Ocean Yield joins the gig economy…

The gig economy is empowerment. This new business paradigm empowers individuals to better shape their own destiny and leverage their existing assets to their benefit.

John McAfee

In today’s gig economy, where jobs have been replaced by ‘portfolios of projects,’ most people find themselves doing more things less well for two-thirds of the money.

Tina Brown

Uber drivers around Oksenøyveien should drop in to Ocean Yield and give the Rokke’s a friendly high-five and welcome them to the gig economy. No more does the Lewek Constellation have to slave under the instructions from Tower 15, they are free to set their own destiny, do with the vessel (soon to be renamed I’m sure) what they wish. Pick and choose jobs merely by switching on an app (metaphorically I guess). The drop in the charter rate from USD 105k per day to USD 40k per day must have felt a little painful, but hey, joining the hipster crowd was always going to be expensive… It’s good to see the blue blood of Norwegian business joining the post-Fordism dream… I may even open a check shirt and beard trimming service around the corner…

It will be interesting to see what value OY mark this asset down to in their next accounts and quite how painful keeping the vessel in full time charter mode will be. I am not sure  the Connector has aged well. A beautiful ship, but a jack-of all-trades-master-of-none in the current market and it is not a vessel well designed for the gig economy.

There has never been a spot market in the offshore for vessels of the this sophistication. All the current contractors who could utilise the system have too much capacity (for years) and anyone who doesn’t have an asset like this isn’t going to make the bid list for deepwater flexlay work. While the Connector has been off doing oil and gas work a host of renewable lay vessels have come into the European interconnector market (think Maersk Connector that can be grounded for beachhead work) and so much flexlay capability in oil and gas has been added in a fixed and modular buildout boom that this looks like a tricky asset to see a natural home for.

The charter rate is a 62% reduction to the previous rate and comes with only a three month backlog. Comparable vessels are struggling to get more than USD 20-30k a day in regular work for a time charter and long-term jobs go for much less, some of this reflects the fact much engineering work will have been done based on the vessel.. Running costs must be in the vicinity of USD 15k per day if OY crew it up and have it ready for time charter work. A rational basis would suggest therefore that a reduction of 80% to book value maybe appropriate. I suspect they will be less agressive than that… although a long spell without utilisation will do wonders for the power of rational thought.

With a broad portfolio of assets OY have no need to pretend the vessel value and future is something it is not and may just take the hit to save them having to explain its position every quarter as they announce results (which would detract from some of their excellent investments). Willing buyer/ willing seller will be very interesting here.

How much is the Lewek Constellation worth? Somewhere between USD 43m and USD 370m (I’m closer to the former)…

“His services are like so many white elephants, of which nobody can make use, and yet that drain one’s gratitude, if indeed one does not feel bankrupt.”

G. E. Jewbury’s Letters, 1892

The EMAS Chiyoda restructuring plan nears execution. The most interesting aspect to me is what the Lewek Constellation is valued at and how the banks get this problem off their hands (i.e. how much of a loss do they have to take?) Outside of Saipem, SS7, Technip, McDermott, and Heerema (maybe) it is very hard to see who the realistic buyers would be? There is no spot market for these assets because you need a huge engineering capability (and cost base) on the beach to run one of these assets. And the real problem is that all these potential buyers have added substantial new tonnage in deepwater pipelay very recently. (My previous thoughts on asset specificity and transaction costs are here). Without a dramatic improvement in the market it’s hard to see why anyone would want this asset?

Or not? In the Chapter 11 reorg Subsea 7 and Chiyoda are essentially providing a USD 90m Debtor-In-Possession  facility that sees them take over 5 EMAS Chiyoda entities emerge that have 15 projects with c.1bn in backlog. Subsea 7 obviously decided this was the easiest way to get the work, and when you drop c.USD 1bn in backlog in a year it’s easy to see why you want to be inventive. The big SURF scopes are Cape Three Points and Chevron Tahiti Vertical Expansion. Given how far the engineering had advanced and the fact the contracts had been awarded it is easy to see why Subsea 7 would want to take some risk getting this work.

Some context: back in 2013, the build year of the Lewek Constellation, Clarkson published this graph:

Clarkson Subsea Trees Nov 25 2013

Now Clarkson’s are no different to anyone. I could have picked any number of information providers, the commonly held view was only how much growth there would be, and how much kit you needed to access it. Shale was not in vogue and starting it’s extraordinary journey.  Although as an aside, because I don’t want to delve into shale productivity here (but you can read some of my thoughts here and here), the US rig count was higher than it currently is.  But the point is clearly that boards, managers, and financing institutions all thought the market would evolve something like that graph. On such a basis the investment decision was made for the Lewek Constellation and DNB and a syndicate of banks advanced USD 503m in two facilities and got two Panamian mortgages and a credit agreement in return. Of that USD 370m in capital is outstanding under facuility A (and the 100m from facility B is effectively written off) in the Chap 11.

The market has obviously changed somewhat:

Subsea Tree Awards 2000-2019e

The single best indicator of future demand for heavy installation vessels is subsea tree awards. Now it is clear that demand has dropped and will remain depressed for a long time at around 2003/2004 levels. Strip out Brazil, where Petrobras has extensive spare PLSV capacity for flexlay, and you are within a margin of error of 2003 numbers. Yes, more proportionately will be in deep water, but the subsea lay fleet was built for 2013/14 not 2003 and no amount of deferred consideration can change that.

Let’s be clear the Lewek Constellation is a capable vessel, but I wrote here about competition: a significant number of competing vessels have been built in recent years and this is all about competition at the margin. These types of vessels don’t work to their maximum potential every day, they work on a broad range of smaller jobs and then make real money on a couple of jobs of a year where the competition is less and pricing is based not only on vessel capability but about engineering value added by the contractor. None of them is differentiated enough to win a project in its own right.

So a market transaction has been reached whereby Newco (owned by Subsea 7) will charter the vessel for USD 4.3m per annum and the cost of the dry dock (c. 2018) is split 50/50 at ~USD 5m each. That is, in the current environment Subsea 7/Newco judges that it is economic to add marginal (extra) lay capacity at bareboat rate per year of USD 4.3m, plus drydock accrual and operating expenses,  and the bank/owner has agreed it is economic to charter their asset at this rate. That is a market-based economic transaction between a “willing-buyer/ willing-seller” for the capital value of the asset and it reflects some backlog that a qualified purchaser can deliver with it. Subsea 7/Newco has an option to purchase the asset for USD 370m during the first 2 years of the charter agreement and this is then used a “floor” going forward or broker valuations less USD 20m. The extension options rise dramatically (see below).

Now if you add 3% per annum to the charter rate, add in dry dock costs, assume 10m salvage value in 20 years, and discount this back by the DNB WACC (10.4% today) you get an implied vessel value of ~ USD 43m.  I would argue that is a fair value for the vessel, which is pretty much in line with the discount MDR paid for the Amazon and NPCC paid for Atlantis (I mentioned this yesterday).  [I used the 3% growth in the annual day rate to reflect an industry with excess capacity and therefore growth roughly inline or above a CPI measure, obviously the mortgage banks would regard this number as unacceptably low. However, I think the discount rate at DNB WACC (rather than funding costs or liquidity spreads perhaps) given the project risk is far too low. Obviously different inputs will lead to different results.] For the sake of a comparison in order to get the vessel value to anything like USD 370m you have to increase the charter rate 25% per annum for the entire assumed 20 year period! The charter rate is also linked to a LIBOR adjustment, something that is very rare, and highlights how senstive the banks are to a valuation projection here.

This purchase option number strikes me as a fantasy and reflects the fact that DNB recorded a capital value of USD 370m outstanding in the Chap 11 filing. If you look at the forward order book for subsea trees or announced projects in three years, and all the excess capacity on the vessels, who really believes Subsea 7 is going to pay USD 60 000 per day in 4 years time (USD 21.9m per annum) rising to USD 80 000 per day (USD 29m per annum) in 5 years time? You might do under the assumptions in the first graph but not in the second. It is a chimera to help the banks out and allow everyone to play for time. The initial charter rate implies a 1.16% interest rate on the capital outstanding, so DNB don’t really believe the USD 370m figure, but it highlights the size of the economic subsidy required now for everyone to pretend they haven’t lost as much money as they say.

I was a big fan of Subsea 7 just handing the asset back and forcing the banks into a lengthy period of nervousness and reality, but it would have meant Subsea having to tender for the work. I believe that the Lewek Constellation is such a specific asset that it is actually effectively valueless in the current market. The best thing for the industry was for the asset to fade into obscurity; in this market, and after Ceona, no one would risk a start-up and few other companies would have agreed to help DNB. Clearly Subsea 7 have a strong cash and liquidity position, need the work, and this gives them an option if the market really did take off again. However, surely the most likely scenario from the banks point-of-view, under any objective reading of the market, is that in two years Subsea 7 come back and tell them to start getting real about the price and the asset value? There is a very Norwegian behind the scenes solution going on here with DNB obviously desperate not to have to recognise the vessel at a fire sale price now, or expose itself to the OpEx, and in all likelihood was involved in soliciting Subsea 7 as part of the financing shop around discussed in the documents.

If the Bibby bondholders are looking at these transactions closely they must be getting nervous now. With the bonds trading in the mid-60s the implied valuation of the Polaris and Sapphire is c.GBP 105m, a number that looks as egregious as the USD 370m purchase option for the Lewek Constellation.

The big risk for Subsea 7 isn’t the committed expenditure, which amounts to USD 4.3m for charter per annum (+ the undefined LIBOR spread), + vessel OpEx (probably the same), and c. USD 5m for the dry-dock, it is that they appear to have agreed to deliver the EMAS Chiyoda contracts for the same lump sum price and contractual terms. The few projects EMAS Chiyoda delivered were a disaster in engineering terms, and that isn’t just Angostura, I have spoken to people who have managed other jobs with them. If Subsea 7 haven’t had enough time to due diligence the project engineering and costing properly, which is notoriously hard in lump sum jobs, they are going to have a big problem. Although the contracts appear to be novated to Newco, who exposure in one set of documents appears capped at USD 90m (that may be a placeholder), such a situation is likely to involve other Subsea 7 tonnage and exposure through the supply chain. Subsea 7 are one of the world’s great engineering houses but in 2013 a painful conference call to discuss Guara Lula (which they had bid themselves) led to these comments:

[w]e moved into the offshore phase of the project in the second quarter, with the Seven Polaris and the Seven Oceans being deployed on location. We are experiencing more weather downtime than originally planned due to severe weather conditions in the Santos Basin during the Brazilian winter. We have suffered equipment damage and the resulting downtime on the Polaris due to this bad weather. We expect these conditions to continue until the season is over. Although we are contractually covered for time spent by the prime vessel waiting on weather, we incur additional costs, both offshore and onshore, which are not covered. In addition, we have taken a more cautious approach in evaluating what can be achieved offshore during periods of calm weather, in view of the complexity of the facts involved…

Second, the stretched supply chain is resulting in delays from international and local suppliers….

[t]here was a delayed start to pipeline fabrication at the Ubu spool-base largely due to customs clearance issues. Initial productivity at Ubu has also taken longer to ramp up than expected…

A re-evaluation of the offshore risks based on experience to date, and the extended timeline of the project, has resulted in us increasing the estimate full-life project loss by between $250 and $300 million.

Final losses were USD 355m and that was on vessels and a project they tendered internally. Subsea 7 don’t know this vessel at all, and the engineers and tendering staff had all been instructed to win these tenders at all costs having spoken to people involved in tendering at that stage for EMAS. It may not happen, and they may have done sufficient due diligence, but when you agree to go basically lump sum you are taking execution risk on a tender and asset outside of your management system. Don’t complain later you couldn’t have forseen it, but backlog looks like it is going down so fast they may feel they have few options.

At some point the industry (contractors and financing institutions) are going to have to accept that if all this tonnage remains in operation, and the operating costs are included, then it will have a structural profitability issue without a dramatic change in demand that just isn’t occuring. Yes the Lewek Constellation is a flexible asset, and it can save a variety of vessels working in the field, but those vessels exist now, amongst the current contractors. If an E&P company really wants this specific vessel because of its advantages let them buy it? It only looks more “efficient” in the field compared to other vessels because it isn’t being compared to the historic investments currently solvent contractors have made in a fleet of vessels that collectively perform the same function.

Maybe Subea 7 are looking to retire some older tonnage later on and the easiest way to get over a difficult discussion with the banks was to kick the problem into touch? But at some point the discussion will have to come and I would have thought the banks auditors would have forced it now because in a default situation the value of the vessel is very clear: about USD 43m on a standard capitalised valuation framework. Convincing the auditor that in 36 months you will get a 6x uplift in the day rate when the market forecast is for negligible growth and stable supply strikes me as unlikely in the extreme.

The amount of offshore work may have hit its bottom level and some good contracts are being awarded, but as Eidesvik reminded us today more restructurings are coming, Solutions like this which simply push the eventual reduction in asset values further into the distance will only ensure continued weak profitability for vessel owners (and banks).

Follow the money… it’s all in the numbers…

“We no longer believe because it is absurd: it is absurd because we must believe.”

 Julio Cortázar, Around the Day in Eighty Worlds

At some point companies are going to have to stop reporting poor financial results and say things are looking good from a tendering perspective to retain credibility (or will they maybe their shareholders want to believe as well?). This week Solstad seemed to pull this trick, while the most brazen appears to be Subsea 7 who while annoucing that their order book had dropped significantly, stated that:

[We have] [c]ause to believe in an improvement in SURF project award activity within 12 months

Early engagement activity increasing

This despite the fact that 1 year ago they had $6.1bn in backlog and they currently only have $5.1bn. Subsea 7 is more exposed to EPIC projects and I believe these will form a bigger percentage part of the market going forward, but it’s still a bold call.

For Solstad the alternative explanation, announced by Bourbon, is that there is no recovery. Or as Siem Offshore stated this week:

we believe there will still be an oversupply of AHTS vessels and PSVs and expect the market to remain challenging for several years. The charter rates and margins still remain below what is sustainable. (Emphasis added).

Part of me thinks the offshore industry just isn’t used to an environment where the forward supply curve price isn’t fundamentally different from the current price. It is worth noting that on an inflation weighted basis the oil price peaked in 1979 and then dropped in real terms for 19 years to reach an all-time low in 1998, before stagnating for a couple of years, before the inexorable rise that we all regard as the new normal, began.

The major reason for the steady decline was both supply and demand based. New sources of supply came on, technology advanced, and high prices encouraged substitution. Clearly it isn’t an iron law that prices will keep rising over the long run as if it is an immutable economic law, yet it is taken as a given by certain sectors of the offshore community.

Solstad announced results this week that seemed to defy all logic. I don’t know how much money Aker have, but they have played the OSV market stunningly badly since the downturn began, and one would think sooner or later they will get sick of throwing more money away on vessel OpEx. Aker jumped into Solstad way to early, and yet for some inexplicable reason, (other than blind faith in a vessel recovery?) when more than 100 North Sea class PSVs were in lay-up in January, agreed to effectively bail Farstad out and combine with DeepSea Supply. Now Solstad came out with this predictable bullet point from their results presentation:

Majority of revenue and EBITDA from CSV segment

Really what a surprise! You just can’t make this up. What is working for them in this downturn is their high-end CSV fleet and then Solstad jump headlong into the most overbuilt commodity shipping in the offshore industry, Madness. The rest of the presentation is an exercise in mental dislocation from industry reality: DESSC’s cost leading business model is praised… but that doesn’t help at the moment when ships are going out for less than their economic value? It’s also not scaleable or transferable in an acquisition of  other vessels (or companies) because it relies on all vessels in the fleet being similar? And can you really have a low cost business model in this sector anyway? Its a boat + crew? What special insight does DESSC have in making this low cost? Apparently a strategic driver for saving Farstad’s banks is their AHTS experience? Great… Farstad are the most skilled company in a market segment that is structurally unprofitable? If the shareholders are like Aker and like owning companies that are the most competent at what they do regardless of whether they make money or not then this is a very good investment idea. I suspect it’s niche though because investors like that are rare.

It is all well and good highlighting that Farstad and DESSC are non-recourse subsidiaries of Solstad wth the implication being if it all goes wrong then they can be jettisoned. But of course JF took his holding in Solstad not the subsidiary which shows you where he thinks the value is. The Solstad supply fleet will simply not be big enough to generate economies of scale that outweigh the negative industry structure or induce pricing power in any region. It is also debatable what the minimum efficient scale is in offshore supply? This was a transaction driven by the desperation of Farstad’s bankers and recognition by DESSC that trying to do a rights issue without a different investment story would have been extraordinarily dilutive given the cash would have been used for OpEx only. Quite how it was sold to Solstdad/ Aker is anyone’s guess.

A good comparison is Gulfmark which is going into a voluntary Chapter 11. Gulfmark will emerge with a clean balance and 72 vessels in the supply sector. If you want to look at a company with the potential to consolidate the PSV sector it is right there with a simple operational structure and balance sheet focused on one sector that investors can understand and measure. It is very rare  for companies to consolidate an industry that come from one of the high cost markets and then work out how to be cheap internationally – it usually works in reverse. US companies like Seacor and Gulfmark are going to be well placed to drive proper industry consolidation in a way that may not be possible for a company coming from a relatively high cost environment. Yet this industry feels a long way from the bottom when NAO Offshore with a mere 10 vessels, and 30% of the fleet in lay-up, all working at nowhere near their cost base, can say blithely:

Nordic American Offshore closed a follow-on offering March 1, 2017, strengthening the Company by about $48.8 million in cash. The main objectives of the offering were to strengthen NAO financially and position NAO for further expansion...

NAO sees opportunities to grow the Company… 

(Emphasis added).

I sometimes wonder if when Norwegian schoolchildren are young they are indoctrinated with a special ship class in which the answer to every question is “ship”. I imagine an immaculate schoolroom (paid for with petrodollars of course), a very small class, and 20 children with their eyes closed humming and intoning gently “skip… skip…. skip…” And the teacher asking “What is the meaning of life?”… and the gentle reply coming back immediately “Skip”… “What is 2 + 2?” … “Skip, Skip + Skip Skip”… “E=MC2?” “Skip”….

I am just not sure the answer to the current problems are more ships… I have a nagging suspicion it’s less ships. A lot less. Consolidation isn’t the only answer here a quantative reduction in vessel numbers is an yes smaller operators need to go.

DOF came in with revenue 23% below Q1 last year which makes it hard to point to any recovery. DOF also announced this week that they may list DOF Subsea as First Reserve would appear to want out. First Reserve have been in DOF Subsea a long-time, and it’s natural they would want to exit at sometime. But you should always ask why inside and knowledgable investors are selling now, at what some are calling the bottom of the cycle; maybe it isn’t the bottom? DOF Subsea project margins were 2.0%! Yes the DOF PLSVs in Brazil are now up an running, but as we all know Petrobras has far too much PLSV capacity and so I suspect First Reserve is trading off a very low point in the cycle against the cost of waiting which brings you a day closer to the possibility of a vessel being redelivered from Brazil.

DOS Subsea specialise in light IRM and small scale projects and out of the North Sea market (where you need a North Sea class DSV) owning a vessel is a disadvantage not an advantage (which isn’t true at the top end EPIC SURF contracting where you need a specialist lay vessel) for some projects as costs become purely variable. Every single asset DOF Subsea have can be chartered in from another company if you are project management house. There used to be a number of project companies that delivered projects but didn’t own vessels, that didn’t last as the market tightened from 2006 onwards and you simply couldn’t charter a vessel (I am trying to think of the Singapore/Perth company Technip brought?). But now that isn’t the case and so not only is there loads of delivery capacity in vessel owners and charterers, but small project management houses can, and will, bid and compete for jobs, which will lower industry profits structurally. The best strategy going forward is to have a fleet much smaller than your delivery schedule requires but still some core tonnage, companies that didn’t splurge in the last boom are clearly better positioned here.

Whatever the reason for First Reserve selling it is a fact that one of the most successful investors in the energy industry is lightening their exposure to the offshore sector. If you buy DOF Subsea shares you need to ask what you know that First Reserve don’t? Interestingly First Reserve hasn’t invested in an offshore exploration company since 2011 (Barra), but has invested in 7 tight oil plays since 2011, a pattern that seems to mirror capital flows in the industry. One wonders if Technip weren’t encouraged to try and by DOF Subsea and a lack of interest led to this way of getting out?

The obvious reason that First Reserve might well be selling is that they think the poor financial results are likely to continue for sometime and they see no easy answer to an industry awash with capacity and declining levels of investment and simply don’t want to fund working capital with an uncertain payback cycle. DOF Subsea has excellent project delivery capability but it simply too long on ships and unlike other contractors these are an essential part of their strategy going forward and they have no ability to given chartered tonnage back as the industry continues to contract.

DOF Subsea also have 67 ROVs. The quiet underperformer in the industry at the moment is the ROV space. Everyone at the moment is giving the ROVs away at costs + crew only. In the old days ROVs were so profitable because you used to able to hide a mark-up on the vessel in the contract amount and they looked very profitable. Now the vessel is given away for free as is the ROV and only the engineering generates some margin. There is clearly going to be some consolidation here and I believe it will be very hard for the smaller companies to raise additional funding without profitable backlog as it becomes clear that there will not be a recovery in 2017. A lot of companies in the ROV market have raised money yet offer the same thing as the industry leaders who have very strong liquidity positions and can play this game far longer than speculative investors. Reach is a well managed company, and can give vessels back eventually, M2 got it’s ROVs cheap, but both are going up against companies like DOF and Oceaneering and eventually, surely, investors are going to realise that without some sort of increase in demand the structure will favour the larger companies who have more equity to dilute to see them through to the final stages of consolidation. There is an argument that smaller nimbler ROV companies can respond better to IRM workscopes than larger companies, particularly at the moment with oversupply in the vessel market; we are about to find out if they can win sufficient market share to be viable.

Obviously there are different views about when the industry is going to recover and how it will look. That is legitimate as no one can know ex ante what will happen ex post but it is becoming apparent that 2017 isn’t going to be the recovery year people hoped and that more people are going to have to raise money to get through this. The Nor DSVs will need to start fundraising in August at the current burn rate, as will others, the dilution that the new money makes on the old money for these secondary fundraisings will be a clue I believe as to how close we are to pricing the bottom. The investors in Nor represented a group who thought there would be a quick bounce back in 2017 in the price of oil and subsea asset values, there are bound to be fewer the next time around and surely they will charge a higher price for their capital, and in many ways this is microcosm of the industry.

The best guide to calling this appears to be those that have looked at previous investment bubbles. Charles Kindleberger, in his classic study of financial panics and manias stated the final stage of an investment bubble led to panic selling which would mark the bottom of the cycle:

‘Overtrading,’ ‘revulsion,’ ‘discredit’ have a musty, old-fashioned flavor; they convey a graphic picture of the decline in investor optimism.

Revulsion and discredit may lead to panic (or as the Germans put it, Torschlusspanik, ‘door-shut-panic’) as investors crowd to get through the door before it slams shut. The panic feeds on itself until prices have declined so far and have become so low that investors are tempted to buy the less liquid assets…

We still look a long way off this in offshore supply and subsea.

 

EZRA fate depends on more than debt write off… it would need significant capital

“Don’t cry because it’s over, smile because it happened.” 

– Dr Suess

An update on the EZRA situation in the Straits Times this morning deals with one part of the EZRA problem:

Much of the company’s fate now hinges on the willingness of its creditors, including bondholders, to write off – whether partially or in full – its massive debt.

Which is true as I have said many times before here, but this would be nowhere near enough. What EZRA would need in addition to a massive debt writedown is a gargantuan injection of equity to fund the company through until profitability. I don’t what the exact number would be, but it is in the tens of millions, and I suspect that number is scaring the banks now. It would also need a completely new leadership team, but I will treat that as a given.

As the article rightly points out the banks exposure is to the high-end vessels like the Lewek Constellation. An engineering marvel it may be, a liquid asset that could be sold at anything like book value, it is not. I often talk here about asset specificity, which the offshore industry and their financial providers spectacularly mispriced in the last boom, but the Lewek Constellation is also an example of a complementary asset: the return on the asset increases the marginal return to another (or its owner). In the hands of a contractor wanting to do deepwater pipelay it’s a very valuable asset, but the reverse is also true, without the right owner such a specific asset is actually close to valueless. Intuitively we know this to be right about the Lewek Constellation, there is nothing else that can be done with that vessel without enormously expensive modifications. Banks should have had a much lower loan-to-value ratio on the vessel, in effect it was a project that was entirely equity risk should it go wrong, because even to hold it at port costs ~USD 15k per day, and it will take months to sell at a fraction of its build cost (unless Subsea 7 are silly enough to buy it) as the Ceona Amazon did.

There was a straight asymmetric payoff for EZRA shareholders here where they put up a fraction of the value of such a complex asset and received all the benefits if it worked and the banks were left holding an unsellable asset with high running costs if it didn’t. It is also clear, and this should be a warning to anyone thinking of funding this, that EZRA massively underestimated how long it would take the vessel to get decent utilisation, and therefore how much capital would be required to fund the roll-out of the Lewek Constellation. A new contractor could realistically only hope to win one or two jobs a year with such a new specialised asset, the EZRA equity holders would have had to accept dramatically lower utilisation than anyone else, and therefore lower immediate payouts (dividends), for the prospect of a higher value firm in the future (if you were following MM theory). But that is equity risk and it is clearly a big number when funding a deepwater pipelay asset to challenge the world’s industry leaders.

But the banks behind EZRA have a choice: accept the loss now, or risk putting millions more in working capital into the venture in the hope that the asset values will increase enough, and the company can repay even more money in the future. Both are really bad options in the current market. Any new equity investor not already exposed to this company would demand market prices for the assets, which doesn’t help the banks at all, but to take an equity position (whatever for the semantic legal definition the capital injection took) to dig themselves out of a very deep hole is a real problem for banks. Equity risk has to be reserved at almost a 1:1 ratio under capital adequacy provisions at the moment, and for good reason: no one can tell when this market is coming back, and indeed if it will ever come back like before.

And even if the market turns a reconstituted EZRA would be competing against Technip, Subsea 7, McDermott, and maybe, longer-term, Saipem (for another blog day). This new company would require sufficient capital to convince the Board of any potential customers that they were the right partner for a large, strategically important, complex offshore field development that would cost in the tens-to-hundreds of millions of dollars. I don’t see anyone taking them up on such a remarkably unattractive offer, in this market, with a surplus of good assets and contractor capacity, you would be mad to willingly choose EZRA as your offshore development partner. All engineering and procurement work for long-term projects is effectively contractor specific and exposes potential E&P customers to becoming unsecured creditors should the new EZRA fail, so it would need a fortress-like balance sheet to convince people they will be here next year, or the year after, but would you hand over a key strategic project to a contractor who has just come out of Chap 11 and defaulted on a large number of people throughout the supply chain? I just don’t see it.

In addition, it would appear that the Norwegian arm is to be liquidated and contracting on this scale only works as a global operation. There is simply no industrial logic for a recapitalised EZRA.

If the banks want a lesson in how expensive a strategy of providing working capital in a depressed offshore market can be they need look no further than Nor Offshore and their two DSVs parked at Blyth. Having raised USD 15m last November, and making a big deal about how much financial flexibility this gave them, they now look certain to have to raise funds again at the end of this year as the entire amount will have been spent on working capital without any work being generated in 2017 (remarkably like 2016 for them).

Nor are desperately hoping that their combined bid with Oceaneering for the BP Trinidad work will come to them. I don’t see it. Bibby have the Bibby Sapphire in the Gulf, know the worksite etc. DOF have the DOF Achiever in the region as well. Would BP really bring a new DSV, with a new crew, that hasn’t dived in a year, and put it into a complex and tidal worksite? I rate their chances at less than 5% (and on a rational basis 0%). Unless Oceaneering has a remarkable relationship with someone at BP I don’t see it happening: at the end of the day a DSV puts people on the seabed and someone at BP would be accepting that if anything went wrong from a safety perspective they had taken a very risky option. And given the market BP would not save any money in doing something so risky. BP need the work done and they need it done safely.  Sure BP, try and get the price down, but who would risk their job to take such a decision? Safety first in everything we do right?

And even if Nor/Oceaneering won the work it’s a 20-25 day transit, 400k on fuel (which BP won’t pay for), and then sea trials, bell run trials etc. Madness. The Nor bondholders will be going backwards in cash flow terms given current day rates at OpEx only, just to get the boat moved. So they will be raising money at the end of the year, or selling the vessels for a lot less than they had hoped, when they raised the USD 15m last year. It is literally locked in because they have no other work and no hope of recovering their liquidity position given the market and their position in it.

Such a situation is magnified a hundred times for the banks involved in EZRA. Someone senior would have to agree to in effect provide enough working capital for at least 24 months to prove they were going to make it through, potentially offer refund guarantees against procurement and engineering etc. As Nor has shown there is no guarantee that conditions will improve in time if you simply sit back and watch. And Nor is bidding on short-cycle projects, most of the construction projects EZRA would have to tender take years to come to fruition and the tendering costs, which require vast engineering resources, are extremely expensive (particularly when you are starting with a pipeline of nothing). As I have said before as well there is no proof that EZRA was actually any good at contracting: the BHP project in Trinidad I believe was a significant loss maker, I have had many people tell me the engineering coming out of Singapore was substandard, and I spoke to someone about the work performed in the Med and they couldn’t have been more critical of the work standard. EZRA is a busted flush.

Investors, or potential investors, should remember my favourite maxim of The Great One: markets can remain irrational longer than you can remain solvent (and I am not even sure they are being irrational at the moment). People keep coming up with really complex theories about EZRA and yet I see it really simply: find me a rational investor who would pump hundreds of millions of dollars into a new subsea contracting company at the moment, in an oversupplied and fiercely competitive market, with an uncertain future, and the industry as whole operating at negative economic value? Until you can find this mythical institution there will be no EZRA. The working capital costs of offshore contracting are so high that only a fool backs a business model with no clear path to decent utilisation.

The solution here is clearly for the banks to approach another contractor with a deal that would preserve asset value while taking capacity out the market. Maybe the banks swap the assets for a stake in Ocean Installer? Let Subsea 7 take the specialist vessels for nothing and some warrants? Save face somehow through financial engineering. Because the truth is the assets really are worth collectively hundreds of millions less than book value in the new environment and no one wants to be exposed to the OpEx of them. Pumping a company with a poor industrial strategy and futile market position full of working capital is the last thing the industry needs, and frankly won’t help the organisations that do it in the long-run.

 

The market isn’t coming back anytime soon… Asset values will suffer.

“It’s not the despair, Laura. I can take the despair. It’s the hope I can’t stand. ~ Brian Stimpson, Clockwise ”

I have been struck over the last couple of weeks by the contrast between the rig market and the subsea market. OceanRig, Seadrill, Vantage, all seem to be realistic that the equity is nearly gone and the previous business model was unsustainable. Borr Drilling has shown that with a clean balance sheet, and access to assets at potentially “low point” pricing, and a clear cash runway to 2020, you have something investible. It’s a punt, but at least one with a plan. Subsea and offshore seems some way away from this reality, Rigs lead the market in terms of creating demand and it seems the sheer scale of their financial needs has made them face economic reality to a greater degree as well. At least the rig guys have a plan, which is not something you can say of subsea yet (apart from sitting around until the market recovers).

I haven’t had a lot to say on the EZRA/ EMAS situation since Chapter 11 mainly because I don’t have anything constructive to add apart from the fact I think it is good for the industry to have this supply side capacity reduced. US Chap 11 is a court run process, and not one I know much about, the only thing I am sure here is that there is a very complicated problem coming regarding the Lewek Express. In order to frame it properly I ask the question can you be a boatless contractor?

The banks now own this asset, although Bibby was in court a few days ago trying to spread the cost of arresting the vessel with the fellow court participant Waksey Bridges, but I expect eventually the banks to have this asset returned, and then, what do they do with it? Even if the US judge returns EMAS Chiyoda to the market free of onerous charters, like that of the Lewek Express (and everything else) then all that remain is a project management company with perhaps the ability to charter ships? But the new owners aren’t going to put enough capital into the Newco to charter the Lewek Express, and without this asset there is no real point to the company. The reason subsea construction companies own vessels is because they have an asset specificity issue: it is cheaper once all the integration and contractual costs are included to own one.

If you try and charter a deepsea pipelay asset who pays for the liquidated damages if it arrives on the site late? Who pays if you buckle the pipe? Who pays if the vessel doesn’t lay at the speed forecast? These issues go on ad infinitum. And yes you can solve them all contractually, but the whole point is it’s cheaper to own the vessel than do this contractually. In the boom days you also needed the vessel to actually have access to one, and for the sort of work EMAS Chiyoda was chasing that is still the case: Technip and Subsea 7 aren’t going to charter them high-end vessels to do deepwater lay. Saipem might as it starts to get desperate enough, but actually they will just bid lower and cross-subsidize the engineering with sub-economic vessel costs. Without access to a vessel EMAS Chiyoda is just a project management house without a boat, no sane investor in this market would create more capacity by injecting equity in a company that would have to charter a vessel off a bank that requires years of tendering before it could win any project work. Remember the cash cost of running the Lewek Express is at least USD 15k per day, so someone might buy it for 100m but they are not buying it at anything like a level that will keep the banks whole.

I see no future for EZRA, EMAS, or EMAS Chiyoda. The first two were too long on vessels and the third simply isn’t viable as a boatless contractor and the market doesn’t need one. A court can’t change an economic reality. The only real question of interest is what percentage recovery rate the bondholders get and what the assets go for?

But at least the drama for this is in its final stages. The North Sea DSV farce continues. I don’t know who should be more terrified of the Bibby results: Bibby or the Nor Bond holders?

The Bibby results were as bad as feared, they actually could not have been any worse, a GBP 10m write-off to EMAS Chiyoda being the real low point of the US expansion strategy. A £-52m Operating Profit indicates a business model entered into in much better times and limited ability to change it as the market declines. The profits from leverage are so great in the good times succumbing to the temptation to go too long on vessels is hard to resist. And so it proved at Bibby. With the Olympic charters (Bibby and Aries) having significantly more time to run (late September 17 and June 18) unless the market changes significantly its a question of when, not if, the restructuring process begins. Customers should sign up now because the contracts will be novated across. The real question is why the bonds are still trading in the mid-60’s which implies an Enterprise Value of £105m, which for a business consuming cash at that rate seems extraordinary. Even stripping out exceptionals the business seems to be going back at £100k per day in cash terms.

I have to be honest and say I don’t think the solution here is to borrow more… The solution proposed seems to be that Bibby Line Group put £10m into the revolver and Barclays open it up for £20m more. If Barclays really follow through and increase their borrowing limits to fund this then they are braver than most commercial bankers; by putting the money in at the revolver level Bibby Line Group would guarantee themselves a seat at the creditor restructuring table, something Barclays and the bondholders are unlikely to welcome. One bondholder has already asked why the BLG £10m (50% of the dividend they took in January 2016) contribution to the revolver wasn’t put it as equity? The answer is BLG has enough accountants not to be that stupid: it’s a risk-free loan (given the revolver has seniority over the bonds) or nothing at this point from Group for Bibby Offshore.

But Bibby got DSV utilisation up to 77% which is impressive. I have put a little comparison in with the Nor vessels:

Bibby DSV Utilisation:      77%

Nor Atlantis Utilisation:    0%

Nor Da Vinci Utilisation:   0%

The problem isn’t that there isn’t any work out there the problem is no one wants to buy what Nor are offering, and this despite the fact The Contracts Department (“TCD”) claimed that they had a plan for the vessels and they were the first point of call people would naturally go to for the vessels and associated work (or so I was told by AMA Ca[ital the bondholders financial adviser). It is hard to know if TCD actually believed this, in which case they aren’t close enough to the market to know what they are doing, or if it was a cynical ploy to extract some money from a dispersed group of clueless financial investors. Most rational people would think sitting at Blyth for well over a year, waiting for the mountain to come to you, was not the most cunning plan, and as sometimes happens the madness of the crowds was right in this instance. The Nor vessels have turned into a rort for contractors and service providers, the dive systems are being maintained by a company whose previous strength was in mobilising Ampleman systems, the Contracts Department are fighting with them now (no doubt to try and get their friends at Rocksalt on the vessels), and there is no economic incentive for any party to actually save the Nor bondholders money because they don’t know when this gravy train will end, so just front load the returns everyone figures. The only work, for one vessel only, appears to be in the Middle East where Nor are one of 18 bidders. Nor Offshore remains a salutary reminder that financial investors can continue to get taken to the cleaners by Ops personnel who realise how limited the general financial investors’ knowledge of the asset is. Any serious charterer or buyer for the Nor DSVs  just needs to sit around until November now, when the owners will be nearly through their USD 15.9m, without having worked a day, and get the firesale price they demand or force them into another complicated fundraising (given the last USD 15 was “super senior”). Given Subsea 7 fired up a DSV for 200 days for Apache the logic of this strategy has really been laid bare for all the risks it entailed.

But unfortunately for Bibby they have got utilisation up by getting real on price (and it’s a credit to the operational managers who have got utilisation this high). Day rates for DSVs have been as low as GBP 75-100k for SAT diving (and the divers/ project crew are £50k of that), there is precious little in the mob fees etc. All that is happening is that equity is being eroded (or is gone), and older DSV operators, who have depreciated the vessel, are at an advantage over newer owners, who must at some time try to recover their capital. Scale and scope count at this point which benefits Technip, Subsea 7 and DOF.

Everyone is chasing wind farm work, but as all those involved in the industry know it is hugely margin dilutive, even if it gets you utilisation, it comes with greater contract risk. Civil contracts are used (not LOGIC), variation orders are hard to get through, there is a greater reliance on free issue equipment etc, and because production doesn’t bring “first oil” there just isn’t the ability for a contractor to make as much money.

I stand by my previous statements that unless there is a substantial pick-up in construction activity this is the new normal in the North Sea DSV market. IRM has reached its lower limits and will not drop more. But Subsea 7 and Technip have introduced new tonnage, and USD 50 oil just isn’t enough to get new projects launched that are based on the “small step-out/ infield” model that drove previous construction booms. Both Bibby and Nor seem to be like rabbits stuck in headlights just pretending that if they wait in the middle of the road long enough, and with enough determination, the good old days will return. Unfortunately for the rabbit it takes a road a very long time before the road returns to it vegetative state, normally longer than the rabbit can last.

 

These cases are just microcosms of a bigger problem which not enough people in subsea have realised in my humble opinion: the fabled recovery, the great hope that everyone holds out for doesn’t seem to have a good economic foundation: supply has increased, demand dropped dramatically, and the “constant” of maintenance work proved to be illusory. At some point asset values are going to have to reflect the fact that OpEx has remained constant (these costs have “nominal rigidity” due to the high labour input), and therefore it is an identity that the asset values must be lower when overall expenditure is capped. Getting there strikes me as a painful journey that has just begun.

DSVs and pipelay vessels have in common that in the old days (c.2014) banks and bondholders would lend against them and that made asset values higher. This downturn has shown how illiquid these assets are, and in the worst case scenario even running them while waiting to recover the costs can entail significant cash expenditure. This means quantitatively the assets are worth less: they will be financed with less gearing (if any) and the payback period will need to be shorter. The biggest change in offshore finance going forward will I believe be the realisation of this factor creeping across the industry: smaller players will struggle to come close to matching the financing advantages of larger companies, a situation that has never before existed in offshore. On any rational basis, the industry will be financed with a significantly higher degree of equity than people were used to in the past and that pool of equity will be chasing more limited financial returns from projects. This will lead to significantly lower equity returns for an extended period that will dry the investment market for all but the best companies and business models, and the slow, inexorable, correction process will continue… just like the rig market, only slower by the look of it.

Subsea 7, Ingleside, and excess capacity…

Mankiw’s third principle: Rational People Think At The Margin.

Thanks to all those who pointed out the “363″ sale in the DIP documentation of Ingleside to Subsea 7. I still think this agrees with my last post. Quite how this fits with a Helix repossession is one for the lawyers. But it would appear Subsea 7 is buying the Ingleside spoolbase, superior to its own in the region, but also leasing, for a minimum of 2 years, the site on a co-lease arrangement back to an EMAS Chiyoda subsidiary. So yes Subsea 7 gets a better spoolbase, but it also helps keep a competitor and the Lewek Constellation (“LC”) remain in the market. In a world of excess capacity that strikes me as a poor strategic move.

Thanks also to the people who pointed out that Subsea 7 doesn’t have a vessel like the LC in the market. I get they may not have an exactly capable vessel (deepwater reel-lay), but you don’t take on ownership a vessel for one project; and more importantly Subsea 7 should want this vessel to leave the market permanently. Chartering the vessel for BP Mad Dog, and allowing access to Ingleside, which keeps the LC in the market, is just allowing someone entry in the market. Buy Ingleside without a lease, or allow the banks to own the LC and Ingleside, sooner or later they will crack, and just sell it for what they can get. After Ceona I imagine the number of private equity buyers for a subsea business, with a complex asset base and no work, is small. The LC without a decent spoolbase is worthless and the banks, who would really have been in trouble without this agreement, must feel they have a get-out-of-jail card. It will take years to get a sale and some work for the vessel if it can be done. Back yourself to win market share instead of committing resources to help others out.

There might be the odd project each year where Subsea 7 could have won it with the LC in the fleet, but are there really enough to take ownership of the boat when the backlog is declining so much? The good Susbea 7 results today were a virtue of projects tendered in better times and supply chain costs coming down in the final delivery phases. Don’t expect this trick to carry on indefintely.

Subsea 7 may lose the odd big project against TechnipFMC/ Heerema (Aegir), but they were not going to win 100% of the possible work anyway.  One of the problems with subsea is the lack of standardisation, so if an E&P company wants the option of a project that can only be done with deepwater reel-lay, then they expect more than one company to tender. But what if there is a natural monopoly?

A natural monopoly is a distinct type of monopoly that may arise when there are extremely high fixed costs of distribution, such as exist when large-scale infrastructure is required to ensure supply. Examples of infrastructure include cables and grids for electricity supply, pipelines for gas and water supply, and networks for rail and underground. These costs are also sunk costs, and they deter entry and exit.

In the case of natural monopolies, trying to increase competition by encouraging new entrants into the market creates a potential loss of efficiency. The efficiency loss to society would exist if the new entrant had to duplicate all the fixed factors – that is, the infrastructure.

It may be more efficient to allow only one firm to supply to the market because allowing competition would mean a wasteful duplication of resources.

What if the number of projects only supports one such vessel on a rational economic basis globally? Then TechnipFMC/Heerema would bid at a level that would force E&P companies to look at other technical solutions better suited to another contractors fleet and skills and prices would magically adjust. If the E&P companies are so convinced they want more than one deepwater reel-lay system in the market ask them to have a whip around and buy the LC and operate it on a pool basis? Or underwrite the OPEX and dry-dock costs for a few years for a reduction in day-rate when they get a project?

This is economic change at the margin where all the real action takes place. Substitution when prices get too high, and new economic actors finding new solutions. The fact is EMAS Chiyoda could not make the LC work in the current economic environment. Not through lack of effort but through lack of demand. That capacity needs to leave the market and Subsea 7 need to be doing everything in their power to assist that not helping potential competitors stay in the market and depress margins.

You simply cannot see the scale of CAPEX reductions coming from E&P companies for further offshore investment and argue all the large assets need to remain. It is simply illogical at the macro level. If the big five contractors simply refuse to help EMAS Chiyoda here, and there is no rational incentive for any of them to move here given they all have extreme excess capacity, the LC is worthless as a pipelay vessel and the banks will have to sell the spoolbase at its fair market value. This DIP provided by Subsea 7 merely delays inevitable restructuring and may peversely keep industry margins depressed for longer than necessary. If I was a shareholder I would be furious.

Subsea 7 (and Chiyoda) lose the plot… And the Red Queen theory.

I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.

Maslow, 1966 (often referred to as “The Law of the Instrument”)

I’ve thought about it all day… and had five double espressos, (so I’m in the mood for a rant)… but try as I might I see no sensible rationale for Subsea 7 turning from an offshore contractor into a provider of Debtor-in-Possession  (“DIP”) financing for a failed offshore company. I see no strategic rationale for this at all… When I say none I guess simplistically if you could buy some work then maybe, but I’ll come back to this, because what are you actually buying?

Subsea 7 and Chiyoda extending DIP financing strikes me as the final stage of lunacy before acceptance that the industry is going to be very different in the future from 2014. This deal looks like one put together by bankers (for the fees); lawyers, promising they can mitigate any losses structurally, and they probably can here (for the fees), and corporate development staff desperate to show they are “adding value” by buying some options. There is no industrial logic to this deal at all. The reason EMAS Chiyoda is in Chap 11 is because there was insufficient demand for what they offered, and when they did manage to win work and deliver it, the end product was substandard and normally over budget. It’s that simple.

The hardest thing to do sometimes is nothing, which is what needed to happen here. When a market contracts capacity needs to as well, and the weakest, most inefficient, and poorly run companies need to go. Schumpeter rightly called this “gales of creative destruction”. And boy did EMAS Chiyoda need to go. Everyone at Subsea 7, and particularly the Directors, have better things to do than try and be too clever here and spend time, and money, on an angle that is opaque when the answer is blindingly obvious. This is a deal being done because it can and because people need to be seen to be doing something. When you’re a banker, a lawyer, or an corporate M&A person, the answer is always a deal, no matter how complicated, or frankly illogical. This was a deal done because a hammer thinks it can see a nail.

Economists have put a lot of effort into studying organizational change at the population level in a field known as “organisational ecology”. I am a subscriber to “Red Queen” theory:

which highlights the relative nature of progress. The theory is borrowed from ecology’s Red Queen hypothesis that successful adaptation in one species is tantamount to a worsening environment for others, which must adapt in turn to cope with the new conditions. The theory’s name is inspired by the character in Lewis Carroll’s Through the Looking Glass who seems to be running but is staying on the same spot. In a 1996 paper, William Barnett describes Red Queen competition among organizations as a process of mutual learning. A company is forced by direct competition to improve its performance, in turn increasing the pressure on its rivals, thus creating a virtuous circle of learning and competition.

Simply put EMAS Chiyoda was “maladapted” for the new economic environment. [The best paper ever on revolutionary change and organisations is this one on the “Punctuated Equilibrium” if you are interested. Offshore oil and gas has definitely been through a period of stasis followed by a punctuated equilibrium.] Anyway…

Firstly, Subsea 7 really doesn’t need an more vessels: they have 33 committed vessels at the moment, a relatively poor order book given the fixed cost commitments, and no capacity issues.The current committed fleet cover every possible industrial, and geographic, permutation the most pedantic engineer could dream up. Subsea 7 needs a vessel like the Lewek Constellation like I need to be left at home with the kids indefinitely: it just wouldn’t be good for either party. Don’t worry about someone else being dumb enough to take it at any price, there has been a huge capacity and capability increase in shallow and deepwater pipelay in the last 5 years, the top 6 players are fine for the next 9 shale revolutions. Anyone taking on that vessel is assuming a liability certainly, and maybe an opportunity: it’s the banks problem don’t make it yours.

The reason 2014 was boom was because there was insufficient supply combined with high demand. While demand might recover the supply is now fixed, so even an increase in demand won’t make an EPIC pipelay resurgence a boom (and no independent data suggest this is likely anyway). I get Boards need to think of the future, but surely the most logical strategy here it to back yourself for margin expansion: if the market recovers try and recover some of the equity lost in the last three years? The solution to a capacity problem probably isn’t another cheap vessel.

Yes, the Lewek Constellation is a really capable ship (although built in Vietnam at Triyards so you’d want a good survey before taking ownership), but I am about to share a shock revelation with you: there are loads of really capable ships with no work at the moment, and they cost a lot to run. In the last Subsea 7 results backlog was down nearly USD 1bn… as a general rule going long on fixed assets with a high running cost while you’re order book is shrinking is a bad idea.

If Subsea 7 want to do something positive with the EMAS Chiyoda vessels I suggest they team up with McDermott, Technip, and Saipem for an en bloc deal with the banks and sink them somewhere. That is likely than being a better investment than getting some of this tonnage “cheap”. The Constellation would be a far safer, and more interesting, dive than the Thistlegorm and potentially more value accretive this way. (Competition authorities please note this should not be construed as investment advice or an inducement to collusion).

Should Subsea 7 really believe it has insufficient pipelay capacity in Asia it should go to Petrobras and strike a deal to remove one of the flexlay vessels from the region (which are far more capable than the EMAS Chiyoda fleet). Operationally they are perfect for Asia, and they might make more money this way that getting it redelivered under a technicality, which PB seems prone to at the moment. Subsea 7 need to harden-up, back themselves competitively, and realise some vessels need to leave this market. Pipelay is hard: jobs are bid a long time in advance, you need a lot of working capital, even tendering is expensive, and in this market E&P companies are going with the safest options etc.: the chances of an upstart picking up the EMAS Chiyoda vessels and winning sensible work at a decent margin in literally trivial.

The other major problem, far greater actually,  is that it is well known at a project level that the engineering EMAS Chiyoda has been doing, for at least the last twelve months, is some of the shoddiest ever seen in the industry. Subsea 7 needs projects, not capacity, and any short-term vessel needs can be met on the charter market. What the Subsea 7 backlog definitely doesn’t need is a commitment to deliver projects bid by a company tendering where the management were telling the engineers they must “win at all costs” to keep their jobs. Subsea 7 wants to be really careful about accessing this work because if the contracts are simply novated across they have brought backlog without any controls over how it was bid, from a firm with a history of losing money on offshore delivery. If they aren’t novating the contracts why bother supplying financing? E&P companies take a huge risk when awarding lump sum in that progress payments are effectively unsecured creditors, and on big projects, like Jack St Malo, this is a material number. But much of the offshore work is vessel specific anyway and that takes us back to the problem that Subsea 7 doesn’t need to help the customers, or creditors, by chartering these vessels to deliver the projects. This is just a bad idea.

Subsea 7 could offer to help due diligence the bid project work, or maybe adapt it to their vessels for free (but that just dilutes margin), but honouring EMAS Chiyoda contracts would be an act of commercial madness in all but the most exceptional circumstances (and a clear incentive mechanism is created here for the people from Subsea 7 who negotiated these agreements to encourage the company to take these risks to prove they struck a good deal: it’s a personal asymetric payoff which should always make you cautious).

The real solution here is just to let EMAS Chiyoda go to the wall. I feel terrible for the staff, but unfortunately the world has changed and there is simply no industrial logic for its continued existence. No one needs the assets, or the second-rate, uneconomic, but exceedingly cheap (in all senses) solutions it offered. The industry will be a better place with it gone and instead of trying to work out some really clever angle to this Subsea 7 just need to help it happen.