Satire is dead…

I just want to remind myself in the future that Dennis Rodman, sponsored by a crypto-currency company seeking to transact in legal marijuana transactions, went to assist Donald Trump negotiate with North Korea. I didn’t see that coming. Love the photo as well,

Shale productivity, oil prices, and marginal demand…

The quote above comes from the CFO of NOV Global, Clay Williams, in 2011. Clearly he understood the transformative nature of shale before many (as well as putting it as eloquently as anything I have ever read). The question for a long time for many was when will shale stop getting funded? But actually the shale revolution is beyond quetion now and the real question for offshore in a era of rising prices again is what proportion of new investment is directed to offshore versus onshore? Particularly for asset owners with high fixed running costs, and rates at below cash break-even on an annualised basis, what is likely in the short-term?

One of the reasons shale continued to be funded wasn’t just rising oil prices it is because capital markets in the US are efficient enough to support business models with high rates of productivity improvement even if the payoff is not immediate. This recent presentation from Helmerich & Payne, the largest US land based driller, shows why:

HP Well efficiency.png

H&P are targeting a 40% increase (as a stretch goal) in efficiency/productivity, an outcome that would further rapidly enhance the economics of shale. Not only that they are doing it with an assumption of pricing power for the drilling contractor where a 20% improvement in efficiency in operations for the customer leads to a 33% increase in their prices (15k-20k), and the next 20% increase brings them another 25% (20k-25k). With these sort of possible productivity improvements, and a much shorter payback time, it is hard to see a freeze in capital funding anytime soon, and in fact at current prices the investment boom is self sustaining anyway. This incremental learning-by-doing and constant improvement is a core part of manufacturing efficiency and has become part of the standard DNA of manufacturing companies (for a fascinating look at how this came to be in the car industry read The Machine that Changed the World). Deming would be proud.

Those sort of productivity improvements, on a per barrel delivered equivalent basis, are the competition for offshore production at the margin for project investment decisions. I continue to believe this will favour much larger, high volume, offshore fields over shallow water developments. Offshore faces the hurdle of clong lead times that were previously just assumed as an unavoidable part of the oil basis. A blog post for another day is the insights behavioural economics offers to this.

Pioneer Natural Resources also came out this week talking up their productivity:

Pioneer Improvement.JPG

This data point is interesting and is the crux of future demand across the offshore supply chain:

Shale rigs vs offshore.JPG

That index ratio is really what will drive the strength of any offshore recovery. Since May 16 up until January 18 rising oil prices (much slower than currently) were met with a massive increase in the shale rig count and continued decreasing demand of the offshore rig count. In May 16 the price of WTI was ~$44.00 and Jan 18 the price of WTI ~66.60 so a ~51% increase in the price of oil was followed by a 160% in US land rigs and a 22% reduction in offshore rigs. Any statistical model of industry demand that not have this relationship in the regression is to my mind invalid. Any statistical model without a period break from c. 2014-2016 should similarly be treated with exceptional caution. The future, statistically speaking, will not be like the past.

There are a host of reasons (many covered here previously) but the argument that increasing oil prices will be met at the margin first with an increase in demand for short cycle shale seems irrefutable. Any “offshore recovery” post the shale revolution is clearly going to be very different to recovery cycles prior to this enormous investment and capital deepening process that has taken place in the last 5-7 years.

NZ bans offshore oil and gas exploration…

Hardly a move that will cause tremors among the offshore companies of the world, and I don’t think a harbinger of things to come for other places, but I was surprised to see NZ ban offshore oil and gas exploration from today.  But if if you want to understand the NZ pysche behind this seemingly Luddite stance you need to understand this comment:

James Shaw, the New Zealand Green Party’s co-leader and climate change minister, praised the move as “the nuclear-free moment of our generation” – a reference to a 1984 ban on nuclear-armed ships entering New Zealand’s waters.

And if you want to understand that comment there is no finer place to start than David Lange at the Oxford Union in 1985. One of the finest pieces of debating you will ever see, I get goosebumps watching it, and it’s hard to overstate the effect this had on NZers at the time.

Watch the whole video “I can smell the uranium as you lean towards me…”


One of the finest pieces of debating ever. Only 6 minutes so watch it.

The French Revolution and Venezuela…

As a follow on from my post on Venezuela a really interesting, and short, article at FT Alphaville (free) comparing Venezuela’s proposed “Petro” and the Assignats of the French Revolution. Maduro is well on his way to becoming a modern Robispierre, with exile or a similar fate awaiting him. Tony Yates highlights that nothing in Venezuela, not the revolutionary tendencies, or the economic solutions of the revolution’s leaders, have changed over time much over time as real options dry-up.

A more in-depth paper here for anyone really interested.

Remembering Simeon Booker…

I don’t often do this… But I read an amazing obituary of Simeon Booker this morning, embarrassingly not someone I had ever heard of:

Booker, though familiar with the indignities of segregation, later wrote that, as a northerner, he was unprepared for the “state-condoned terror” in Mississippi at the time…

Kown simply as “the man from Jet”, Booker, in his signature bow tie and glasses, attended most of the major events of the civil rights struggle. He was the only reporter aboard the 1961 “Freedom Rides”, a bus trip across the south protesting against the refusal of southern states to implement a Supreme Court order to integrate interstate transport. A violent mob attacked Booker’s bus. He was rescued and taken to safety at a local preacher’s house.

There, he took a call from attorney-general Robert F Kennedy to explain the day’s events. “That was probably the best reporting I did in my journalism career,” Booker told Ebony, “explaining to Kennedy what happened.”

Stories he wrote about a 14 year old being murdered by a two white men (later acquitted after 67 minutes of deliberation) made Rosa Parks refuse to give up her seat on the bus… and the rest is history.

An amazing man who led an amazing life. Great obituary (free) in the NYT here.

Friday morning cheer for the bulls… and safe thoughts for those in Houston…

“Give me a one-handed Economist. All my economists say ‘on the one hand…’, then ‘but on the other…”

Harry Truman


As I am off on holiday to Spain I thought I would spread some cheer for the weekend…The Bull case for oil was made by the Federal Reserve Bank of San Francisco yesterday looking at oil demand in China and combining it with The Varian Rule (which I hadn’t heard of either):

A simple way to forecast the future is to look at what rich people have today; middle-income people will have something equivalent in 10 years, and poor people will have it in an additional decade.

The economists from the Federal Reserve conclude what every offshore bull hopes for, even if it is in a delightfully non-commital and unspecified in timeframe:

In particular, if both domestic and foreign oil producers are reluctant to invest now in exploration and development, they may be unable to expand quickly to meet a sharp increase in Chinese demand. If global supply cannot expand fast enough, oil prices will have to rise to balance the market, as they did in the early 2000s.

On the other hand DNB came out with this graph this week:

DNB Offshore Spend 2017e

The point about being “unable” to expand is a good one. Even if the price spiked now the supply chain has laid off so many people in the short term all that will happen is there would be an explosion in wage costs not asset utilisation (and therefore day rates) as projects would take time to wind up. For the supply chain there is no easy solution to the current problems apart from slow deleveraging and the occassional exogenous shock maybe?

To all my friends in Houston I hope all is well and you are hunkered down safely. For the record no one obviously wants an increase in demand generated in such a way.

Hornbeck Hurricane map.png

Source: Hornbeck

Fire in the DSV market… literally…

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.

Jacque Cousteau


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.