Bibby to Boskalis looks likely…

I have been told by mutliple credible people now that Boskalis are negotiating directly with the Bibby Offshore bondholders to purchase certain assets of the company that would in effect be the refinancing of the company. Booskalis are pitching at around .30 which values Bibby Offshore at c.£52m if true. For that they would get the Sapphire, Polaris, and all intellectual property etc and simply collapse the North Sea business into their current operations. The rest will be left for the creditors who will make a minimal recovery.

Despite the fact the bonds have recently traded at .39 if I was a bondholder I would jump at this offer and be running to find a pen to sign. The only other option is likely to involve them putting money in or a hugely dilutive liquidity issue (like the Nor Offshore one). Instead this is clean and well above any possible recovery they would get in a liquidation event.

The London high-yield market will get a timely reminder that covenant light issues have real risks. The Bibby shareholders took a £39m dividend when the bond was issued and another £20m at the start of 2016, at that stage they must have known the order book was empty,  in the end the company lost £52m at the operating profit level that year. As I have said before at that stage this event, or if it doesn’t happen one similar, became only a matter of time. Bibby Offshore may not have created as much value as Bibby Line Group would have dreamed only a few years ago but they have still done okay out it, whereas bondholders who in effect lent a non-ammortising loan on depreciating assets at the peak of the market, have suffered severe losses. They should be thankful however because a Nor scenario that saw them taking delivery of the Polaris and Sapphire in this market would have seen losses I believe as high as 90-100%.

It will be very interesting to see what happens to the Topaz. I suspect Boskalis don’t need it and will seek a charter that is 100% risk based if at all. I could be wrong on this as they have substantial North Sea operations and windfarm backlog that could use the vessel in a support role. Either way Bibby will revert to a small UK 2 or 3 x North Sea DSV operation supporting the Boskalis operations in Europe with management 100% dominated by Boskalis.

Whether this is in effect a hostile offer or is supported by Bibby Line Group I don’t know. I would struggle to see it being friendly given it would wipe out BLGs equity entirely but it would be the best thing for the company and provide a degree of security or at least certainty for those involved. The bond requires, according to my broad reading, only that interest payments are current and that BOHL has £10m, so a struggle whereby the necessary administration is delayed for a situation that cannot be changed would help no one. Waiting until December for an interest payment that cannot be made (interest accruing at c. £35k per day), or for the cash covenant to be broken allowing the bondholders to act, would be disastrous for their postion. The only thing I am sure of here is that some very expensive lawyers from both sides will be reviewing the bond indenture very carefully.

A competing offer from private equity looks unlikely as they simply do not have the contract coverage Boskalis does to risk some overhead on the vessels. Boskalis can probably release some chartered tonnage and have the DSVs work as ROV vessels on some of their windfarm projects if needed. For Boskalis this is a very sensible acquisition that offers upside only for them really with very minimal risk on running costs.

This will not take long to play out. When the BOHL financials are released it will all become obvious because if the assets have been revalued at anything like market levels it won’t just be a liquidity issue but a solvency one forcing the Directors to protect the creditors, and highlighting how close they company is to running out of actual cash. Resolution by the end of August is my prediction here.

North Sea refinancings continue… Volstad and Bibby edition

On Monday the Bibby Offshore bonds jumped from £0.32 (implying Bibby Offshore was worth £56.0m) to £0.39 (implying a value of £68.3m), the only tangible cause would appear to be the refinancing of Volstad Maritime which would give Bibby continued access to the Topaz as the Volstad Subsea bond was redeemed in full. The two companies make an interesting contrast as to how a likely refinancing will happen at Bibby.

I note that far from being a fringe opinion when I raised it early this year Bibby Offshore management have now accepted they need to change the capital structure to make the business sustainable. That means a restructuring event. However, the business still looks unprepared for the scale of change required in order to attract sensible amounts of new equity:  for example until recently there were 21 people in the US office which has had less than 30 days work in 2017. As early as Nov 16 that office should have been shut down and an agent appointed to sub-lease out the building, instead they have blown at least USD 3m in OpEx, with nothing to show for it and flown a new senior manager over just weeks before the cash crunch bites.

A refinanced Bibby Offshore, if it happens and I think it is a real if, will revert back to being a two, maybe three, North Sea DSV operation. Maximum 80 people and an Aberdeen office only. Quite how the musical chairs in management play out in the new structure is beyond me, but the days of effectively one Board per DSV are gone. Not even the UK operation is making money so any re-financing relies on new money accepting a “market recovery” will come in 2018, because without it you need GBP 20-30m in OpEx just to keep the doors open. As I have said before there is no backlog and that is the problem. The US, Singapore, and Norwegian offices are just vanity projects and if there is no structural way to close them through a pre-pack then the re-financing will fail.

Investors who believe the share pledge, Sapphire, and Polaris, the only security behind the bonds would be worth GBP 68m are either delusional or have not been following vessel values closely. The maximum in a fire sale for those 2 vessels is likely to be USD 30m excluding the running costs for the six months it would take. The business has fixed assets of £35-40m on a non distressed sale basis, but requires £20m OpEx for 1 year to access their full value, putting a value on that is very difficult because in a poor year (like this year or the year before) you have just blown £20m on Opex and clearly the business has negative value.

The Bibby bondholders face a realistic recovery of 5-10% of their initial investment under a bankrupcy scenario and this fact alone may convince them to put some money in for OpEx to try and see if time will buy them a higher recovery rate. But they will not invest anything like the current running costs of the company and therefore they will need a legal change in the structure and something significant to the cost base going forward.

I note that the funding Bibby Line Group made available (subject to Board approval and definitely not unconditional) was roughly equivalent to the Dec interest payment and ROV interest. It may be a coincidence but I think likely this was done only to help strengthen the BLG position in any negotiations, because if they miss a single interest payment the company is not theirs but the bondholders. Another poor year of trading results have made this a relatively pointless gesture. Remember BLG is only agreeing to guarantee Barclays a secured portion of the revolver facility, they are not actually injecting money into Bibby Offshore. In the Tidewater and CGG restructurings shareholders not putting in new equity have ended up with less than 5% of the equity and given the scale of the writedown bondholders will take here similar formulas will be used, I find it hard to see a meaningful role for Bibby Line Group in the restructured entity because they simply don’t have cash required for a significant recapitalisation.

Volsdtad on the other hand was another classic Norwegian restructuring. It doesn’t solve anything permanently but buys some headroom and financial flexibility. The real surprise was redeeming the bond in full which valued the Topaz at USD 60m if viewed as a standalone transaction. Clearly it wasn’t that but was blended in the overall cost of the equity injection from the Saevik family. The bondholders appear to have done well out of this as the bonds have traded as low as the mid-30s and large chunks I understand traded in the 40s recently, being redeemed at par was infinitely preferable to taking the Topaz in the current environment.

But Volstad has five other highend CSVs, three with a blue chip charterer with multi-year 365 contracts. If there is a recovery these assets will be a part of it. The risk of course is that Helix renew at dramatically lower charter rates or choose alternative tonnage, very easy now, which is all but a certainty even if they love the vessels. Some press reports tended to indicate a parachiol Norwegian element to the transaction but effectively the Saevik family paid USD 36m for a 49% share that gives them exposure to USD 540m of assets. If Bibby don’t make it, and the Topaz isn’t sold quickly, I guess the vessel can go into lay-up and the other five vessels keep ticking over. But the big contrast is that with the amount of backog the new investor is taking some risk on the asset price over time but no short term risk on OpEx as the is in the majority covered. As with DeepOcean you need backlog to successfully refinance in this market I would argue.

Long term however I am not sure Volstad shareholders are in a materially better place than the Bibby bondholders:  There are a large number of large CSVs either idle or entering lay-up, Bibby get rid of the Ares next week and the Boa vessels are available for example. Unless there is a fundamental increase in demand there are simply too may vessels and their capital value will remain below their contracted debt levels, the windfarm work that many are gravitating to covers OpEx only without even a basic contribution to drydocking.

The Saevik family have already achieved a similar result with the financial restructuring of Havila. It may give a runway until 2020 but this is a business that for Q1 2017 still lost (exclusive of restructuring charges NOK 100m) for 26 vessels 9 of which are in lay-up. But the link to Bibby is that with a poor order book Havila raised more in equity capital than it had to write off in debt and while every case is different it shows the scale of the challenge Bibby have in restructuring. The contrast between the Saevik and Bibby families could also not be greater: the Saeviks who have diversified interests in ship contruction and property, are investing equity, pure risk capital, as a core part of deals they are involved in. Instead of Michael Bibby flying to Aberdeen and telling staff the capital situation will be sorted it would be good to see them issue a corporate guarantee to all staff and small trade creditors of Bibby Offshore that regardless of circumstances they will not see them suffer should the worst occur.

Longer term I still feel that the European owners are positioning themselves poorly compared to the US counterparts. All the US deals involve significant writedowns on the secured elements of the debt whereas Havila, SolstadFarstad etc just involve deferral of the largest parts. Volstad will face the same issue when the Helix charters come up for renewal without a dramatic, and very hard to see, change in market circumstances.

BOA and Volstad: End of a Norwegian era… More restructurings to come…

The best of men cannot suspend their fate: The good die early and the bad die late.

DANIEL DEFOE, Character of the late Dr. S. Annesley

Boa Offshore and Volstad Maritime are both involved in restructuring talks at the moment, both are bound by the same ties of market fate and financial commitments: excessive leverage, financial speculation, and a secular change in demand for the asset base that underpinned the bonds. On a wider scale these should be seen as examples of small Norwegian companies that rode an oil and credit wave that has now definitely ended and their place in the market will remain limited at best and in the Boa case is likely to be non-existent.

The excessive leverage isn’t simply a case of hindsight: again like the Bibby bonds these were depreciating assets backed by bonds that required no repayment during the life of the instrument. Capital assets that do not have to earn a return on their principal but rather rely on further refinancing are simply speculation by both parties to the transaction and are clearly indicative of a credit bubble. Such investments are what Minsky called Ponzi financing, it requires a suspension of belief from economic reality that such a situation can continue, and that interest payments can be met by constantly drawing on an increased capital value. In the offshore oil services world this wasn’t willfully disregardng the evidence but rather the industry belief that ever rising oil prices and demand side factors were immutable forces of nature. The failure to recognise that in the long-run this would cause some innovative firms to seek new solutions is one of the great enduring mental models that has led previous generations to believe fervently in ‘peak oil’.

The other similarity is the type of vessels both Boa and Volstad have backed: no other asset class in offshore has been as overbuilt as the large OCV (~250t crane, 1000m2+ back deck etc). Potential new investors in Volstad should look at how illiquid the Boa Deep C and Boa Sub C are: bondholders are looking at a liquidity issue because these assets are in all reality unsellable at any price at the moment. When the Volstad vessel charters finish their maximum upside is surely capped to the amount bondholders in comparable assets are willing to accept to supply vessels to Helix-Canyon… and that is surely lower than their current charters? And that would assume Helix need as many vessels, a bold asumption looking at their utilisation record. In the old offshore such assets were rare and expensive… now not so much…

Part of the clue to the lack of sales in the OSV market is not just in the demand side of the market it also lies in the behaviour of banks. Have a look at DVB (my previous thoughts on the bank here), lending to offshore was running at c. USD 2-3bn per annum in 2010 to 2014:

DVB lending by segment 2010-2014.png

Welcome to the world of The New Offshore and closed loan books as the DVB investor presentation (2017) shows:

DVB New Transport Business 2017

That isn’t DVB specific this is a relfection of all banks in the market and a total withdrawal of asset financing. No matter what the relationship bankers tell you to all but the most exceptional cases the loan book is closed for offshore assets in all banks (apart from US focused companies with a US revenue base and a US bank). And no one pays close to historical value for such specialised assets if you cannot get a loan, but this has become a self-referential cycle that will be very hard to break, and in reality will only be done so as part of an overall consolidation play by a player with a realistic financing structure relative to the market risk.

Volstad Maritime may have a viable business going forward (i.e. strategy and execution capability) based solely on the Helix-Canyon charters, but liquidity is a different issue. The fate of the Bibby Topaz remains a major area of interest as the vessel is part of a three boat high-yeild bond and the owners of the bond have in effect an option to take full control of the Topaz. The bond has a corporate guarantee from Volstad Maritime AS that adds to the complications. OTC bonds are a grey area but rumours abound of Alchemy (the core M2 investor), other funds, and industrial players all having positions in the bond. Bibby Offshore may well be delaying their restructuring announcement until the position of Volstad Maritime and the Topaz is clear (although if they can make it to September without legally overtrading handing back an Olympic vessel is also likely an announcement time). A seperation of the Helix chartered vessels could be a viable option but only if the corporate Volstad corporate guarantee can be squared with the bond owners (who also own the m/v Tau on charter to DeepOcean but must surely been seen as effectively worthless, and the Geco Bluefin (in lay-up?)).

The Boa bondholders and banks seem to be repeating the same mistake the Harkand/Nor bondholders have consistently made: confusing a permanent impairment in asset values for a temporary market dislocation. In fact the Boa OCV bond term sheet contains the following nugget:

the aggregate current market value of the vessels according to information provided by the Group prior to the date of this Term Sheet is NOK 810,000,000

No sane individual believes that you could get USD 95.7m for the Boa Deep C and Boa Sub C at the moment:  2 vessels that have to enter lay-up because there is no work for them and assets that no bank that would lend against. There is a nice gap in the documentation here where the advisers to Boa state they have not undertaken due diligence of any information supplied. Everyone here wants to believe something everyone knows not to be true.

The structure calls for the seperation of the various asset classes into their individual vessel type exposures and is in effect a wait-and-pray strategy. Bondholders pay a “Newco” management company a fee to manage the vessels and provision is made for a further liquidity issue. I sound like a broken record here but the longer everyone keeps providing further liquidity the further any supplyside recovery becomes. The Sub C and Deep C are very nice vessels but two vessels does not an operator make in the current market, all this set-up does is support latent capacity, like the North Sea PSV market, that keeps everyone bidding at OpEx levels only. Hope is not a strategy.

I don’t have any magic answers here beyond investors accepting the economic reality of their position which they are under no obligation to do. The Boa bondholders, like the Harkand bondholders, and others, figure they have lost so much what harm can one last roll of the dice do I suspect? For those of you who have seen the movie ‘A Beautiful Mind’ you may recognise this as a problem that is a case of Nash Equilibrium:

a solution to a non-cooperative game where players, knowing the playing strategies of their opponents, have no incentive to change their strategy

It drove Nash to a nervous breakdown (literally) and I have no intention therefore of taking this any further.

The New Offshore: Liquidity, Strategy, Execution. Nothing else matters.

How much is enough?

How much equity and working capital do you need to be a UKCS saturation dive contractor? And just as importantly, how much can you make from such an investment? Two different groups of North Sea DSV bondholders are pondering this question at the moment.

On the one hand are the Bibby Offshore Holding Ltd (“BOHL”) bondholders who must realise now that a financial restructuring is coming. Moodys noted in November that:

Bibby Offshore cash generation has been negative since the beginning of the year resulting in a reduction of cash on balance sheet of approximately GBP40 million out of the GBP97.1 million it had at the start of the year. Moody’s believes that cash generation will remain negative in 2017 to approximately GBP30 million with increased pressure in the first half of 2017 due to seasonality. Cash generation in the second half of 2017 should slightly improve due to the anticipated positive effects of the renegotiation of charter rates.

In anything things have only got worse… Let’s leave out the fact that the only charter open for renegotiation in 2017 is the Bibby Topaz and here BOHL have a problem: give the vessel back and the bond holders know they are not getting paid back in full as BOHL can’t generate enough revenue; or, keep the vessel, and spend some of the remaining cash on a vessel with little backlog.

Moody’s estimated Bibby will generate EBITDA of GBP 12m for 2017 and means leverage rises to more than 20x EBITDA (including operating lease calculations): a totally unsustainable number. The only hope could have been a really busy 2017 summer with extraordinarily high day-rates; however, despite high tendering levels, rates are rock bottom and the volume of work is small. The question for BOHL is only the size of the financing gap not the reality of the need for one.

BOHL needs a debt-for-equity swap. [Non-financially interested don’t need to worry about the specifics here but in essence the people who lent the company money on a fixed basis agree to turn this into shares accepting the may carry some upside potential].  In reality, I think there will be a raidcal restructuring of the BOHL. I believe the bondholders will seek a restructuring that takes the business back the 2005 model of 2 x DSVs based in Aberdeen. Singapore, Norway, and the US are gone. No offices outside Aberdeen appear to be cash flow generative at all even taking into account ROV utilisation. The bondholders are in for the Sapphire and Polaris anyway so the need to come up with the least cash exposure that offers them the maximum return. ROVs are not a BOHL specialty and there is no reason to fund that business with precious working capital beyond the DSVs own need. Its back to Waterloo Quay and 2005 for those of us who were there (and they were great days I can assure you).

Given the size fof the debt write-down the bondholders will be expected to take they will leave enough cash in to allow the business to trade for a few years in a way that maximises their chances of recovery and nothing more. So unless they can reach a revenue sharing agreement with the Volstad Topaz bond holders that won’t feature as well. The ramifications to the BOHL brand will be enormous but the cash call will be of a magnitude that will allow for little sentimentality.

What % of the business they demand for this is anyone’s gusess and will be dependent on any equity Bibby Line Group agree to put in.  These things are a matter for negotiation rather than hard-and-fast rules. Remember also this is a business that is going to have to be 100% equity financed for the foreseeable future as no one will lend to such specialist vessels without backlog (i.e. an asset and cash flow facility) for a long time. However what does seem reasonable is this:

EBITDA per DSV: GBP 8 – 12m; Corp Overhead: GBP 4m; Implied cash flow for debt multiple: GBP 16m (mid-point average). [Debt at 4.0x EBITDA: 64m]; [Debt at 5.0x EBITDA: 80m]. Outstanding debt: GBP 175m.

I get valuation and cash flow modelling are an art not a science and that I have made a lot of assumptions here. But also bear in mind most DSV operators will kill to get EBITDA of GBP 10m per vessel this year, many DSVs are going out at OPEX plus a small margin if they are lucky, and given the way discounting works I could be seen to be generous here front-loading cash flow. Don’t forget the risk either: this market is far more volatile than anyone, including me, ever thought possible. I think I am directionally correct here and I don’t need to to into greater detail in this forum. The core point is this: under any number of reasonable scenarios the bondholders are looking at writing off at least 50% – 66% of their debt and if a working capital call is made then way more than that; and that selling the DSVs in this market is probably the worst, but not unthinkable, option for them.

The BOHL bondholders are (rightly) terrified of getting the Polaris and Sapphire redelivered. Not only have the Nor/Harkand bondholders taken the vessels out of the market for them they have also highlighted what a shambles getting re-delivered such vessels can be. It is very doubtful the two BOHL DSVs could be sold at anything like the value implied by recent bond market prices (.60-.67) if at all. The bondholders knew the DSVs didn’t cover the value of the bond (i.e. it wasn’t fully secured) but they are currently spending funds they thought would be used to grow the business on basic working capital (that is the fault of the market not management it needs to be said and was a risk they took signing up to a huge unsecured portion of the bond for “general corporate purposes” in a cyclical industry). The cash position could be significantly worse than Moody’s forecast: I doubt EMAS has paid for the Angostura work and some sort of agreed deal with Borderlon, currently in arbitration, could see c. USD 5m handed over for a settlement for 10% of the outstanding claim. Anything more could mean a nuclear outcome for BOHL. Better to stem the exposure now…

At these sort of levels the bondholders are going to ask for a significant dilution of the Bibby Line Group stake (potentially all of it if a signficant amount isn’t invested with the bondholders in the new working capital facility). But the most logical option here is therefore to cut the business back to what could realistically trade at a profit and cauterise the loss making exposure. That means everything apart from the core UK dive business with maybe a couple of ROVs to support it. But the BOHL bondholders are disparate and international. And while M&G (who have their own workout team) are the largest I believe, and may have some interest in a controlled restructuring, this was a “US 144 issue” meaning that a lot of the bonds will be held by US institutions who may just write this off as it becomes to complicated. In such a situation a rump business being sold is the most likely option as there is some value there, just nothing like GBP 175m + working capital.

I think we are looking at a pre-pack here with a “credit bidding” element where the bondholders, or new investors, agree to buy the vessels, backlog, IP and management system and very little visibly changes apart from the closure of international operations and the redlivery of the Topaz and the Olympic vessels with the Borderlon claim left in the insolvent rump. Quite how far they will run the cash reserves down to before such a transaction happens will be the call of from the legal/financial advisers. Olympic, who would appear not have to any Bibby Line Group guarantee, will simply end up as an unsecured creditor and have to accept redelivery of their vessels for what in this market are essentially onerous charters. Borderlon in Houston potentially have the most to lose: having built a vessel for Bibby in the US the charter was cancelled when the market turned. I have no idea who was wrong or right legally, but UK companies traditionally do very badly in US Courts/ Arbitration and they must be hoping for a meaningful payout.

I am not sure the scale of the problems are acknowledged. The company has 10 Directors now, and seems to be focusing on such diverse strategies as small pools (which offer the prospect of cost with no immediate revenues). It’s the ultimate re-arranging of deck chairs on the Topaz  Titanic. I undertand why. I have been in a similar position and there is an element of cognitive dissonance involved. But to believe the bondholders would write off at least half their debt and fund an international expansion for a loss-making business is about as likely as believing the UKCS SAT diving market will miraculously recover. Stranger things have happened.

The only other option would seem to be an investor throwing millions into this business to keep it going until the market recovers and would involve keeping the bondholders whole. I just don’t see it and it pains me to say that. Because the answer to the first question is of course, like all post-modern phenomena, the answer is relative. BOHL not only need enough working capital to satisfy their creditors they need enough to outlast other players in the market especially DOF Subsea.

The marionette Nor Bondholders and their puppet-master Maritime Finance Corporation have a plan so cunning Blackadder would be confused. The top secret idea is to do exactly what they did last year and tie the DSVs up in Blyth and wait for the market to recover and thus, without any investment in infrastructure and systems that the other five SAT dive companies have spent millions per annum on; they will ride a demand wave and recover their investment. Like all cunning plans it involves an element of risk, namely, exactly like last year where they end up spending USD 350k per vessel per month and get no work. But hey I realise I’m a glass half empty guy…

The Nor bondholder have gambled that USD 15m is enough. However, they have burned through at least USD 2.1m since November when they raised the money and appear no closer to some paid days. The problem for Bibby isn’t that they are seriously threatening work its that it is artifically depressing DSV asset prices. I’ll discuss my views on the Nor vessels in depth later. But while their strategy is economically irrational it isn’t depressing rates because 1) E&P companies buy a system + DSV (i.e. engineering, HSE, etc); or 2) the current SAT dive companies all have excess tonnage.

The amount of working capital and the financing gap BOHL have is dependent on all these factors and there is no firm answer here. Keep the debt high and you need a lot. But whatever the agreement is it represents a number in the low tens of millions each year until a market recovery and no one can supply any quantitative information suggesting one, in fact a lot can be shown to make the opposite: this is a period of structural decline for UKCS DSVs.

The North Sea DSV Market: no deus ex-machina forecast…

I have been asked by request for my opinion on the North Sea DSV market (that’s you Mr Cappalletti). At the moment I appear to be nothing but a catastrophist on here,  but I have only one word for my prediction: Grim. The following is from a presentation I have given to a small number of people in the market.

A near 40% reduction in the UKCS DSV fleet in 2016 still saw poor utilisation and very low day rates.

ukcs-dsv

(Source: Stamford Maritime)

New vessels are arriving in 2017 for Subsea 7 and Technip. I predict low profitability as a result of excess supply and weak demand.Why such a grim forecast? There are basically two reasons for this that point to a structural decline in the market and it is not easy to see what will make it reverse:

  1. CAPEX work at shallow water depths has all but disappeared. This was major driver of DSV utilisation taking Technip and Subsea 7 out of the Inspection, Repair, and Maintenance (IRM) market and leaving it for Bibby and Harkand (to a lesser extent who still traded their DSVs a lot in Africa).
  2. The decrease in OPEX/IRM has been far more dramatic than many people, including myself, ever thought possible. But the facts are clear.

UKCS DATA.png

The CAPEX cut back is most serious for Bibby Offshore. Despite having made major strides in becoming a construction contractor, like Icarus, they flew too close to the sun; prior even to the bond issue Bibby committed to the Olympic vessels, ultimately moving from specialist vessels to commodity vessels at the top of the market. I understand this move, in the subsea Dark Ages (c. 2012), vessels with large back decks and 250t cranes were unavailable unless lengthy charter commitments were taken. Not only did Technip and Subsea 7 have access to the pipelay assets but for much of the year they had others locked out of the heavier tonnage required for complex ROV-based interventions. Accessing this work, inevitable once the commitment to ROVs had been made, the fateful journey began. Bibby dialled up the risk without increasing the equity to anything like the extent of the financial commitments made.

Then they doubled-down! A GBP 175m bond for a dividend re-cap, a general purpose bond, that essentially withdrew equity from the business. While the operational effect of the moves was different the net balance sheet result was the same: a highly leveraged bet on the North Sea oil price and a management team executing flawlessly in an international expansion strategy. No one is criticising the management here, most of whom I have a great deal of time for, but the balance sheet made this impossible. The time-honoured, and well-tested instrument for pure risk, which is what this was, is equity. That beautiful part of there balance sheet that can expand and contract as cyclical markets move without shattering the other constituent parts. And the Bibby balance is as bereft of this as I was of girls as a teenager.

There is no doubt Bibby, aware of their predicament, must already talking to the largest bond investors about the situation they are in (the only logical strategy to try and preserve some value for Group). Difficulties abound and there is no certainty of success. I don’t think Group will make a significant contribution (as a minimum I would be demanding the 20m taken out this time a year ago but that maybe unrealistic now), and it certainly won’t be at current equity levels, because that equity is worthless. The bondholders face the terrible prospect of getting redelivered two North Sea class DSVs, some of the most specific and costly shipping assets in the world to maintain, or making a complete shambles of it as the Harkand bondholders did as financial investors. Clearly neither is an appealing option and the Bibby bondholders will have to choose between kissing their sister or the dog.

Because, if everyone is honest, Bibby isn’t going to be a major construction contractor with activity at these levels. The majority of the construction work that is being done in the North Sea is deep-water and requires rigid pipelay, or floating bundles, for flowlines that Bibby do not have the asset base for, and these projects use very little DSV days (if any being significantly deeper than 300m but maybe some riser hook-up). Technip and Subsea 7 have this to themselves, but to add insult to injury, as they are so quiet they have now moved in to significantly take market share off Bibby in the IRM market. In the old days (c. 2013) smaller E&P companies with a USD40-50m construction project would be lucky to get a call-back from Technip or Subsea 7. Now they are all over these companies for even 10 days diving, and like the ugly duckling at the school ball who suddenly finds the cool guys chasing her, the nice guy isn’t getting a look in.

This highlights the other problem the Bibby bondholders have: if you were recreating Bibby tomorrow it wouldn’t be with the Polaris and Sapphire yet these are the vessels they have a mortgage over. Polaris at 25 years is operationally capable, but in reality probably unsellable, which locks the investors into an irrational course for a long-term business decision. A better bet would be to buy a pre-pack of the management system and IP and merge it with the Topaz and the Vard new-build. If I was Vard I would trade a sale now for an equity stake in a service business, but there are clearly a vast number of complications and agendas to be overcome before a transaction like that could be done.

The news get worse because as many people have noted the UKCS is not going to rebound like Norway. As DNB noted (in a pessimistic market report) this morning:

The outlook on the UKCS does not look as strong, however, and we highlight that only ~GBP0.5bn of new investments was sanctioned in 2016, versus an average of ~GBP8bn in 2010–2015. In other words, we believe the recovery in activity in 2017– 2019 is likely to be limited to the NCS, which is a major difference from the 2010–2013 recovery in this region.

Technip, Subsea 7,DOF Subsea, and Ocean Installer are going to cross subsidise their UK operations with the Norwegian market where Bibby has minute market share and no NORSOK operational DSVs. The cancellation of another Brazilian PLSV for Subsea 7 will only strengthen their determination to get what work they can on the UKCS, and if that vessel isn’t stacked is likely to head North anyway.

Until the construction market returns there will be no sufficient market for an independent IRM focused dive contractors until their asset-base is revalued and expected equity returns and loan profiles subsequently adjusted.

Which leads us nicely to the IRM market:

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The fact of the mater is we were all wrong. No one more than me. E&P companies could, and did, cut back IRM spend more than we thought. There is no reason to believe this isn’t structural as there are currently a large number of wells “shut-in” as operators simply refuse to spend on maintenance and defer production.  If you believe the optimists and think the E&P companies have been storing IRM up you need to explain why the DSV schedules for the major contractors is empty? Economic logic would suggest book work now when DSV contractors will give the vessel for OPEX only? Speak to people in Aberdeen and they will tell you the schedules of all five serious DSV companies are wide open next year. S&P commented on the lack of backlog at Bibby in their recent downgrade.

My views on the Harkand/Nor vessels are well known: sooner or later the grown-ups will take charge and at least one of these assets will leave the North Sea. They don’t have the crane size to compete as heavy-lift vessels, Nor has nowhere near enough capital and infrastructure to compete as a dive contractor, and they will be completely dependent in M2, a start-up, on winning work for them. Unless Technip runs short on vessel days, which would seem unlikely at this stage, I don’t see them working in the North Sea much at all.

Helix will continue to cover their OPEX with well intervention and continue to keep pressure on rates by virtue of having excess capacity and a well regarded delivery capability.

DOF I believe are the real wild card as I have said. DOF Subsea are a serious company with a far stronger balance sheet than Bibby and an ability to cross-subsidise across the fleet.  The Skandi Achiever may only be single-bell but she has worked for Technip and already done some decommissioning work.

The supply side remains of real concern for overall profitability. The Vard new-build has to be delivered and find work. DOF again would make a good home but don’t need the OPEX. Bibby must either strike a deal with the Volstad Topaz bondholders or redeliver the asset which would return to the market. Bibby would have to spend millions removing the dive system something I don’t believe they will do. As an aside, I believe Bibby did the diving for EMAS Chiyoda on Angostura… I hope they got paid because otherwise I think they will take a serious credit impairment there.

I don’t see the UDS vessels making it at all the North Sea: they simply aren’t needed. Norway appears to have about 600 addressable dive days per annum and 2 x NORSOK DSVs already.

These are genuinely epochal times for contractors in the North Sea. The market will adjust to a more normal level, probably higher than now. But there won’t be a deus ex-machina event here that will keep everyone whole.

I hope I haven’t lost you in my verboseness Sergio!

 

One of the Nor DSVs off to Africa?

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I’ve always had a soft spot for McDermott. I remember when it was J R McDermott. Who else but a good ole boy from Houston would start out barge lifting and build a great global contractor? I also still believe the franchise is good enough for them to become a proper SURF contractor if they commit over a multi-year period. Everyone in the industry knows that if something goes really wrong in a complex project McDermott has the intellectual horsepower, somewhere in their vast repository, to solve it. You might need French mathematical skills to drop 30″ PIP at 3000m in Brazil, but if you need a solid platform or jacket in the Middle East there is only one contractor of choice; and when clients come to make crucial decisionsMcDermott have enough heritage and balance sheet strength to be a serious contender on larger projects. A rights issue at the opportune time to buy some bargain assets would transform them quickly into a tier 1 SURF contractor.

McDermott, so I am told, are going long on one of the Nor Offshore vessels and taking it to Africa. McDermott has deep institutional roots in  Africa and they have won a lot of work in the region recently. Their current DSV in the region Emerald Sea  is a 1996 build with a small, single-bell, system and a carousel. McDermott could hugely reduce project execution risk with a twin-bell vessel and have enough ancillary work to get decent utilisation of the ROVs and crane.

I am not privy to the details but if I were McDermott I would go for a 5 year bareboat charter with a purchase option. The purchase option is going to be the killer for the current investors (and I understand it was on this point discussions earlier in the year broke down). Pitch it at USD 55-60m and the original bondholders will have a sense of humour failure but the late/distressed investors may be able to live with it. A near 1.7x straight money multiple (assuming the brought in c. .35-.38), excluding charter revenue, might be in play given the reduction in opex. McDermott don’t need to go any higher, they have the in-house skills to take the ex-Mermaid vessel and the yard is getting desperate there. Given the current outlook for Nor you could negotiate a day rate for 2017 that may be even less than the daily opex the owners face now: how hard are they really going to push you if you offer to escalate it over five years? Nor face residual value risk if their asset is redelivered after five years in Africa; but there are no good deals on the table at the moment and failure to do a deal like this will see them seeking more cash next year.

That leaves Nor with one DSV in the North Sea (and given they are likely to have to deliver the vessel in Africa it really raises the question again of why on earth the DSVs were brought to Blyth in the first place?) and a “commercial manager role” (Disclosure: I had a brief discussion about Stamford doing this). Its not looking good as a sub-scale ship owner but to be fair if they can close this deal I think this is as much as could be hoped for in the current market and there isn’t much credit risk with McDermott. As I have said before I think starting dive operations would be an act of economic madness and there are a lot of OSVs with large decks and 150t cranes at the moment so its hard to see what work the vessel can hope for on a regular basis.

With the remaining DSV I’d be trying to partner with DOF to make them a two vessel DSV operator in the North Sea and see what develops, because if you can’t strike a deal, and Bibby re-deliver the Bibby Topaz in June, DOF may well buy/charter it (although its such a good ship I think SS7 and Technip would look at it). The bondholders would surely take ~USD 50m given the competing vessels and this would set price expectations for every other DSV in the market. DOF would become a clear number 4 in the DSV/ IRM market with a much better balance sheet than Bibby, infrastructure, and some really good people, and the ability to cross-subsidise across the fleet to get utilisation.

The Bibby Topaz is the DSV wild card. Yes Bibby have an option on the dive system but who really believes they are going to spend USD 5-8m to take it out and restore the Topaz to original condition? (c. 10% of their remaining cash). Bibby cannot afford to give the Topaz back (because then the bondholders will realise they are never getting there money back at close to par) but they don’t have the forward order book to justify keeping the Topaz at the moment (because then the bondholders will be angry that their money is being spent on an idle vessel charter). Debt is a cruel master. In the current market the Volstad bondholders probably dream of Bibby redelivering it as an OSV… I think the rate at which Bibby can build up their summer order book will define how quickly they will approach the bondholders with a restructuring proposal because if they can sell enough days on the Topaz over summer their funding need will decline markedly.

But if DOF take the Topaz (and probably force Bibby to bring the Bibby Sapphire back to the UK), and Ocean Installer take the Vard new build as has been discussed, and the Chinese yards deliver all the DSVs on order, then the remaining Nor vessel will only be worth whatever an Asian operator will pay. I accept there are a lot of “if’s” but the Vard DSV will come (probably in a risk sharing deal) and at least some of the Chinese tonnage looks far enough through to make it to completion even if the contracted buyers don’t have take-out financing lined-up.

It’s like Kremlin watching but with boats…