The sea, the great unifier, is man’s only hope. Now, as never before, the old phrase has a literal meaning: we are all in the same boat.
Ultimately, these strains expose growing problems in the quality of the underlying assets, leading to fire sales of assets which accelerate declines in asset prices, resulting in further balance sheet pressures. Throughout this process, funding liquidity crises can exacerbate solvency concerns. These tensions feed on imbalances in bank funding structures, such as excessive recourse to debt financing that is reflected in historically high degrees of leverage. As the increase in debt often finances expansion into riskier business areas, this spills over into a deterioration of the quality of bank assets. If it goes unchecked, the process may lay the foundation for future financial crises and severe dislocations in bank funding markets.
Bank for International Settlements, 2013 (Financial crises and bank funding: recent experience in the euro area)
That the Nor Da Vinci caught fire on the way mobilise for the BP Trinidad work with Oceaneering seems likely a metaphor for the market as whole. The Da Vinci had sat in Blyth for 18 months without working a day, and then on its mobilisation voyage had a small fire necessitating a mayday call, which does not bode well for a complex worksite and a dive crew that have never worked as a team on the vessel before. I have no idea what Oceaneering and BP have agreed as a scope for getting the vessel on the dive site but one would have thought it would involve trial wet bell runs and other extensive testing, and one would have thought this will be to the owners or charterers account because there is no reason for BP to take this risk on an asset they don’t control in the current market.
The work doesn’t help the Nor owners much as the vessel will undertake a 21-25 day transit for c. 30 days of work, although the asset will be repositioned in a better location than Aberdeen, not that it helped the Bibby Sapphire. But surely the mobilisation and other costs were done on at most a reimbursable basis? But the fact such contracts are being so keenly contested surely shows how unprofitable the whole market is at the moment?
All DSVs are still working at rock bottom rates, when they can get work, and both Bibby and Nor need further liquidity injections to remain viable in the short-term. Rumour has it that the Sapphire and Atlantis will enter lay-up but they will only join a vast amount of latent capacity in the system that under any rational analysis would point to a profitable market for contractors being a long way off.
But just as some of the fleet will be laid up it would appear the UDS have passed the point of no return where the yard will now deliver the two large construction DSVs. UDS had already struck a deal with the yard to take on the old Mermaid Ausana, the vessel still hasn’t worked and brokers report UDS bidding for anything anywhere with the vessel at rock bottom rates. They can do this because until I see proof to the contrary I do not believe UDS are paying a penny for the vessel and the same can be said for the other two new builds. UDS has in effect created a 3 North Sea class DSV company, the same number of vessels as Bibby who still turned over GBP 120m last year, without paying a cent for vessels. That is not a positive development if people actually want the market to function on some sort of rational basis.
Like the Keppel new build it will be interesting to see if there is a good second-hand market for the UDS vessels should the yards decide to stop financing them. Flashtekk is one of the major component suppliers and is controlled by parties related to UDS and not a known supplier of high quality systems (or rather I shoould say systems at all having never delivered a complete DSV on anything like this scale). One of the intriguing questions of this money go round is whether the yard is paying Flashtekk and then receving the funds back as progress payments? And frankly how big are the progress payments?
The backer of UDS is a wealthy individual but not wealthy enough to start buying multiple DSVs at USD 150-200m. There have been no announcements of any financings or associated fundraisings with the new builds and no indications that any banks, even Chinese, are behind the yard in this and it would appear that Chinese yards are in effect financing at least four very expensive new DSVs now if you include the Fugro chartered DSV in Asia. In the North Sea Vard still have the Haldane sitting as latent capacity and no realistic hope of moving the vessel to a North Sea contractor, and thus realise close to its build cost, for the foreseeable future.
All these assets are effectively financed by debt. Paper obligations with almost no equity or real cash backing them. It is well known what happens in markets where a small group of companies, holding highly illiquid assets with little tangible equity, when they drop: asset prices plummet and and cause major instablity in both solvency and liquidity terms for those involved. There is now no difference between banks and DSV owners in terms of their interactions between asset values and financing as they are both equity light/asset heavy companies and hence my quote above (albeit DSVs have no central bank to backstop asset prices.. well maybe in Singapore). Someone can no more give you the accurate “value” of a North Sea class DSV at the moment any more than they could a complex CDO in 2008, all you can get is a price and that makes raising any finance to back these assets very hard because the prices are fire sales only.
You can read all the optimistic pronouncements you want about the market getting better but until someone shows me the money and the numbers I won’t believe it. It is also worth stressing again with additions like the Kruez new Vard vessel to Brunei, the NPCC purchase of the Swiber Atlantis, and other additions the time charter market is even more competitive than ever as these vessels are replacing jobs that were chartered every year.
But the UDS story is the biggest mystery of all. In order to justify the price of these new-builds they would have to work in the North Sea, and as Harkand and Bibby have shown that isn’t profitable, but current Asian DSV rates are not even reaching USD 100k with divers. So either UDS have got some sort of Chinese government/oil company linkup or the yard/ an associated bank will finance those vessels forever, and if that happens the market will be in disarray for years because a substantial part of the the high-end DSV fleet will be effectively getting the boats for free in a time of over capacity. It is a recipe for endless sub-acceptable economic returns.