Offshore takeovers and the psychology of preferences…

Haile selassie.jpg

Courtier T.L. — Amid all the people starving, missionaries and nurses clamoring, students rioting, and police cracking heads, His Serene Majesty went to Eritrea, where he was received by his grandson, Fleet Commander Eskinder Desta, with whom he intended to make an official cruise on the flagship Ethiopia. They could only manage to start one engine, however, and the cruise had to be called off. His Highness then moved to the French ship Protet, where he was received on board by Hiele, the well-known admiral from Marseille. The next day, in the port of Massawa, His Most Ineffable Highness raised himself for the occasion to the rank of Grand Admiral of the Imperial Fleet, and made seven cadets officers, thereby increasing our naval power. Also he summoned the wretched notables from the north who had been accused by the missionaries and nurses of speculation and stealing from the starving, and he conferred high distinctions on them to prove that they were innocent and to curb the foreign gossip and slander.

Ryszard Kapuscinski, “The Emperor” (1978)

“It was surreal. When someone asked why he was doing the deal, here–now, he actually said, basically, ‘Because Americans are the dumbest investors around, and there’s lots of liquidity in this market.’”

From Kathryn Welling

 

An industry in decline has much in common with the decline of an Empire and the ancien regime. The changing of the guard, the Schumpterian competition that upsets the stability of the known order, is a constant in the evolution of social systems. Kapuscinski’s account of the fall of Haile Selassie’s empire is a classic account of a system unable to intepret information in the light of new objective realities with direct relevance to businesses facing structural changes. 

I think one needs to look at recent takeovers in offshore with a degree of cynicism that moves beyond the stated narrative of ‘confidence in the future’ based on rising oil prices, but also reflects the unwillingness of the participants to objectively view the risks being taken as the ancien regime of offshore faces a more competitive environment. One of the best comments I have read on the Tranocean/Ocean Rig deal is from Bassoe Offshore ‘Transocean Saves Ocean Rig from slow-moving train wreck‘. But the article only highlights the huge utilisation risks this deal (like so many others) creates: if the work doesn’t come at forecast levels Transocean will have gifted value to Ocean Rig who had few other options. A collection of rigs in cold-stack is not worth billions.

I would also add that I think the Transocean/Ocean Rig and Tidewater/Gulfmark takeovers bear striking similarities beyond the superficial of underutilised asset companies proffering a Common Knowledge of future confidence in future demand. The core similarity is that the shareholders of the selling entities were largely restructured debt holders and distressed debt investors seeking an exit from their investments. Behind the scenes these investors appear to have looked at the lack of forward demand, the high cash burn rate, and the willingness and ability of their competitors to burn cash with an identical strategy and asset base, and instructed an investment bank to get them out of their position. A peculiarity of the ORIG deal is the ability of the colourful Mr Economou to extract $130m over and above his proportionate economic interest in the company (the MSA break fee in the presentation), a situation that I imagine only encouraged the other shareholders to want to relinquish control (FT Alphaville has some interesting background on the him and here).

It is worth taking a recap on what the Common Knowledge was until quite recently (see here and here ) regarding the offshore industry (pushed by the Missionaries at the investment banks and other promoters). In 2017 and at the start of 2018 a credible story, as can be seen from the Seadrill restructuring presentation below, was for a sharp rebound in day rates and utilisation. The Seadrill restructuring was so complex and long that by late 2017 when it was actually due for completion, an update had to be issued and lo-and-behold the recovery was further off than first anticipated (if at all)…

Seadrill VA Dec 17.png

This presentation was by no means unique. Credible people will tell you that not only will day-rates double in three years (or less), but also that this will happen in addition to utilisation hitting 2014 levels. And this will all happen apparently in an environment where E&P companies are deliberately using shale as a competing investment to lower offshore costs…

It may happen, I don’t know the future, there is Knightian uncertainty, but on a probability weighted basis I would argue these sorts of outcomes are low probability events. The offshore industry will over time reach a new equilibrium in terms of demand and supply, in almost all other industries where there has been severe overcapacity issues before normalisation, it has led to lower structural profits on an ongoing basis.

Financial markets work on narratives and Common Knowledge as much fundamental valuation models rooted in the Efficient Market Hypothesis. Indeed these are the core of a financial bubble: a mis-alignment of current prices with long-term risk-weighted returns. What offshore industry particpants wanted to believe in 2017, against the face of significant evidence to the contrary, was that there would be a quick rebound in the demand for offshore drilling and subsea services. Despite the public pronouncements of the major E&P companies that CapEx was fixed and excess cash would be used to pay shareholders or reduce debt, despite the clear investment boom forming in shale, and despite stubbornly low day rates from their own contracting operations. People wanted to believe.

And so the investors rushed in. For Seadrill, for Borr Drilling, for Standard Drilling, for Solstad Farstad, and a myriad of others. While other investors through restructurings became reluctantly (pre-crash security holders) and willingly (post-crash distress debt investors) owners of these companies. Now, having realised that they own asset heavy companies, losing vast amounts of cash, with no possibility of bank lending to support asset values, and a slow growing market, they want out.

The meme for these deals is meant to be one of success… but really it isn’t. And just as the hard cash flow constraint is binding on the individual companies involved many of the hedge fund investors who get involved in these deals are required to produce quarterly performance reports. Charging 2/20 for an oil derived asset declining in the face of rising oil prices can cause questions, or even worse, redemptions.

So having rapidly opened the ‘black box’ of the companies they own the shareholders in both Gulfmark and ORIG realised that they were the proud owners of companies with no immediate respite from the market. The the most logical way to get out was to get shares in an even bigger entity where the shares are significantly more liquid and tradeable. That management of the acquired entities managed to get an acquisition premium is testament to the skills of the bankers involved no doubt, but also down to the fact that the acquiring companies wanted to be bigger, not because they really believe in a market recovery and pricing power (although the pricing power is valid), but because if or when they next raise capital it is better to be bigger in absolute value terms. Show me the incentive and I’ll show you the outcome…

In behavioural finance it is well known that humans overweight the possibility effect of unlikely high risk outcomes and underweight more likely certainty effects (the canonical reference is here):

POP 2018

What does this mean for offshore in general and Transocean/ORIG in particular? It means that the managers backing this deal are overweighting the possibility of a sudden and unexpected rise in offshore demand versus the more statistically likely chance of a gradual return to equilibrium of the market. It is exactly the same miscalculation that the management and shareholders of Borr Drilling appear to have made. The decline in share values recently indicates some shareholders in all these companies get the deal here. The risk of a slow recovery, and a vast increase in the stacking costs of the ORIG rigs is borne more significantly by Transocean shareholders who have borrowed ~$900m to fund the deal, while the upside is shared on a proportionate economic interest basis.

I have confidence in offshore as a production technique for the long-term. It will be a significant part of the energy mix for the foreseeable future. But a 2008 style recovery, given the importance of shale as a marginal producer and the increased offshore fleet size, looks to be an unlikely outcome that is still being heavily being bet on.

 

Borr Drilling… The Tesla of Offshore…

Speculative finance units are units that can meet their payment commitments on “income account” on their liabilities, even as they cannot repay the principle out of  . Such units need to”rollover”their liabilities: (e.g. issue new debt to meet commitments on maturing debt)…

For Ponzi units, the cash flows from operations are not sufficient to fulfill either the repayment of principle or the interest due on outstanding debts by their cash flows from operations. Such units can sell assets or borrow. Borrowing to pay interest or selling assets to pay interest (and even dividends) on common stock lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes. A unit that Ponzi finances lowers the margin of safety that it offers the holders of its debts.

Hyman Minsky

It is true that Tesla needed capital to build up its production capacity, especially given its promise to deliver hundreds of thousands of Tesla 3s in 2018, but it is also true that the best way to raise this capital for a company with negative earnings and cash flows and significant growth potential is to use equity, not debt. To the counter that this will cause dilution, it is better to have a diluted share in a much valuable company than a concentrated share of a defaulted entity.

Aswath Damodaran

Borr Drilling is a Rubin’s Vase, just like Tesla. Some see a visionary company accurately calling the end of the offshore down cycle. Others see the worst of the offshore boom with vast, unfunded, embedded leverage in to-be-delivered jack-ups with no work. One (Borr) has a charismatic Chairman while the other has an enigmatic CEO. Both are start-ups funded using vast amounts of debt, and both sail very close to the wind in financial terms. Without spectacular operational success and market growth they will also be terrible financial investments. The comments by the world-renowned valuation expert Aswath Damodaran on Tesla could virtually be repeated for Borr.

For the non-believers Borr is a play on a market recovery in shallow water drilling and operations that has been called too early and simply has no market pricing power or backlog to take on the quantum of new units they have committed to. Transocean and other deepwater drillers exited the shallow water market because just as in subsea there are far lower barriers to entry and therefore more firms compete lowering margins for everyone. The entire jack-up industry is racked by over capacity, has new buildings aplenty to be delivered, has seen the collapse of the shallow water US market (100% due to shale), and has had numerous competitors successfully complete restructurings or fund-raising that allow them to (continue to) operate at cash break-even at best. Direct comparison companies like Shelf, with a far longer operational history, are still losing money.

Don’t get me wrong Borr is a fundraising machine and executes a lot of things. In fact it is clearly part of the strategy: in an under-researched market it hires every conceivable investment bank thereby ensuring nearly all the research on it is positive. And thus the momentum continues… I take my hat off to the sheer outrageousness of the vision: To become a listed contrarian investment almost (bar say Tesla) without equal. This graph from the latest results shows what needs to happen for Borr to have any realistic chance of financial success:

BD Market Q2 2018.png

Activity is in offshore is clearly picking up, I am not denying that, not like 300% though? More of a modest  increase surely… But this graph, if it proves to be an accurate forecast, is amazing. Higher shallow water well investments, in fact almost double, 2010, when shale was far more marginal source of volume and smaller US independents were still doing shallow water work. Note as well how long it took these Final Investment Decisions to flow through to work with the 2008 approvals creating the 2013/14 project boom.

Even more amazing is that E&P companies are promising to sanction such an increase in this niche market without managing to drive up day rates in any of the assets that perform the work or adding substantially to the asset backlog of any asset owners in the space. The public prognostications of E&P company executives that they will not allow a cost explosion in the supply chain are running head-to-head with the investors and management who believe a boom must be coming.

I would be interested to know what sort of price and other assumptions are behind this forecast. As E&P companies don’t publish this data publicly graphs like this without the assumptions the “data” is based on actually useless because without knowing on that you are 100% reliant on quality of the forecast. In order to come up with this number Rystad have had to take actual (and assumed?) project sanctions and multiply them by an internally derived number on field development costs and assumed bidding levels of subcontractors etc. It is better than nothing but it’s all about the room for forecast error which is likely to be huge in something like this. The Gulf States and Asian regions shallow water spending is going up but the NOC’s don’t seem to have increased their CapEx budgets that much so where the money is coming from is an interesting question?

Plus markets are about demand and supply (the core Borr market is the  >350 segment). In 8 years a fleet of assets that lasts 30-35 years has doubled. 31% more (77 units out of 249) are on order and 99 our of 249 units are uncontracted! For this market to even equilibriate at a point where companies are earning their cost of capital requires an enormous move, yet alone make an unexpected gain.

KM August 2018 JU.png

Source: Kennedy Marr, August, 2018.

Borr with assets of $2.6bn, had $54m in the bank of unrestricted cash at the enf of Q2 2018, had an Operating Cash Deficit of $40m in the same period, and made a draw down of $30m on its revolving credit line of $200m, a short-term financing instrument that requires the company to have at least $50m in cash. It has 11 active jack-ups and 12 stacked with 11 to be delivered in the next 27 months. It can only be described as an enormously leveraged (financially and operationally) play on a large unforecasted surge in offshore demand.

BD FA P2.png

So if the market doesn’t grow massively in the next 27 months, or a vast array of the jack-up fleet is scrapped, Borr will have doubled their capacity in a market growing at a much slower rate, where all their competitors have excess capacity and the financial resources to compete on price, and roughly ~30% of the global fleet is still to be delivered. As a general rule firms in such situations, offering a near identical product as their competitors, with strong knowledgeable customers, in a market with widely known price statistics, are called price takers. And in all probability such firms are lucky to cover their cost of capital let alone earn the excess returns shareholders in ventures like these require. The market is fragmented and Borr simply does not have enough market share with 30 odd units to influence pricing.

All the new building are financed by the yards who had no other option but to provide non-takeout vendor financing to Borr. In all reality there were few other buyers. In every shipping and offshore cycle a key signal of excess credit is the unfinanced deliveries where yards and owners take on “take-out” risk (getting a commercial bank on board to pay the yard on delivery). I have no idea what rights Keppel and PPL have if Borr cannot come up with the money in 5 years post delivery, but it must surely involve the ability to wipe out the shareholders? Borr won’t have earned enough by then so if the market does not literally boom then shareholders are buying into a massive funding hole risk. This was a classic Minskian insight into the causes of financial instability (and see the article link above for the original source).

So it was a surprise when Borr announced yesterday they are buying back up to $20m of their shares, and then duly followed up today by stepping into the market today for $420k worth. Borr surely needs more long-term capital not less? Borr will literally have to dip into a short-term loan facility (the revolver) to finance purchasing its own shares when in the very near future it will have to raise significant sources of new funds to pay for its OpEx. This at a time when management say they are going to reactivate units stacked on risk?

The Borr Q2 18 EBITDA figure was $3.2m: they are spending 6x that buying back their own shares? There are very few reasons to do this. The obvious one is to make sure the share price doesn’t dip as you prepare for a major equity raise, potentiall related to a takeover (Borr own options on a listed driller). Only one of those options can solve Borr’s financial constraints as they simply cannot get enough jack-ups to work at rates sufficient to cover anything like their forecast expenditure (and the working capital takes a big hit every time they mobilise one). There will be a deal here. I suspect fundraising for a loss making jack-up firm is getting hard the longer the well-known (sic) offshore recovery takes to arrive and given the sheer scale of the company now getting meaningful percentage increases in capital size. Clearly this very short-term strategy is part of how the Board will deal with this.

Borr has enough asset value to cover this but just like Tesla it has loaded up on convertible debt instead of start-up equity. Returning to the equity market to cover basic OpEx given the scale of the company now is likely to be very expensive.

The other interesting dynamic here is what Schlumberger are going to do as a ~13% shareholder. Schlumberger bailed on Western Geco (seismic) earlier in the month in another clear signal of their intention to focus on shale. They have also pulled out of their Golar venture. Finding another credible shareholder on this scale will not be easy should they choose to leave.

The Borr investment case is based on the scrapping of over 100 units and the Rystad figures leading to over 2.8x increase in FID in their target market. All the people buying the shares are presumably informed financial buyers, some of whom may well just be taking a leveraged play on a dramatic increase in offshore work. There is clearly a market for such an investment.

But as I keep saying here if Borr, like everyone else in the offshore market, keeps raising money to keep capacity high and day rates low, then “the recovery” will by definition never arrive. Which is I admit not quite the same (one of the many?) problem(s) Tesla has at the moment but still bear some striking similarities from a financial perspective.

Anecdote is not the singular of data…

“As regards the scope of political economy, no question is more important, or in a way more difficult, than its true relation to practical problems. Does it treat of the actual or of the ideal? Is it a positive science concerned exclusively with the investigation of uniformities, or is it an art having for its object the determination of practical rules of action?”

John Neville Keynes, 1890, Chapter 2

Music journalists know a lot about music… if you want some good summer listening I would advise taking them seriously. However, as a general rule, their knowledge of finance and economics is less sound… ‘Greatest Hits’ have for example included complete confidence that EMAS Chiyoda would be recapitalised right before they went bankrupt… or that the scheme from Nautilus to put ancient DSVs in lay-up wasn’t stark raving mad because the Sapphire couldn’t get work either… I digress…

On a logical basis it is very hard to argue that a majority of companies in an industry can consistently be under margin pressure and and that they will exist indefinitely regardless of cash flow losses. It might make a good album cover but as economic reasoning it leaves a lot to be desired.

Let me be very clear here: if the total number of firms in an industry are operating at below cash break-even only one of three things (or a combination of) are possible:

  1. Some firms exit the industry. Capacity is withdrawn and the margins of the remaining firms rise to breakeven (a supply side correction).
  2. The market recovers or grows (a demand side correction).
  3. An external source injects funds into the loss making companies or they sell assets (a funding correction).

There are no other options. I write this not because I want people to lose their jobs, or because I hate my old company, or because I didn’t like the Back Street Boys as much as the next music journalist in Westhill, I write it because it is an axiomatic law of economics. To write that firms, backed by private equity companies, who have a very high cost of capital, will simply carry on funding these businesses indefinitely is simply delusional.

A deus ex machina event where a central bank provides unlimited liquidity to an industry only happens in the banking sector generally (in the energy space even Thatcher made the banks deliver in general on their BP underwriting commitment). Subsea appears to flushed out the dumb liquidity money, convinced of a quick turnaround, and being turning toward the committed industrial money now.

The real problem for both York and HitecVision, or indeed any private equity investor in  the industry isn’t getting in it’s getting out (as Alchemy are demonstrating). Both have ample funds to deploy if they really believe the market is coming back and this is just a short-term liquidity issue, but who do they sell these companies to eventually? It was very different selling an investment story to the market in 2013 when all the graphs were hockey sticks but now anyone with no long-term backlog (i.e. more than a season) will struggle to get investors (even current ones). The DOF Subsea IPO, even with their long-term Brazil work, failed and the market is (rightly) more sceptical now. Every year the market fails to reover in the snap-back hoped for each incremental funding round gets riskier and theoretically more expensive.

Private equity firms have a range of strategies but they generally involve leverage. Pure equity investment in loss making companies in the hope of building scale or waiting for the market to develop is actually a venture capital strategy. Without the use of leverage the returns need to be very high to cover the cost of funding, and if the market doesn’t grow then this isn’t possible because you need to compete on price to win market share and by definition firms struggle to earn economic profits, yet alone excess profits, that would allow a private equity investor to profit from the equity invested. For private equity investors now each funding round becomes a competition to last longer than someone else until the market recovers. In simple terms without a demand side boom where asset values are bid up significantly above their current levels the funding costs of this strategy become financially irrational.

In this vein HitecVision are trying to exit OMP by turning it into an Ocean Yield copy. The GP/LP structure will be ditched if possible and the investment in the MR tankers shows the strategy of being a specialist subsea/offshore vessel company is dead. Like the contracting companies it isn’t a viable economic model given the vintage year the funds all started.

Bibby Offshore may have backlog but it is losing money at a cash flow level. The backlog (and I use the 2013 definition here where it implies a contractual commitment) it does have beyond this year consists solely of a contract with Fairfield for decom work. This contract is break-even at best and contains extraordinary risks around Waiting-On-Weather and other delivery risks that are pushed onto the delivery contractor. It is a millstone not a selling point.

Aside from the cost base another major issue for Bibby is the Polaris. Polaris will be 20 years old next year and in need of a 4th special survery: only the clinically insane would take that cost and on if they didn’t already own it (i.e. buy the company beforehand). Not only that but at 10 years the vessel is within sight of the end of her working life. Any semi-knowledgeable buyer would value her not as a perpetuity but as a fixed-life annuity with an explicit model period and this has a massive impact on the value of the firm. In simple terms I mean that the vessel within 5-10 years needs to generate enough cash to pay for a replacement asset (to keep company revenues and margins stable) that costs new USD ~165m and for a spot market operator might need to be paid for with a very high equity cheque (say ~$80m). Sure a buyer can capture some of this value, but not much and they don’t need to give this away.

In order to fund her replacement capital value the Polaris needs to bank ~USD 22k per day on top of her earnings. Good luck with that. When I talk about lower secular profits in  the industry and the slow dimishment of the capital base that is it in a microcosm: an expensive specialist asset that will be worked to death, above cash flow breakeven in a good year, with no hope of generating enough value in the current economic regime to pay for a replacement. This is how the capital base of the industry will shrink in many cases, not the quick flash of scrapping, but the slow gradual erosion of economic value.

Ocean Installer also have limited work although it is installation work and firmly grounded in Norway. Like everyone else this is not a management failing but a reflection of market circumstances.

McDermott and OI could not reach a deal on  price previously. MDR realised they could just hire some engineers, get some vessels (and even continue to park them in an obscure Norwegian port if needed by Equinor), and recreate OI very quickly. All OI has worth selling is a Norwegian franchise the rest is fantasy. An ex-growth business with single customer risk and some chartered vessels has a value but nowhere near enough to make a venture capital strategy work in financial terms.

Now at both companies there are some extremely astute financial investors are doing the numbers and they must either send out letters to fund investors requiring a draw down to inject funds into these businesses, explaining why they think it is worth it, and putting their reputations on the line for the performance. It may have been worth a risk in 2016, and 17, but really again in 18? Really? [For those unaware of how PE works the money isn’t raised and put in a bank it is irrevocable undertaking to unconditionally provide the funds when the investment manager demands. Investors in big funds know when the money goes in generally and what it is being used for.] And again in 19? And the more they draw down now the higher the upturn has to be to recover. (In York’s case I think it’s more subtle as the investment exposure seems to have moved from the fund to Mr Dinan personally given the substantial person of interest filings).

But whatever. If they do this all the firms do this forever then they will all continue to lose money barring a significant increase in demand. And we know that this is not possible in the short-term from data supplied to the various regulatory agencies. And for the UK sector we know production starts to decline in two years (see graph). So in the UK two years just to keep the same available spend in the region the price of oil will have to go up or E&P companies will have to spend more proportionately on the service companies. This is not a structurally attractive market beset as it is with overcapacity.

Aside from the major tier 1 companies are a host of smaller companies like DOF Subsea, Maersk, Bourbon, and Swire, long on vessels and project teams, and with a rational comnmitment and ability to keep in the market until some smaller players leave. I repeat: this is a commitment issue and the companies with the highest cost of capital and the smallest balance sheets and reources will lose. These companies don’t need to win the tie-backs etc. that OI (and Bibby) are really aiming for: they just need to take enough small projects to ensure that the cost base OI and Bibby have to maintain for trying to get larger projects is uneconomic and expensive in short-term cash costs. It is a much lower bar to aim for but an achievable one.

So the private equity funded companies are left with option 3 as are the industrial companies. The problem is that the industrial companies have a Weighted Average Cost of Capital of ~8-15% and private equity companies who like to make a 2.5x money multiple have about a 25-30% (including portfolio losses) The magic of discounting means the nominal variance over time is considerably larger.

And for both OI and Bibby the fact is they face a very different market from when they started. Both companies went long on specialised tonnage when there was a shortage, taking real financial and operational risk, and growing in a growing market. That market looks likely never to return and the exit route for their private equity backers therefore becomes trying to convince other investors that they need to go long on specialist assets that operate in the spot the market with little visibility and backlog beyonnd the next six months. As someone who tried raising capital for one of these companies in downturns and booms I can tell you that is a very hard task.

So if you want some easy listening summer music I suggest you take advice from a music journalist. On the other hand if you want a serious strategic and financial plan that reflects the market please contact me.

What is an offshore construction vessel worth?

There is an article from Subsea World News here that is sure to have bank risk officers and CFOs choking over their coffee… VesselValues new OCV is launching a new analytics tool for the sector. The ten most valuable vessels in the OCV sector are apparently:

  • Normand Maximus $189m;
  • Fortitude $99 million;
  • Deep Explorer $97 million;
  • Siem Helix 2 $96 million;
  • Seven Kestrel $95 million;
  • Siem Helix 1 $95 million;
  • Island Venture $94 million;
  • Viking Neptun $92 million;
  • Far Sentinel $90 million;
  • Far Sleipner $89 million;

Firstly, look at the depreciation this would imply? As an example the Maximus was delivered in 2016 at a contract price of USD $367m. So in less than 2 years the vessel has dropped about 48% in value. Similarly the two new DSVs the Seven Kestrel and Deep Explorer appear to be worth about 67% of value for a little over two years depreciation.

Secondly, the methodology. I broadly agree with using an economic fundamentals approach to valuation. And I definitely agree that in a future of lower SURF project margins that these assets have a lower price than would have been implied when the vessels were ordered. I have doubts that you can seperate out completely the value of a reel-lay ship like Maximus from the value of the projects it works on but you need to start somewhere. It is clear that SURF projects will have a lower structural margin going forward and logically this must be reflected in a vessel’s value so I agree with the overall idea of what is being said.

There is a spot market for DSVs on the other hand so their value must reflect this as well as the SURF projects market where larger contractors traditionally cross-subsidised their investment in these assets. A 33% reduction in value in two years might well reflect an ongoing structural change in the North Sea DSV market and is consistent with the Nor/Boskalis transactions on an ongoing basis. This adds weight to the fact York have overpaid significantly for Bibby, who would be unable to add any future capacity to the DSV market in the pricing model this would imply and not even be earning enough to justify a replacement asset. Given the Polaris will need a fourth special survey next year, and is operating at below economic value at current market rates, even justifying the cost of the drydock in cash terms on a rational basis is difficult.

Depreciation levels like this imply clearly that the industry needs less capital in it and a supply side reduction to adjust to normal levels. Technip and Subsea 7 are big enough to trade through this and will realise the reality of similar figures internally even if they don’t take a writedown to reflect this. Boskalis looks to have purchased at fair value not bargain value to enter the North Sea DSV market. SolstadFarstad on the hand have major financial issues and Saipem locked into a charter rate for the next 8 years at way above market rates, but with earnings dependent on the current market, will have to admit that while the Maximus might be a project enabler it will also be a significant drag on operational earnings. The VesselsValue number seems to be a fair reflection of what that overall number might look like.

The longer the “offshore recovery” remains illusory the harder it will be for banks, CFOs, and auditors to ignore the reality of some sort of rational, economic value criteria, for offshore assets based on the cash flows the assets can actually generate.