MPV Everest and DSV business models….

So it appears the Russians have paid equity and have fully taken delivery of the MPV Everest. Well done Keppel on getting paid the full contract value for such specialised tonnage in this market. I was wrong to cast aspersions on the soundness of the contract. And well done MCS for following through and taking full asset risk on this. I am not sure anyone esle can claim such a credit across most offshore asset classes?

The vessel looks close to signing some short-term work in Asia and will have the dive system commissioned as part of this. But…

The problem is the day rate… particularly as this is a vessel that looks set to operate at not that much more than cash breakeven on the first job and it has an empty schedule beyond that. The fact is the entirely speculative strategy of building high-quality DSV assets and thinking they would get a premium day rate, while displacing older tonnage, is having an extremely expensive initial experiment and proving its instigators both wrong and right…

Right in the fact there is a premium, but wrong in total economic terms because it is nowhere near enough for people to cover their cost of capital or hope to recover the builkd cost. The Everest was always a rescue job, having been built for a terminated contract, but others are not. UDS is rumoured to be getting USD 50k a day from McDermott for the Qatar job, but sitting in Singapore waiting for someone else’s boat to break is a high-risk strategy and unlikely to be profitable in the long run. The Everest looks like commanding a 10-15% premium to competitor vessels in the spot market but would need a ~400% premium to have any hope of recovering the build cost. This reflects the overspecification of the vessel, the fact it cannot command ice/polar rates, and the oversupply in the DSV market.

My only point on this has been that when a wall of oversupply meets a very weak market then economic returns will be substantially below economic costs. Continuing to deliver high quality tonnage to undercapitalised operators and chartering parties will just prolong any downturn for the existing fleet owners. But if initial indications are anything to go by MCS are in this for the long run, they have been burning c.10-15k per day Opex with Fox since delivery and purchased some second hand ROVs (from M2 I understand); and having put USD 200m into the vessel are unlikely to walk away quickly. Unfortunately the most logical, and likely, reaction from competing owners is simply to drop prices even more.

Random DSV write-off Friday …

The map above, in the yellow circle, shows the MPV Everest parked right outside Keppel in Singapore (this morning)… which is an odd place to park a SGD 265m vessel you have “delivered”. I mean you have literally delivered it, but normally in shipping terms it means to someone who has paid for it. Sooner or later Keppel is going to have to front up and admit they haven’t been paid for this. I am surprised that as a listed company they haven’t had to already, but they will also need to come up with a realistic impairment value here which will be interesting?

Because according to AIS the two UDS DSVs (Lichtenstein and Picasso) are also in lay-up effectively in Singapore. With three more being built having 0% utilisation on the first two in the fleet must be a minor concern?

Jumeirah Offshore ST.jpg

And now into the mix comes the Jumeirah Offshore DSV being built at Huangpu… At least the yard here is being honest and admitting that the buyers have defaulted. But in the next breath you are told they will only sell at 100% of book value… And the vessel is c. 80% complete apparently: just enough to have purchased all the expensive long lead items but not enough to recover their value. This is a nice vessel on paper, 24 man Drass system, ST design, 250t crane, and a fairly generous power capacity etc.

In fact it is possibly as nice as the Vard DSV, speaking of unsold DSVs (although without the build quality one suspects), that will also only be sold at book value. So when looking at the size of the financial write down that these yards will have to take why not look there given Vard have just published their accounts? It is not completely clear how much value Vard are acribing to the vessel as they hold it in inventory with another vessel, but amazingly the write-off for all their vessels is only NOK 54m, or around $7m!

Given the discounts going around in offshore at the moment for completed offshore vessels, and the price Boskalis recently paid for the Nor vessels, to pretend that the Vard 801 only lost a maximum of $7m on it’s build cost (Vard use realisable value) is really unbelievable. Preposterous in fact. Surely a discount of 50% to cost would be needed to actually sell the vessel in this market? The scale of the loss here is massive for Vard, not quite a solvency event but not that far off and hence their desperation to hold an unrealistic value, but this is really a case where it is hard to see how the auditor has been objective here? There is enough market intelligence to suggest that a North Sea Class DSV that cost c. $150m to build would need to be marked down more than 5% to sell in this market? Good news for Keppel because they are audited by PWC as well I guess?

The fact is there are a host of very high-end DSVs mounting up in yards now with no realistic buyers and yet somehow we are meant to believe these vessels are worth close to what they cost to build? This despite the fact that UDS has made a business out of offering to commercially market very similar vessels and apart from a small job in Iran, and short-lived contract with a company without an office or phone, has managed to get close to zero utilisation. I am going to share with you an extremely insightful piece of economic thinking: if a boat isn’t being paid to work then it it isn’t worth a lot of money (generally speaking).

And still they come… three more from UDS alone… will they really be finished or cancelled like the Toisa vessel in China?

Quite where all these vessels end up is a great unkown. Only a maximum of 2 could ever end up in the North Sea given current demand levels and replacement requirements, and more likely one, and just as likely Technip and Subsea 7 just decide to replicate their last DSV new builds with export financing and attractive delivery terms… in which case none are worth the North Sea premium.

That means these vessels are likely to end up in the Middle East and Asia where day rates have never supported North Sea class DSVs for a host of very good economic and environmental reasons. So either there are a whole pile of USD 150m DSVs sitting around idle, with no buyers, that are all worth nearly exactly what they cost indefinitely, or someone is going to start losing some real money soon, even if the auditors allow them to pretend they won’t for a while longer.

Fox Offshore managing MPV Everest…. How much have Keppel been paid?

So Fox Offshore are managing the MPV/ DSV Everest. (hat-tip: RD).

My only real point with this is that I don’t believe Keppel have been paid anything like the SGD 265m contracted build price. Fox may well do a good job of managing the vessel but they clearly don’t have the resources to pay for it. So are Keppel paying for the OpEx as well?

This is a material transaction for Keppel Oil and Gas given the size. It will be interesting to see from a disclosure point-of-view how long they can simply not update the market on their financial exposure here.

MPV Everest at mooring

According to the Marine AIS the MPV/DSV Everest is currently moored in Singapore. It is now over 2 months since Keppel stated they had delivered the vessel. I have always taken delivered to mean “paid for” by the new owner? (Previous thoughts here).

I am pretty sure that hasn’t happened in this instance. But if anyone has any definitive information on it could you PM/email me?

I note with interests the auditors (PWC) made the following statement in 2016:

Downturn in the Oil and Gas industry

The downturn in the Oil and Gas industry has had a significant impact on the financial statements of the Group, in particular over the following areas:

i) Appropriateness of revenue recognition and recoverability of work-in progress balances in relation to Offshore and Marine construction contracts
(Refer to Note 13(a) to the financial statements)

We focused on this area because of the significant judgment required in:

  • assessing whether the Group’s customers will be able to fulfill their contractual obligations and take delivery of the rigs/vessels at the contracted or revised delivery dates; and
  • estimating the net realisable values of stocks for sale.

We reviewed management’s assessment of the risk of customers defaulting on the contracts, and corroborated management’s assessment against our understanding of the industry. We read public announcements and other externally available information that would be relevant to understanding the financial position of the major customers…

We reviewed the terms of each contract as well as the terms of the modifications to assess if management’s judgment on the continued recognition of revenue and associated margin was appropriate.

We also reviewed management’s assessment of the external valuation of each rig/vessel, to assess if the related work-in- progress balances of construction contracts and stocks would be recoverable through sale, in the event that any of the Group’s customers are unable to take delivery of the rigs/vessels at the contracted or revised delivery date.

And the conclusion (for year end 2016):

Based on our procedures, we found that management’s judgment around the recognition of revenue, including associated margin on the Group’s Offshore and Marine projects for the financial year was appropriate. We also found that the work-in-progress balances on construction contracts and stocks were appropriately assessed to be recoverable.

So I guess it would be embarrassing for all concerned if there was a major event of default here? You would think an SPV set up to purchase a SGD 250m vessel, with no underlying charter and pre-arranged take-out financing, would therefore have warranted some special attention from the auditors?

This is not a “farm burner” for a company the size of Keppel, but it is also pretty serious if the counterparty can’t pay, because there are a host of these high-class DSVs building up now. The Everest is BV classed which also surely limits her resale potential? I have no idea what would be required to get her DNV or Lloyds classed but surely any other buyer would expect this to be to Keppel’s account?

Frankly, I would have expected Keppel to provide slightly more information regarding this vessel. It is a material transaction for the Group and it is very hard to believe they have simply delivered the vessel, been paid for it, and the new buyers have left her at anchor in Singapore? And if the contracted buyer cannot fulfill their obligations then any value to Keppel of this assets will be tens of millions lower than the contracted build price.

Surely Vard are (even more) worried now? I heard again last week that their DSV had been sold (this time the rumour was to a smaller company), but this ship has a clearing price (as eventually do the UDS vessels). With Technip scrapping the Wellservicer they have a host of options on replacement tonnage should they choose to invest in what is turning into an oversupplied sector.

When is a vessel delivered? Keppel version…

Show me the incentive and I’ll show you the outcome…

Charlie Munger

Keppel came out with a S$619m loss last Thursday, the result of a corruption fine and other related costs. The subsidiary Keppel Offshore and Marine are where most of the problems lie, mainly as the result of Brazilian exposure. There is a good article here on how provisioning for losses on the Sete contracts and other jack up exposure Keppel has.

But I am intrigued by the recently “delivered” MPV Everest. Keppel reports on a Jan – Dec financial year, and on Dec 18 2017, a relatively quiet time of the year, it announced it had delivered the MPV Everest… Just in time to book the associated revenue for 2017 which would help prop up what had been a dreadful financial year for the Group.

Now for those not in  the know, the MPV Everest is a strange beast, and one of the most expensive DSVs ever built (my previous thoughts on it are here). Marine Construction Services are taking the vessel, they are linked to Edison Capital who are linked to New Orient Marine Ltd, the legal purchaser, (an SPV formed to finance the vessel). MCS/ Edison have supplied their offshore tonnage to MRTS in Russia. Earlier in the year, about the time New Orient would need to have been organising take-out financing, shipbrokers I know were approached about marketing the vessel at an outrageously high day rates, seemingly desperate to back on to a financing deal. Now none can get Edison to tell them what is happening with the vessel.

The MPV Everest, at S$265m is by an order of magnitude more complicated and expensive than any vessel these companies have experience in. Admittedly, MRTS have taken the Toisa Paladin to Russia on a time charter previously, but this is on a different scale. And it is very hard to see without a long term charter, at significantly above current market rates, from an extremely creditworthy counterparty, any bank backing an SPV to provide takeout financing for New Orient Marine Ltd to pay Keppel? People who have been on the vessel have told me there have been some real problems in commissioning the dive system (although that would have been pushed to JFD).

I have also worked with an Eastern European contractor looking to get a vessel to MRTS, and if you think Indian companies don’t like to pay for boats wait until you get feedback from a Russian company… so paying for this?

As I said before I have real doubts about the value and economic credibility of this vessel: it is ICE class but not NORSOK? And it is a BV classed DSV? The dive system is Lexmar? These characteristics make the resale value of the vessel, should there be an event of default, extremely hard to gauge but must point towards the extreme downside in value and in length of time taken to even get a sale. The DSV  market itself is replete with lay-ups and loss making companies and this asset, unless it goes to Russia, has extraordinarily poor prospects for economic work in the short-to-medium term.

It is very strange that MCS, Edison, and MRTS (for whom the vessel was surely destined) have remained extremely quiet and their websites fail to reflect the enormity of the task they have completed? Verging on a world first? Announcing some work and plans maybe? A photo of the naming ceremony perhaps?

The vessel according to AIS has not left Keppel since delivery and here we are are six weeks later? It is not unusual for a vessel of this complexity to face sea trials, commissioning issues etc. But I have real doubts this is the case here. I look forward to the annual report with interest because there are only a few scenarios that would make sense here:

  1. Keppel have been paid and the vessel is merely undergoing the final few stages of fitout and sea trials;
  2. There is a handover issue between the “owner” and the yard, and actually New Orient Marine Ltd have not accepted delivery (and in all likelihood can neither pay for the vessel,  nor in this market even want it);
  3. A nuclear scenario where Keppel have booked a sale of the vessel and moved the debt to the balance sheet and/or another entity. I hasten to add I have no proof of this, but it seems so extraordinary that New Orient Marine Ltd could actually have paid S$265m for this vessel that they have no work for? Maybe some of the S$54m of other unexplained writedowns was the start of a slow series of writedowns on this vessel? All the rig owners at Keppel are paying for delayed delivery because they have no work but this vessel, in the middle of the greatest ever OSV downturn, is simply going to float away and make money? I don’t see it.

We will see. Russia is involved so you can never rule anything out here. Maybe I am being harsh given the Sete scandal, but Keppel just doesn’t strike me as a yard that did a lot of due diligence on customers in the offshore oil boom when this vessel was ordered, and so the chances of them collecting hefty upfront contributions strike me as remote.

The one thing I defintiely know is that no serious saturation diving contractor has chartered this vessel and no one in the industry knows anything about where she is going. It strikes me as very binary, either a) in the immediate future we are going to hear of a long-term charter of the vessel by a Russian company to operate the vessel in Sakhalin, at way above market rates; or b) Keppel have a massive credit issue.

I await with interest…

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.