few other potential buyers, ordered in the boom times with no takeout financing. Surely, yet again, like the DSVs floating around at the moment the yard is going to be stuck with this?

The economics of this argues that a charter is not the right option for Nautalis here. The vessel is the perfect example of asset specificity where it has a higher value to Nautalis than any other owner, and logic would dictate that Nautalis should raise the capital to pay for it. But Nautalis may get lucky here that the yard knows this and will simply have to charter them the vessel to avoid a firesale for an asset that has few other natural buyers. Delivery date is approaching here and it will start to get interesting.

When you read about the Chinese credit bubble it isn’t all in real estate (although a fair proportion is). This asset is one of number where it seems fairly clear that the losses, or at least the risks in the case of this vessel, will be taken by a semi-private entity at some point, maybe moved to a state bank leasing arm. The question is how systemically important the number is overall for all the Chinese yards? Rumours in China abound that the UDS may end up with the Chinese Navy or Coastguard.

At some point, as the German banks discovered, lending money to make ships that people can’t pay for, even as great short term job creation scheme, has an enormous economic cost.

There is a good article here summarising the Chinese push to become far more active in ship finance as part of a broader strategic plan. I have no idea what the bad loan capacity is for China Inc. as a whole in shipping, in offshore the Chinese lease houses appear to have paid top dollar for some average assets, but so did everyone in the boom and staying power will be important the longer demand stays depressed. In general shipping they may have missed the worst and be coming in at a good time.

Regardless, quite what happens to this vessel will make an interesting case study of how these issues get dealt with. Ship building is a relatively low margin industry that takes massive risks to get orders in the door, often with tacit or explicit state support, but when it goes wrong the potential losses seem so much larger than the upside ever offered. Hopefully the number of speculative new builds for such specific assets, without take-out financing, will drop going forward because it is so economically inefficient. But I doubt it.