Dogecoin … you can’t make this up…

Great NYT story about a guy who made a digital coin as a “satirical mash-up” to poke fun at the Bitcoiners… But then it’s market value climbed to $400m before dropping to a mere $100m! You literally cannot make this up: read the whole thing.

During the South  Sea Bubble someone floated a company to “drain the Irish Bogs” and this is of a similar ilk.  No one can really believe this. I keep quoting Keynes beauty theory here because nothing else sums it up better:

“It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.” (Keynes, General Theory of Employment, Interest and Money, 1936).

The article contains a definition of an initial coin offering that is set to become a classic:

Imagine that a friend is building a casino and asks you to invest. In exchange, you get chips that can be used at the casino’s tables once it’s finished. Now imagine that the value of the chips isn’t fixed, and will instead fluctuate depending on the popularity of the casino, the number of other gamblers and the regulatory environment for casinos. Oh, and instead of a friend, imagine it’s a stranger on the internet who might be using a fake name, who might not actually know how to build a casino, and whom you probably can’t sue for fraud if he steals your money and uses it to buy a Porsche instead. That’s an I.C.O

You think it’s a joke but the Wall Street Journal found:

Union Square Ventures, Bessemer Venture Partners and Sequoia Capital all have reacted—using investor funds—by buying digital tokens directly or by putting money into hedge funds that buy tokens. Some venture investors, such as Nick Tomaino of Runa Capital, left their firms to set up crypto hedge funds.

“If you are in the business of investing in the future you probably have to change the style of investment to accommodate novel ideas and opportunities,” said Brad Burnham, managing partner at Union Square Ventures.

Union Square Ventures is a tier 1 NYC VC firm whose founders made hundreds of millions in South American telcos and social media. Maybe cash shells represent the apex of a bubble: Social Capital Hedosophia Holdings Corp. got $600m in an IPO to buy another company who wants to go public but doesn’t want the hassle of it (but then it will be public?).

Productivity in the long run…

I go on about it a lot but productivity is the core of economic growth and undertsanding its importance is crucial to having a reasonable chance of understanding how an industry may evolve. Brad De Long makes this clear when discussing the iPhone X;

Consider the 256 GB memory iPhone X: Implemented in vacuum tubes in 1957, the transistors in an iPhoneX alone would have:

  • cost 150 trillion of today’s dollars: one and a half times today’s global annual product

  • taken up a hundred-story square building 300 meters high, and 3 kilometers long and wide

  • drawn 150 terawatts of power—30 times the world’s current generating capacity

Renewable also energy seems to be in a marked phase of marked productivity improvement:


I am not predicting the end of oil already: it is simply too efficient on an output basis. but in the long run everything is a productivity game, the supply curve in oil is just a very long run curve that requires technology to fundamentally change it. And for offshore it isn’t doing that much at the moment. The risk here is that large E&P companies reduce their focus on CapEx for offshore, which becomes self-fulfilling because it prompts infrastructure investments that make renewables even more efficient. Most commentators believe this productivity surge has a long way to go with maybe a 20-30% further cost reduction by 2030.

And big institutions have the investment narrative that says this is hot with Blackrock Infratsructure (who admittedly have their own agenda to raise money) backing a shift in energy sources:

During a recent interview, Jim Barry, a managing director of BlackRock and global head of the investment firm’s Infrastructure and Investment Group, recently declared that “coal is dead.” While he acknowledged that coal will still be part of many countries’ energy portfolios, Barry said any investor who is seeking returns from coal beyond 10 years from now is “gambling very significantly.”…

And largely due to the cheap cost of renewables, Barry and BlackRock are sanguine about these technologies’ future. Barry was also optimistic during the interview on the outlook for electric cars, due to their improved range and the declining cost of battery storage. While talk of “peak oil” has been underway for years, Barry views the oil markets through a different lens, insisting that “peak demand,” not just supply, is a dynamic that investors should not ignore. As consumers embrace electric vehicles, the demand for oil will continue to decline – with the end result a cloudy future for conventional energy companies with large oil reserves on their books.

Don’t for a second underestimate the fact that senior managers at large E&P companies see investors like this as their boss and seek to deliver messages that please them.

I think some of the big mergers will help integrated solutions deliver productivity to make oil more competitive. But production productivity, and not just demand, will be crucial for the future of offshore production. The core of productivity improvements is generally mass production of all components in the supply chain by a small number of vast tier one suppliers and a network of subcontractors (who make minimal margins), and this is almost antithetical to the entire make-up of offshore. Change is coming.

Dimon calls (unspecified) time on Bitcoin mania…

“I can calculate the motions of the heavenly bodies, but not the madness of people”

Sir Isaac Newton (who invested £3500 in The South Sea Company and sold out at £7000; he then re-entered the market and lost £20 000).


“[T]here shall be one coinage throughout the realm”

An Anglo Saxon rule dated to Athelstan, c. 930AD

So Jamie Dimon (CEO of JP Morgan Chase & Co), probably not a reader of this blog, also thinks Bitcoin is a bubble:

I’m going to be really clear in this one. Forget the blockchain, that’s a technology… But… the currency isn’t going to work. You can’t have a business where people can invent a currency out of thin air and think the people buying it are really smart. It’s worse than tulip bulbs, OK?

Note use of the word currency not money. Banks create money out of thin air as The Bank of England agrees. And private money creation has a long intellectual tradition in economics, with Friedman asking the question “Does the Government have any Role in Money?”. And there are less extreme examples: in 1970 during the Irish Bank stike even cheque clearing closed down and Irish pubs and supermarkets continued to “cash” cheques as they passed like money throughout the system for over six months and cheques were cashed by pubs as if the banks were open.

Currency on the other hand is a unit of account given the force of state backing and can be used to settle tax obligations. As soon as there is a threat to the tax base or the control of money the government will extinguish that threat: clearly the more authoritarian the bigger the threat and the quicker they will act.

What is clear is that Bitcoin is a bubble. There is no intrinsic value in it and the price and it is clearly only worth what someone else will pay. I love this quote:

When Stanley Druckenmiller, who managed George Soros’ $8.2 billion Quantum Fund, was asked why he didn’t get out of technology stocks even earlier if he knew they were overvalued he replied that he thought the party wasn’t going to end so quickly. In his words “We thought we were in the eigth inning, and it was the ninth”. Faced with mounting losses, Druckenmiller resigned as Quantum’s fund manager in April 2000… Julian Robertson, manager of the legendary Tiger Hedge Fund, refused to invest in technology stocks since he thought they were overvalued. The Tiger Hedge Fund was dissolved in 1999 because its returns could not keep up with returns generated by dotcom stocks.

A Wall Street analyst who has dealt with both managers vividly summarized the situation: “Julian said, ‘This is irrational and I won’t play,’ and they carried him out feet first. Druckenmiller said, ‘This is irrational and I will play’, and they carried him out feet first.”

Dimon has history on his side. Sooner or later this is going to end badly. Currency creation is a prerogative of the state as is the ability to tax and the two are inseparable. As Redish notes:

Numismatists believe that the earliest coins were produced at Lydia (now Western Turkey.  in the mid-seventh century BC. The coins were made of electrum, a naturally occurring alloy of gold and silver. They had a designon one side and were of uniform weight but had a highly variable proportion of gold. In an influential article, Cook (1958)  argued that these coins were introduced to pay mercenaries, a thesis modified by Kraay (1964) who suggested that governments minted coins to pay mercenaries only in order to create a medium for the payment of taxes. Both interpretations stress the role of the government in the introduction of coinage.

Something that has worked for thousands of years and used to keep governments in power and is crucial to the tax base isn’t going to be usurped by an unkown computer programmer, a bunch of gun nuts (who don’t want to pay tax), drug dealers (who don’t want to pay tax and get caught (crime clearly has a major impact on Bitcoin valuation)), and a bunch of fintech guys (who don’t want to pay tax and have no sense of economic history). Something Ross Ulbricht could testify to.

Backlog, boats, and oligopolies…

“[E]conomists usually assume that people know how the economy works. This is a bit strange since economists don’t even know how the economy works”. …

Xavier Gabaix

There was a lot of talk about Subsea 7 ordering a new pipelay vessel last week, and given the engineering quality at Subsea 7 I am sure it will be an efficient, if not technically brilliant, asset. I don’t have a counter-opinion on this: Subsea 7 shareholders expect them to be a market leader and this means buying assets, particularly when yard prices are likely to be advantageous.  The plan would seem to try and push the technical window of pipelay even further and make it harder for smaller tier two contractors to offer a competitive product with such technical features as heated pipe-in-pipe.

As a replacement for the erstwhile Navica it will ensure a leading edge capability. The Navica was built in 1999 so Subsea 7 had 16 good years out of her and  for a number of years Technip and Subsea 7 offered the only realistic reel lay in the North Sea, and I would say the vessel made real money for the shareholders from 2004 onwards (especially when considering the huge number of DSV days she generated) until 2014. Subsea 7 depreciates vessels between 10-25 years and I wonder what the figure is for pipelay assets?  If the pace of innovation in the pipe technology is such that you need a new vessel as a platform every few years then the economics would dictate a slow diffusion of pipe technology (I don’t think it’s likely).

At USD~300m it is not a massive purchase for Subsea 7 either. In 2017, in the midst of the worst industry crisis ever, Subsea 7 made a special dividend of USD 191m, and this vessel is 3 years away from the take-out payment (and could probably be pushed back if needed). The interesting thing is given the delivery time how Subsea 7 see the market coming back… because its not in the backlog. In 2013 Subsea 7 published their backlog as USD 11.8bn:

Subsea 7 Backlog Q4 13

Strangely, for the last few quarters the bar graph has been dropped in favour of the pie graph and the number is materially smaller:

Subsea 7 Backlog June 2017.png

That USD 4.4bn also includes ~USD 1.4bn for the PLSVs in Brazil. Now to be fair when Subsea 7 had backlog of USD 11bn it had six vessels under construction and was targeting CapEx of ~USD 1bn, 60% on new builds and 25% on replacement CapEx. As the order book at Subsea 7 has dropped so has CapEx pretty much proportionately. It is also interesting that they can cut maintenance CapEx back so much with guidance for total CapEx this year guided in at USD 180-220m. Yes, it’s a lot less than Depreciation, but as the industry contracts this is going to become more normal, the asset base has to shrink to reflect the total macro demand.

However, I think you can get a sense of Subsea 7 managements’ confidence in the future from this graph in their 2016 annual report:

Subsea 7 Outlook Feb 17

2014-2018 look like lean years with the tap opening up in 2018. The sceptic in me always looks at the variability of the grey box (USD/bbl 40-60) and thinks the longer market sentiment remains negative the less likely this segment is likely to fulfill its potential, because the baseload of offshore projects at USD 40 is depressingly small. But if Subsea 7 shareholders expect their company to be a market leader, and if the market is moving to longer tie-ins with heated pipe, then that is the direction the company must go. What is interesting, and will be impossible to tell for outsiders initially, is how they price this in the market? If they only have 10 years to get a return on the investment the project day rate will have to be substantially higher than if it’s a 20 year investment.

You can make a bear case for Subsea 7 being too long on pipelay capacity in Brazil and for it going too early with this vessel if the recovery doesn’t come, otherwise they have arguably handled and read the downturn better than anyone. But I guess what the management really don’t want is a company that doesn’t have the asset base if the market comes back and this is only balanced against the very high cost base vessels have if they don’t work.  Again in the latest SS7 presentation they showed this market data which would give the Management/Board the confidence to invest:

Subsea market outlook Sep 2017

Subsea 7 have the liquidity to make it through to a forecast upturn and other shareholders will have the confidence they are following on the back of Siem Industries,  who have been remarkably honest about the problems they face at Siem Offshore and their commodity tonnage.

I think it likely that at the top end of SURF FMC Technip, Saipem, Subsea 7 and McDermott pull away from the other companies and create a small pool of competitors who bid for projects offshore globally that only they can realistically do given the technical sophitication and asset base required for delivery. A large number of the tier two installation contractors are no more (Swiber, EMAS Chiyoda, SeaTrucks), so the bigger contractors should gain market share on some of the more basic installations and offer a host of technical capabilities that will make it impossible for smaller companies to compete on the larger projects.

Therefore the question is whether a small number of firms bid each other out of profits or whether they create economic value? I think you can make a bull case for Subsea 7, and the other large integrated SURF contractors, based on theories of market power and argue that this is a case where if they can push the technical and asset window enough they will generate significant economic profits, and this vessel order needs to be seen in that light. This isn’t true for every segment in the subsea market and is unique to the financial strength and product breadth the large integrated contractors have.

Markets with a small number of selling firms who are in a strong position are known as oligopolies. These market structures have fascinated economists for years because of the potential for collusion and price setting (as well as the failure of the firm profits to decline over time as classical theory would suggest). But two theories, based on French mathemeticians (who looked at a spring water duopoly) allow some insight into how the SURF companies will behave in the future: Bertrand competition, which argues that companies in this position would sell on price; or Cournot competition, which argues that companies in this position maximise sales and ultimately profitability.

In a much longer post (for another day and likely of limited interest) I will argue that this likely oligopoly of large SURF contractors will compete on a Cournot model, and therefore these firms are likely to make significant economic profits, despite the capital intensity of the industry. Cournot models are defined by:

  • [M]ore than one firm and all firms produce a homogeneous product, i.e. there is no product differentiation;
  • Firms do not cooperate, i.e. there is no collusion;
  • Firms have market power, i.e. each firm’s output decision affects the good’s price;
  • The number of firms is fixed;
  • Firms compete in quantities, and choose quantities simultaneously;
  • The firms are economically rational and act strategically, usually seeking to maximize profit given their competitors’ decisions.

The high-end SURF market is a clear case of this: a relatively small number of firms (n=4 maybe n=7 in some cases) and specialised asset base, well known to competitors and easily monitored, allows firms to understand well what there rivals are doing. For game theorists it is a market made in heaven where the signalling intentions of all parties are obvious. From an E&P perspective, when you cut through the enginering voodoo language, the product is homogenous: it takes oil from a well to a transfer point. Firms will not irrationally bid down project margins constantly as they are aware of the competitive effect of doing this (which is different from when EMAS Chiyoda and other pretenders were in existence), and in reality the high-end SURF firms are well aware what projects suit their asset base and are “must win” projects. The network of alliances, and integrated solutions from the seabed, cannot be easily replicated but are not so different in technical terms that competitors cannot make intelligent judgements about a competitors cost base.

Each firms output decision will affect price because the large step increase in investment required for new capacity will make these companies more cautious is a more depressed market. The quantity theory of output is likely the least intuitive part of the theory for subsea but in essence firms will limit the supply of new vessels and concentrate on utilisation. The big four SURF contractors will only add vessel capacity when it generates profits well above capital costs – which simply hasn’t been true in the past. Over time as the new build wave subsides the firms will choose to limit the supply and focus on cash which will drive up rates (above marginal cost). This is different from a bank enforced asset freeze I have mentioned before as these companies are large enough to access asset funding.

For the tier 2 companies and vessel owners below my depressing tone of poor margins and over capacity will continue for some time I guess. But technical innovation and high CapEx, with mildly increasing demand, should allow the top SURF contractors to exercise a degree of non-collusive pricing power that will generate real economic profits in the not too distant future. These firms will take market share in the more commoditised (and shallow) field development market and face limited competition for high-end field development work which is a growing segment of the market (hence Subsea 7’s move into the Gulf of Mexico in a big way with the EMASC assets).

So despite a generally depressed industry it is easy to imagine the high-end SURF firms prospering to a certain extent. Brazil is the country however that hangs over Subsea 7 and to a lesser extent FMC Technip (and I wonder if it really sank the DOF Subsea IPO): too much flexlay capacity. It’s very hard to see how much capacity Petrobras is going to give back, but a look at tree awards suggests a degree of discomfort for the vessel owners.With one dominant customer the downside is clearly and intense period of price competition between FMC Technip and Subsea 7 in Brazil to keep their assets working. This is a classic example of Betrand competition where two firms who offer an identical product, and cannot collude, find the buyer chooses everything from the firm with the lowest price. Such a statement seems vaguely tautological but in economic terms it is more about a formal proof that two firms can push industry margins down to zero economic profits as efficiently as a large number of firms competing.

Note: For Saipem I am talking SURF only. At a corporate level I don’t see any respite for them).

(P.S. The header pictire is of a “Kinked” demand curve which is core to the oligopoly model.)



What matters more firm or industry?

So for Reach Subsea it all comes down to Q3 and Q4 this year… having raised money in February, the company came in came in with some significant losses in profit and cash flow but is fully confident its all coming right in the next two quarters. I don’t know they people from Reach, all of whom look to be very talented individuals, but I am interested in the company because I can’t think of a more structurally unattractive industry to be in than ROVs at the moment, and all the people I know in the ROV game tell me how hard it is currently with everything going out for free virtually bar personnel.

Reach has a host of competitors: i.e. M2, ROVOP, Bibby, and then the larger competitors. This is a fragmented industry and this is because the entry costs are low and the gains from scaling up the business so small given the fixed cost nature of per unit output. All the smaller companies in particular are simply finding desperate vessel owners and putting an ROV on their boat: it is not an original strategy and not one that strikes me as having great longevity once the market balances more. Every single company with ROVs is trying to hire a few project engineers and say they offer a full service not just taking hire revenue… it’s brutal and E&P companies/contractors/vessel owners are driving very hard pricing and contractual terms.

This chart from Oceaneering shows the scale of competition Reach and the other small companies are up against:

OII Vessel Fleet 31 Mar 2017.png

That is from an asset base of 282 units and strong stable revenue drill support market – although with low margins.

Last week Bibby gave up the game in Asia and sold its ROVs to Shelf for a few million. The transaction will likely reduce their revenue and cash generation potential and will make investors even more cognizant of the fact that the depleting asset base will not make paying the bond investors back possible. But as the noose of an interest bill of £35k per day tightens few options were left. The numbers I have heard suggest a sale way below book value of the asset base and that is common across the industry and the reason for that is like vessels the ROVs cannot generate the amount of cash required to pretend historic values reflect current economic values (~USD 7.5m).

I use Oceaneering as a proxy for the industry simply because with 28% of the total ROV fleet they are clearly representative of the market as a whole. Reach is simply the only listed entity of the pure play ROV companies and it therefore makes it easy to get information but the comments I make about them are appropriate for any of the smaller companies. Oceaneering has also announced it is going to focus on vessel based units and has put 18 units on long-term contract with Heerema and Maersk, and this surely is the future? Consolidation of the contractor base will see larger procurement orders from larger companies, or worse a host of smaller companies on both the vessel and the ROV side stay and operate at a subeconomic level because the exit costs would see them realise nothing?

I find the ROV industry interesting from the point-of-view of firm versus industry effects: In 1985 Richard Schmalensee published a seminal paper “Do Markets Matter?” Schmalensee was trying to ascertain if strategy was simply a matter of picking markets with strong structural characteristics, the focus of the famous “Porter’s Five Forces Analysis”, or if firms had innate features that allowed them to generate returns regardless of poor markets? A later line of enquiry that became known as ‘The Resource-Based View of the Firm (RBV)” and was made famous in management circles by the book “Competing for the Future” where the idea of Core Competencies entered the business vernacular (its digestibility masking the deep academic heritage of the ideas).

For what it’s worth I don’t think the debate on firm versus industry has been completely solved but it points to the likelihood of certain events. As always with economics you can find good arguments for both sides: Rumelt (“How much does industry matter?“) argued pace Schlmalensee that industry effects were outweighed by firm effects, McGahan and Porter (“How much does industry matter really?“) argued that actually the relationship is complex but with a weighting to firm effects being stronger, but more so in service firms whereas Wenerfelt and Montgomery (“Tobin’s q and the Importance of Focus in Firm Performance“) agree industry effects are strong but some firms defy them and outperform. I could go on…

This article seems to suggest why you can find evidence of both firm effects and industry effects:

In other words, only for a few dominant value creators (leaders) and destroyers (losers) do firm-specific assets seem to matter significantly more than industry factors. For most other firms, i.e., for those that are not notable leaders or losers in their industry, however, the industry effect turns out to be more important for performance than firm-specific factors

It’s not everything either… size does matter: profits are positively correlated to size in broad cross-sectional research.

I read it that you are either a statistical outlier or the fact is the industry effects will dominate your likely financial performance. The clues to being an outlier, originally called strategic rent factors by economists, but made far more palatable by the consultants who created entire teams that specialised in “core competencies”, are now well accepted. To be a positive outlier Peteraf outlines:

four conditions must be met for a firm to enjoy sustained above-normal returns. Resource heterogeneity creates Ricardian or monopoly rents. Ex post limits to competition prevent the rents from being competed away. Imperfect factor mobility ensures that valuable factors remain with the firm and that the rents are shared. Ex ante limits to competition keep costs from offsetting the rents.

In diagrammatical form it looks like this:

Cornerstone of competitive advantage.png

Note economists call profits above breakeven “economic rents”. I should obviously point out that while it’s easy to look back with hindsight about this creating these rents is considerably more difficult and represents the dividing line between economics and management.

The diagram in simply says:

  1. Heterogeneity: Firms must be different and the profits must come from limiting the supply of factors (monopoly) or an inability to increase those factors that drive profits in the short run (Ricardian)
  2. Ex post limits: Essentially the imperfect imitability and substitution from the ‘Porters’ Five Forces’… not everyone can copy what your firm does or replace your product service with a substitute
  3. Imperfect mobility: A competitor can’t just go and buy your superior skills on the market. For example anyone could approach Airbus suppliers but could they really build a plane?
  4. Ex-ante limits: Not everyone decides to do the same thing before it becomes profitable.

Prahalad and Hamel became famous because the summed this up with three factors they said made something a “Core Competency” if it:

  1. Provides potential access to a wide variety of markets.
  2. Should make a significant contribution to the perceived customer benefits of the end product.
  3. Difficult to imitate by competitors.

So to bring all this back to the ROV market I think you can argue that a wide base of economic research says this is structurally a very unattractive market: low barriers to entry, easy substituability and imitability, high customer bargaining power, and intense competiton. And I look at most of the small ROV firms, not just Reach, and I see no core competencies or economic factors that would give rise to economic rents (i.e. profits above break-even) and a lot of red ink still being spilled. I see lots of good relationships, smart people, and great technical skills; what I don’t see is a lot of differentiation on anything other than price.

All of which leads me to believe none of the smaller ROV firms satisfy any of the conditions that would allow them to be statistical outliers against industry trends. They are all offering to put cheap ROVs on vessels and work at marginal cost only hoping someone else goes out of business first which makes them a hostage to industry forces only. I can’t see anything other than a wave of consolidation as the larger companies, who can manage their ROVs cost base better by cross-subsidising it while times are poor, taking the smaller companies who eventually struggle to fund OpEx. Sooner or later there needs to be a reduction in the number of operating ROVs to restore the industry to “normal”/breakeven profitability and the smaller companies simply lack commitment that the larger companies have.

I could be wrong… I have been before… I miscalculated for example how good a deal Subsea7 had struck on the EMAS Chiyoda assets … and I think we are in for a better market in some segments in 18 than 17, but continued cost pressure will favour well capitalised substantial companies in this industry not start-ups/growth companies I feel in this market segment… but getting there could be financially painful.

Like Facebook and Alphabet… Nautalis Marine Plc and First Bitcoin Capital Corp… a hot M&A tip…

a company for carrying out an undertaking of great advantage, but nobody is to know what it is

From the listing prospectus of a company issuing shares during the South Sea Bubble, c. 1720

On February 27th Grand Pacaraima Gold Corp., a mining corporation focused on Venezuela,  changed its name to First Bitcoin Capital Corp (“BITCF”) thus moving from a small penny listed Canadian mining corporation to being a small listed Canadian penny listed Bitcoin/Altcoin focused corporation (h/t Matt Levine). Similarly on 16th January Global Energy Development Plc changed its name to Nautalis Marine Plc, having been previously invested in E&P production in South America, in a related party transaction purchased potentially the worst 11 vessels in the entire global subsea fleet and continued their lay-up in Louisiana, and became a small cap listed offshore vessel owner (not operator as all the assets are in lay-up).

Global Energy/Nautalis entered into a complicated loan note, validated by advisors, although this opinion has not to my knowledge been made public, to complete this transaction in which the related parties released their interest in the vessels and thus exchanged a highly uncertain equity stake, in 11 of the oldest (and most operationally compromised) OSVs in the world, for fixed obligation loan notes. The company, having generously lent the related parties money to buy the vessels in the first place, then even more generously extended credit to purchase them back. Now the company seriously states it is looking for technology focused acquisitions to add value to their vessels… one of these was built in 1967…

BITCF is also fond of complicated transactions. BITCF has managed not only a share buyback but also a dividend in cryptocurrency: BITCF used XOM “the internet of money” to buy back ordinary shares, and then Tesla Coin (“TESLA”) to pay a dividend (BITCF owns 20% of TESLA). Unfortunately, the Securities and Exchange Commission appears to have had a sense of humour failure and has suspended trading in the shares, which is a shame because on mirth value alone I recommend reading the letter explaining this which states:

BITCF is extremely rare in this regard for an OTC company as most are dilution machines designed either to grow their company or unjustly enrich management and promoters. Our management has never sold one share of our stock in spite of the meteoric rise in price per share.

The reason we have been able to succeed without external funding is due to the fact that we early learned how to develop crypto assets on a shoe string, so to speak. This also resulted in our being able to pay off our debt which was owed to management with one of our created crypto currencies.

Clearly BITCF found mining for coins easier than finding gold. In a similar vein Global/Nautalis found buying decrepit DSVs, in a related party transaction, easier than foraging for oil. Both are essentially technology plays they claim, kind of like Facebook and Snap… I guess…

I often wonder these days why I am not involved in a cryptocurrency. Can life have meaning without one? I get The Bank of England shares doubts about the stability and role of this unit of account in a modern world… but really can a bank created to finance a government loan see the future?

I note that Nautalis seeks a niche a specialised offshore technology. I think the M&A bankers can already see the possibilities that I do?! DSV Coin? There are over 850 cryptocurrenciesalready (none of which carrying the symbol DSV that I am aware of?) and BITCF allows users to mine their own coins based on their own blockchain, (although the company itself has mined 20.7m of the potential 21.0m coins). How can you not want to invest in a company that issues the following statement:

the company intends to pay additional dividends in various crypto currencies that may include crypto exchange symbols $WEED $FLY $PRES, $HILL, $GARY, $BURN, $OTX and $KLC. We may also from time to time pay dividends in our own common shares in their crypto form which trades under the crypto symbol $BITCF on various foreign cryptocurrency exchanges.

$WEED coin listed on 3 exchanges during 3rd successful ICO (Initial Coin Offering).

WEED coin now trades on the OMNIDEX, COINQX and CRYPTOPIA

Similarly Nautalis (who also have some great promotional material) makes much of the of the fact that they are they are “unique”:

Nautalis Differentiation.png

That is my favourite slide ever. And I say that as an ex-management consultant who was virtually paid by the slide at one point and can make the cleverest idea into a meaningless deck of slides in an instant. They should have added a line “Number of offshore energy services companies with their entire fleet in lay-up – 1 (.001%)”, that is the only improvement I could suggest. I once had a boss who was a stickler for detail who would have crucified me for not explaining the correlatation/causation aspect of so few offshore companies and the need for the industry to have less capital as E&P spending decline… but maybe not if the slide was of this quality.

Nautalis have noticed a “massive” industry (one they also have limited experience in) and are therefore “targeting a niche market”… with 11/11  vessels in lay-up that is patently true! Nautalius note there are 10 000 companies…. and probably none with their entire fleet in lay-up either! It’s a veritable Cambrian explosion of wealth…

Nautalis Opportunity.png

These companies are made for each other. NautalisBITCF can issue the first cryptocurrency based on DSVs. As the oil market recovers the vessels can be scrapped to issue genuine metal tokens (“money”) in the blockchain, backed by actual ships: A quaint physical symbol of the past perhaps? Or you could short the ships (defintitely if I offered investment advice, which I don’t) and go long AltCoin, or DSVCoin, or whatever you could get away in an Initial Coin Offering.

The link here as always is investment bubbles: BITCF are hoping to ride the wave up whereas Nautlis Plc appear to have timed spectacularly badly the offshore oil services downturn. The one thing you can guarantee here is that that those Nautalis vessels won’t dive again (unless they are sinking), or in the case of the barge lay pipe, and anyone not taking seigniorage on “money” issued by BITCF is unlikely to get a return…

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