Reach(ing) for the absurd… Structure-Conduct-Performance

Situations emerge in the process of creative destruction in which many firms may have to perish that nevertheless would be able to live on vigorously and usefully if they could weather a particular storm.

Joseph A. Schumpeter

I have been busy lately and therefore not had as much time to write as I would like. I am working on a longer post about how much a North Sea DSV is worth (following the Nor and Bibby results), and another post on DeepSea Supply. But the constant theme in the market at the moment seems to be that no matter how bad the numbers are to claim an increase in tendering activity, as if all will be well if we just hold on a little longer, and it is this that has forced me to write…

The most logical explanation, borne out by the numbers at the moment, is that tendering is increasing because those putting out the tenders have realised there is a marginal benefit in doing so: they get cheaper prices and do not face diminishing returns from the increasing tender costs. Such an explanation fits easily with everyone reporting declining margins (Maersk, Bibby, Reach, Bourbon, DeepOcean, Solstad etc.,) across the entire supply chain while unanimously claiming to be tendering more. I get contracting lags tenders, and at some point this will mean that tenders will increase prior to work, but it simply isn’t happening at the moment: the schedules are still being cut and work delayed as all those reporting weaker numbers tell you, with no sense of apparent irony, at the same time as they report increased tendering activity.

I still feel that many people in the industry haven’t yet come to grips with the scale of change in the supply change that will be necessary for the market to balance and the structural nature of that change. Until investors who don’t understand this have been flushed out, and it would appear that this will only happen when they have faced mutliple capital injections at ever decreasing rates of return, the entire supply chain will suffer with profitability and utilisation issues.

Reach Subsea reported results and commentary this week in exactly this vein. The ROV industry in particular reminds me of my first job in NZ when a couple of weeks into it someone flew down from Germany to have a strategy meeting with us. “We are going to grow twice as fast as the market” he stated, when I asked “Isn’t everyone else saying this at their planning day as well, so what are we going to do differently” I realised my career at this company was off to a bad start. (I also realised that marketing wasn’t for me. Although the hilarity did ensue when the said individual returned later in the year (1997) to demand higher returns as the Asian currency crisis was having a poor effect on his P&L. When I pointed out 65% of NZ’s trade balance came from APEC countries I was pleased to have a UK passport.

Collectively it is axiomatic that the sum of all firms in the industry can only be equal to the market size and the overall market growth rate. Yet everyone in the ROV space at the moment claims to be growing market share or holding up despite new companies launching and no one making any money.

ROV systems are preferable to own over an offshore vessel only because they don’t have the running costs and you can put them in a warehouse until a recovery appears. But the ROV industry has very low barriers to entry, are in huge oversupply, and the industry is dominated by 5 very well capitalised and global companies. I have lost count of the number of companies striking a deal with a vessel owner to put the system on for free while they take the risk and cost of tendering on. It is not an original business model.

This graph from the market leader, Oceaneering, makes it clear the scale of the large companies:

ROV Market 2017

Source: MS Presentation, May 2017, IHS Data

And the largest company in the market (OII) has poor utilisation and a day rate reduction of 25% since 2014:

OII fleet utilisation.png

The question is really why you would want to go long on this market? Reach to be clear has 6 systems while OII has 282. Four competitors control more than 50% of the market. This is a market that has declined significantly in the last couple of years and seen a small number of new competitors (i.e. M2) come in and buy assets below depreciated value from previously bankrupt companies. If you speak to anyone in the market at the ROV companies they will tell you they are giving away the ROV for free and trying to make money off the personnel and mobilisations. It is a totally unsustainable business model.

The only economically rational strategy here is for a massive consolidation amongst the larger industry players, starting with the grey quarter in the graph who don’t even get their own colour. There is no differentiation in the end product to the customer and no ability for ROV contractors to add value in all but a few extreme circumstances. The longer investors support companies like this the longer the entire industry will operate at below a profitability level required to get CapEx to equal depreciation and ROE to equal the cost of capital.

Reach to be clear reported revenue down more than 50% on the same period last year but at the same time like everyone else reported increased tendering. Reach are krill that will eventually be eaten by a blue whale (hence the photo). I understand that smaller contractors face risks where one vessel is in proportion a larger part of their business, but that just reinforces the economic necessity of having the assets controlled by a larger firm, because the cost base doesn’t vary by the same amount and the lack the scale and scope required to market and develop such assets.

I also noted in the Reach private placement memo this note about their strategy:

8.9 The Group’s strategy

The strategy of the Group in a five-year perspective, could be outlined as follows:

8.9.1 Strategy in the OPEX-market (fields in operation)

  • Target IMR frame agreements
  • Export of North Sea technology and standards to selected major deepwater areas in the world (emphasis added)
  • Provide new services in the segment
  • Bid for seasonal contracts in key regions  (FTSS: Really?)

8.9.2 Strategy in the CAPEX-market (fields under construction)

  • The goal is to be a preferred subcontractor to the major EPIC subsea contractors
  • Securing the right assets will be key (FTSS: They are everywhere and in huge quantity, no problem)
  • Gradually develop assets and resource base
  • Do smaller EPIC-contracts at own risk

8.9.3 International expansion (FTSS: And take market share off who? How?)

  • Develop the international market in parallel with the North Sea market when opportunities appear
  • Seek international partners in selected areas like Australia, Mexico, Brazil and West Africa
  • Develop a foothold in new deepwater areas

8.9.4 Asset base

  • Invest in new assets (FTSS: Why?! The industry has overcapacity)
  • Secure the right assets
  • Mix of owned and hired equipment

I don’t know when I have disagreed with something more. Firstly, if offshore is to grow as industry it needs to compete on cost and that means the North Sea becoming more like the rest of the world not the other way around. Taking the North Sea standard overseas is a proven failure. Bibby tried it in the Gulf of Mexico with disastrous results, and in Asia with a DSV, it was worth trying in Asia but it wasn’t needed or wanted. Technip did the same in Australia. Anyone who thinks they can take the North Sea standard out of the North Sea hasn’t been out of the region. The North Sea is like it is because a) the environmental conditions are more severe than anywhere else, and b) the regulatory environment. You can’t force E&P companies to add to their cost base when it adds no value in the current environment.

If Reach are looking to expand internationally in a declining market then someone else is losing market share. Call me sceptical but in this market that is simply unrealistic. That a company with 6 systems, could have the resources to do this and start to drive consolidation when they are 276 systems behind the market leader isn’t real.

OII and others have literally tens of spare systems, they make them, and are giving them away for free. OII and others are here for as long as there is an industry (and OII have a current market cap of USD 2.3bn). I am not saying Reach is a bad investment (I don’t give investment advice), although it does strike me that it is an asymetric payoff where either someone buys them at a takeover premium, or they slowly make a return at less than their cost of capital and eventually funding runs out. Quite why you would pay higher than NAV for some ROVs which are cheaper on the second hand market and some vessel commitments is beyond me though.

I could go on. I don’t want to do a hatchet job on Reach, that isn’t my point. My point is simply that this industry needs to be signficantly smaller on the supply side and that this requires letting some firms go under. The economic rationale is called the structure-conduct-performance paradigm and is a well known feature of industrial organisation analysis. Porter’s five forces model (that all MBA’s learn), is based on this intellectual strand and the simple expedient that industry effects can be stronger than firm effects (there is much more to this and it deserves a much bigger piece for another day, including the move in the 80’s to the Resource-Based view of the firm which argues that firm effects are stronger and markets not so deterministic:, but in a consolidating industry the evidence is clear). No matter how competent the management of Reach Subsea are, and they clearly are skilled operators, they cannot in the long run compete against market structures so entrenched and differing in scale. Path dependency counts.

The offshore supply chain is clearly going to evolve in a way that was very different from the past. In the pre-2014 environment the industry had large numbers of small subcontractors, like Reach, who made money because the big companies were too busy, and making too much money, to concentrate on the small stuff. That isn’t the case now where they are under pressure to supply assets with very high fixed costs at below breakeven to win work. In order to do that they using the supply chain for ROVs (and other equipment) to supply their kit at below cost and ensure both sides lose their equity. When there is no more for the supply chain to give they will internalise the costs and reduce unit costs where possible. There is no other way this will play out.

Financial investors like Standard Drilling (PSVs), Nor Offshore (DSVs), Reach (ROVs) have all brought in expecting this was some temporary downturn and thought prices would start rising, as per previous models, and then they would then be handsomely rewarded for their (sic) foresight. It is becoming apparent now that this is not the right narrative: this is a structural downturn (Rystad  put a demand return in 10 years!). Only last week I learnt Shell was making a major commitment to ROVs on platforms (again) to consistently reduce OpEx where previously they had used vessels. Examples like this are legion, and I believe in total these stories to be representative of a wider and deeper change where E&P companies will seek to drive down unit costs offshore and this favours consolidation in the industry. So far the numbers are with my theory.

The beauty of capitalism is that you can place bets with money that help determine the outcome. I could be wrong and some huge, totally unexpected, market recovery could take place. The investors in the Nor vessels have so far been way off in their judgement, and I believe Standard Drilling have as well. Let’s see with Reach. But as long as there are investors for companies like this out there, and demand remains at current levels, expect to read plenty more stories about increased tendering while digesting appalling financial results.

Ocean Yield joins the gig economy…

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

John McAfee

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

Tina Brown

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

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

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

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

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

The narrative in capital allocation moves to shale…

I use the term narrative to mean a simple story or easily expressed explanation of events that many people want to bring up in conversation or on news or social media because it can be used to stimulate the concerns or emotions of others, and/or because it appears to advance self-interest. To be stimulating, it usually has some human interest either direct or implied. As I (and many others) use the term, a narrative is a gem for conversation, and may take the form of an extraordinary or heroic tale or even a joke. It is not generally a researched story, and may have glaring holes, as in “urban legends.” The form of the narrative varies through time and across tellings, but maintains a core contagious element, in the forms that are successful in spreading. Why an element is contagious, when it may even “go viral,” may be hard to understand, unless we reflect carefully on the reason people like to spread the narrative. Mutations in narratives spring up randomly, just as in organisms in evolutionary biology, and when they are contagious, the mutated narratives generate seemingly unpredictable changes in the economy.

Shiller, 2017

News that BP had started production at Quad 204 (Schiehallion) led curmudgeonly FT columnist Lombard to note  yesterday:

If anything, then, Monday’s news is more of a last hurrah for BP in the North Sea, and for the UK Continental Shelf more broadly. With the strongest capital flows — and investor buzz — focused on unconventional US resources, traditional offshore oil can seem as fashionable as a set of free “crystal” tumblers from a 1970s petrol station. With a big shield logo.

I have mentioned here before that behavioural finance is starting to examine the narrative in economics (see initial quote), and at the moment this is the narrative in London and other capital markets. This ties in nicely with an excellent piece from Rystad earlier in the week looking at the future of the North Sea and the Gulf of Mexico (I recommend reading the whole thing). For service companies Rystad notes:

After such a deep cut in this market it will take some time before the industry experiences a full recovery. Even with oil prices of $90/bbl to $100/bbl for the next decade, the market will not be back to 2014 levels before 2024.

The link for me is that offshore is going to bifurcate into huge developments (Quad 204, Mariner, Bressay, Mad Dog 2) and “the rest”. The rest are unfortunately going to be much smaller in number and less frequent. Rystad specifically mentions the lack of tie-back and tie-in projects in these regions. These projects are the investments that really compete with shale: 8-12 000 bpd that were ignored by larger E&P companies. The larger developments with high flow rates, and multi-decade economic plans, are vital for security of volume and a core underpinning of E&P profitability, and they are very economic, playing to super-major strengths of vast capital requirements combined with astounding engineering capability; but smaller developments in the USD 50-200m range are at a real risk of grinding to a slow halt for all except the companies currently committed to this space.

The North Sea, and to a lesser extent GoM, always had a significant number of smaller players (think Ithaca Energy (recently sold to Dalek) or Enquest), that raised (relatively) small sums of money and then sought to regenerate an exisiting area or develop smaller finds. Access to financing for that market simply doesn’t exist at the moment on anything like the scale it did before. Those Finance Directors who used to traipse around fund managers in London, Vancouver, New York etc with a deck of slides explaining their proposed developments are simply not getting a hearing. Not only that the tried and tested business model of developing a few fields and selling out with a takeover premium when they had built sufficient scale isn’t credible any more as potential acquirers focus on more on tight oil. Now those fund managers are meeting with guys who have a deck of slides that start with a shale rig, emphasise the relatively low upfront capital (as opposed to the higher OpEx) and their ability to rein in variable costs should price declines occur. The meme in financial markets now is all about shale, and rightly or wrongly, influential columns such as the one above help set this “dominant logic”.

Inside the big E&P companies managers, who are cognizent of the fact they must deal with analysts in the financial community and the investor base who follow the same narrative, are adapting and spending more time to examining potential shale investments. Offshore is getting less airtime. When was the last time you hard someone say “all the easy oil is gone” – which was taken as fact only 5 years ago. From this myriad of individual meetings and actions the macro picture of slowing capital flows into offshore and increased investment in shale is being driven, and it will be very hard to reverse without some exogenous event.

As behavioural economics teaches us humans are “boundedly rational” not the perfectly rational homo economicus so beloved of the efficient markets crowd. What this means is that potential investors can only process so much information, if you combine this with the fact that institutional investors “herd” (i.e. invest where their competitors do), you can see the current investment vogue is short cycle shale which makes even getting funding hard even for compelling offshore investments. Those who have heard the word “Permania” used to describe the boom in Permian basin will relate to this quote from the IMF on investment herding:

[p]rocyclicality in asset allocation can make swings in financial asset value and economic activity more intense. From an individual investor’s point of view, procyclical behavior can be rational, especially if short-term constraints become binding or if the investor can exit earlier than others. However, the collective actions of many investors may lead to increased volatility of asset prices and instability of the financial system..

Eventually the shale mania will wain as people overpay for land and productivity improvements slow. The problem for offshore is the amount of OpEx people will have to burn to get to this point and the consistently increasing productivity of shale.

Big players in the North Sea region like Apache, Taqa, and Sinopec will conitnue to develop offshore fields but they are not doing as many projects. The threshold rate for investment will be higher, because experience has taught us that you can get 5 years of low oil prices and many of these projects only have economic lives of 5-10 years (risk models are great at solving previous issues). These companies have less access to capital markets than their shale competitors because the high-yield desk has the same meme as the equity investors, higher equity costs and more risk averse bank funding raise project return requirements even more. Even state -backed companies like Taqa must vie for funding internally. Outside of the North Sea and GoM these developments are likely to remain dominated by National Oil Companies who may not rank projects on a strictly economic basis but will take the expected spot price of oil into account in their investment decisions. But as Rystad makes clear the North Sea and GoM volume increases will all be driven by a smaller number of larger projects.

This affects contractors differently. As Rystad notes EPIC work will decline proportionately less than other work.  For DSVs and ROV operators and vessel owners) this is grim . Until construction work, that uses far more DSV and ROV days than maintenance work, improves the supply side of the industry will take the adjustments both in day rates and utilisation levels. The supply chain is going to change into a few large integrated contractors in these regions with a vast choice of assets to service their needs and they are likely to reduce their comitted charter tonnage . These large contractors will make an economic return but part of it will be done by ensuring the smaller companies in the supply chain make only enough economic profit to survive and the equity value (if any) in these companies and assets looks set to be depressed for an extended period. Consolidation on a scale only dreamed of at the moment amongst vessel owners looks certain.

Demand will not return for smaller projects until the market price for oil stabilises at a substantially higher price than now, and does so for long-enough to give potential funders confidence that the upturn isn’t temporary. The uplift will likely be less severe because shale has introduced a “kink” in the supply curve. Projects take time to pass through engineering, funding etc before meaningful offshore work occurs. This is a long-term issue: Demand may have stabilised at current levels but recovery for the supply chain that is based on the realistic prospect of higher days rates and utillisation looks some way off.  For an asset base built to supply a 2013/14 demand curve the outcome looks uncomfortably obvious.



DSV market runs out of ‘Greater Fools’… Keppel version…

It might have been supposed that competition between expert professionals, possessing judgment and knowledge beyond that of the average private investor, would correct the vagaries of the ignorant individual left to himself. It happens, however, that the energies and skill of the professional investor and speculator are mainly occupied otherwise. For most of these persons are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public. They are concerned, not with what an investment is really worth to a man who buys it for “keeps”, but with what the market will value it at, under the influence of mass psychology, three months or a year hence.

— John Maynard Keynes

If something cannot go on forever, it will stop.” (Stein’s Law)

— Herbert Stein

The greater fool investment theory is acribed to the Great Man, who in a famous passage noted that the stock market worked like a beauty parade and that picking a winner was not about backing one’s own judgement:

“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)

This led to the ‘greater fool’ theory as it has been observed that assets trade not on an intrinsic value (i.e. the cash they can be assumed to generate) but on the basis of what people believe others will pay for them at some point in the future. The boom in DSV building is running into the wall of cash requirements and a shortage of fools willing to invest in them.

If the market scuttlebut is true, and I believe it is, somewhere in 31 Shipyard Road, if it hasn’t happened already, a terrible realisation is taking place: New Orient Marine Pte Ltd, a subsidiary of  Marine Construction Services Ltd (Luxembourg), has a financing issue with the new ICE Class DSV, and in reality isn’t going to take delivery as planned. SOR reported last week that they were seeking a charterer at rates of USD 80-100k a day, a number that if true is so absurd it is beyond satire. The vessel as you can see from the Keppel Q1 presentation is due to be delivered at some time this year.

You can write the script here I suspect: New Orient will be a thinly capitalised company that had sufficient funds to make the progress payments only. Unable to get work for the vessel they have now have no takeout financing, and will be unable to take delivery from Keppel. A frantic search is therefore underway to find someone, anyone, to try and take the vessel off their hands.

At the time the order was signed in 2015 (when the market was cooling significantly), Keppel issued this press release with the comment:

Mr Knut Reinertz, Director of Maritime Construction Services, said, “There is a demand for modern ice-class multi-purpose vessels in the market and we believe this new state-of-the art vessel we are building with Keppel Singmarine is ideally suited to meet this need.

The problem I have with this statement is that how much demand there was/is? And how you split the risk? And even more importantly what is the supply side looking like? MCS/MRTS have used the Toisa Paladin in the region and it has never been on a 365 basis, and they certainly never had the forward order book to justify going long on a vessel of this complexity and cost. So they were either completely mad, or wildly optimistic as to their prospects to resell or recharter the vessel prior to delivery (and they aren’t the only people doing this in the DSV space). Unfortunately the timing is spectacularly bad. I don’t know what the payment profile was for this asset but I can guess it was something like 5% down with 10% later, and if Keppel were lucky, another 10% further on. But apart from that I don’t see them getting any more for this.

I actually believe this vessel, with a reported build costs of USD 200m, or SGD 265m, is valueless. I say this not to be controversial but a cold examination of the market and the asset.

Firstly, and most importantly, the vessel is being classed by Bureau Veritas. That wasn’t a joke, I’m serious. You can read the BV press release and documentation here. Those who have worked for a saturation diving company will appreciate the significance of this, while others may wonder where I am going with it? Saturation diving isn’t rocket science, but not everyone can do it either, you need a certain number of systems, and processes, and high quality people to be there to create a certain institutional knowledge base to do it safely and efficiently (particularly North Sea/ ICE work). Small things can cost you a lot of money and this is a classic example where cutting corners, is I believe, going to render this hull worthless. For those still here, there is no other DSV in the world classed by BV, it is just not a classification society recognised to give a vessel SAT notation. The only reason you would use them, and not DNV or Lloyds (and maybe ABS at a push), is to save money, and anyone looking at buying this vessel at anything close to its construction cost would know the original purchaser did this to be cheap. Very cheap.

Secondly, the chambers and other equipment are not NORSOK compliant. I don’t even think a BV system could be NORSOK compliant without a vast amount of bridging documentation and ancillary work (I am happy to be proven wrong on this). The only market in the world where you can get day rates that would cover that build cost is Norway, and they already have two NORSOK DSVs for a total market of 550-600 DSV days on a good year.

Thirdly, the dive system is a Lexmar, and has had known installation problems throughout the build. No one spends USD 200m on a dive vessel with a Lexmar system. Again it was done to be cheap and it will in all likelihood render the vessel unsellable.

Although I am a paid consultant I have therefore done Keppel a favour and compiled a list of all the possible buyers for this asset (who says consultants ask for your watch and then tell you the time?):




Unfortunately, as you can see, it’s quite a small list. But the number of people needing a USD 200m DSV at the moment is 0. The largest owner of high class DSVs is rapidly beoming Yard Inc. Lichtenstein is still in Shenzhen, Vard has the Haldane, and now Keppel has the New Orient DSV. And that is without getting into idle tonnage and the DSVs still to be delivered. If you speak to people associated with these assets they all assure you that they are close to selling them, yet if these vessels are not used in the North Sea they are only worth the Asian/African DSV price, where you are competing with modular systems on a PSV, and all the North Sea contractors have too much tonnage, as the Nor vessels prove. Find me a CFO from one of the big 6 who could take one of these DSVs at anything like book value, and who is willing to go to the stockmarket, with backlog collapsing, and say he has paid anything less than a steal for one of these? No one outside of these companies could get the vessel into a region where they could hope to recover that sort of cost – and even then not in the current market.

New Orient Marine Pte Ltd , are in turn linked with MRTS, a Russian owned contractor focused on the Sakhalin region (although I think they have done other work in the Caspian).  It’s worthwhile having a look at their fleet to see the sophistication of vessel they are normally used to dealing with here and the risk Keppel took in this contract given this. MCS have hired DSVs on a time charter basis, but have never owned a DSV; you therefore have to admire their… courage?… in striking out to build one of the most advanced DSVs in the world.

Clearly they were hoping to sell something well above it’s intrinsic value by being bold. The payoff was an asymetric one to MCS though, who stood to benefit enormously while Keppel are going to be stuck with this eccentric design for a long time prior to reality setting in I suspect. Keppel are a big company with a multi-billion market cap so this isn’t a “farmburner” for them, but they could realistically have to writeoff USD 150-200m here which is going to be very painful all the same. The Chinese yards have decided to play for time, the Tasik DSV was yard financed and  UDS are the potential saviour for the Lichtenstein. Not everyone can be saved here because there is just insufficient demand until the DSVs return to construction work not maintenance, and that looks a long way off.

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

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

G. E. Jewbury’s Letters, 1892

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

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

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

Clarkson Subsea Trees Nov 25 2013

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

The market has obviously changed somewhat:

Subsea Tree Awards 2000-2019e

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

High fixed costs and low marginal costs explain why something can cost a lot and be worth nothing…

The world’s worst business is one with high fixed costs, low marginal costs, and lots of competition. In that case the competitive forces will drive prices down to the low marginal costs – and it will be impossible to recover fixed costs.

When the fixed costs are debt financed, bankruptcy often follows. That is precisely why the airlines have been bankrupt many times. The marginal cost of filling the otherwise empty seat is very low – and competition at times drives prices to those very low marginal costs.

John Hempton, Bronte Capital

I wrote yesterday about when the bottom in subsea and offshore supply would come and then came across the quote above. It could clearly have been written about offshore supply or the subsea fleet. The quote explains perfectly why something can cost a lot but not be worth anything, which is a concept I think some distressed investors in offshore struggle with. I think the amount of work offshore will gradually increase but the problem is the supply side of the market. Being an offshore contractor is a good business potentially, as long as you don’t have too many vessels, but it won’t be as good as 2012/2013 for a very long time (if ever).

I think the “recovery” or bottom will have arrived when industrial players are the main purchasers of assets and provide the pricing signal as to intrinsic value driven by the real cash they can generate. Anedoctally I have spoken  to too many alternative finance providers lately who are just trying to be to clever: all of them are hoping to discover a way of finding the metaphorical “cash behind the sofa” that someone else hasn’t thought of, when actually it is pretty simple: there are simply too many vessels relative to the amount of work.

In the subsea space the DSV Swiber Atlantis went to NPCC for c. USD 8m, when in 2013 it had a broker valuation of USD 40m, this is slightly less on a percentage basis than the Amazon going to McDermott for USD 52m when the original build cost was USD 400m (but that included some of the mothballed lay system). So the new market value is potentially a 75% reduction on build cost or 20% of 2013 market value.

The Nor DSVs remain the most interesting asset here: they have not worked in well over 18 months now and will not work in the North Sea, barring a recapitalisation as a North Sea dive contractor, something that would be in the tens of millions in addition to the vessel OpEx, and offer nothing but lower rates for all with absolutely no guarantee of success. The owners are in the worst positon of anyone in the market: trying to be a vessel owning company but unable to behave like one. Move the vessels somewhere else and the owners will have to accept that they are worth well below par because no one out of the North Sea needs such a high spec DSV… The original investors lent USD 110m per vessel and have now ended up with an equity position valued at USD 20-25m based on the comparable transactions above – less the USD 15m (c. USD 7.5 per vessel) that was put in as “super senior” to give them the working capital to remain tied up in Blyth this year (that by there own forecast will be exhausted by December this year). If the vessels sold at the low range that would imply a c. USD 13m net proceeds (11.8% of par)… But the only other option is to fund another year of OpEx with no guarantee it will be different to the last? (And actually its more likely  that there is no change because before any responsible company allowed those vessels to dive now they would insist on some expensive trial dives and likely remedial work).

Some of the distressed debt investors brought into the Nor bonds at ~.30 par which implies they need a sale of at least USD 40.5 million to breakeven before December. Mark this as a bellweather deal. At some point the distressed investors actually need an industrial buyer, they just can’t keep selling the bonds to each other at an ever greater discount?

In offshore supply one of the reasons I think the HugeStadSea merger is a mistake is that an industrial buyer is paying far more for the asets than they would be worth on a liquidated basis. Yet it is very easy to see a Gulfmark or Tidewater emerging from Chapter 11 and buying assets strategically on a liquidated basis and having a more compelling economic and investment case than Solstad Farstad (how long will the Farstad last I wonder? Maybe until the first deeply discounted rights issue?) You don’t even have to be that hypothetical: Fletcher Shipping, with signficant investment from Standard Drilling, is bringing older PSVs back to the North Sea – while 80 vessels are in lay-up in the peak summer months – to operate (hopefully?) at cash break even on vessels purchased for USD 2.5m (plus refit fully delivered c. USD 8m), way above the implied values Solstad has paid. Yes, they are not the same quality tonnage, but if buyers were discrimiating on vessel quality at the moment NAO would be breaking even and the Fletcher vessels would be quiet… and that clearly isn’t the case.

Tidewater, Gulfmark and CGG shareholders all look to get less than 5% of the restructured companies going forward and using that as a comparator again Solstad looks to have given up its exposure to quality tonnage for commodity tonnage very cheaply. Will it really be able to compete against a recapitalised American group of companies such as Seacor, Hornbeck (restructuring imminent) etc? Trico shareholders led the creation of DeepOcean and US investors just seem so willing to back big ideas…

The Fletcher model of assets that are fully equity financed but breaking even on a cash basis is where the market needs to get to. When the market adjusts to the new lower values which reflects the risk highlighted in the opening quotation, and industrial buyers are the ultimate owners, then I think we have reached the market trough.

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

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

 Julio Cortázar, Around the Day in Eighty Worlds

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

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

Early engagement activity increasing

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

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

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

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

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

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

Majority of revenue and EBITDA from CSV segment

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

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

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

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

NAO sees opportunities to grow the Company… 

(Emphasis added).

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

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

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

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

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

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

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

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

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

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

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

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