McDermott buys Chicago Bridge and Iron…

“Chicago Bridge and Iron is not based in Chicago, doesn’t make bridges, and uses no iron”.

Anonymous

 

We argue that mergers and merger waves can occur when managers prefer that their firms remain independent rather than be acquired. We assume that managers can reduce their chance of being acquired by acquiring another firm and hence increasing the size of their own firm. We show that if managers value private benefits of control sufficiently, they may engage in unprofitable defensive acquisitions.

Gorton, Kahl, and Rosen, 2005

 

If you want to have a look at what signals the insiders in offshore SURF are sending, and that major shareholders are supporting, look no further than McDermott (“MDR”) acquiring Chicago Bridge and Iron (“CBI”). MDR, which had $435m cash on hand at Q3, generated $155m EBITDA in the quarter, and is widely regarded as a very well run company, brought a declining onshore construction and fabrication house (with a small technology arm). No wonder the shares dropped 9% in aftermarket trading while CBI rose.

What it means is that a well informed group of rational senior executives in the offshore industry, in a company with ample liquidity and investment capability, decided the best option for growth and shareholder returns were for them to diversify onshore in the US. I don’t think that rings of confidence for an offshore recovery. At the moment anyone with enough financial capacity to charter ships (at below economic cost) and hire engineers can win market share. It is obvious what that will do to financial returns and why therefore companies are looking at different sources of growth and not recycling cash flow generated from the industry back into it. Over the long term this is part of the story of how the offshore industry will lose the capital it needs to in order restore the market to equilibrium.

This is a defensive merger. MDR was simply too small not to be acquired as part of a major acquisition had it remained independent (part of the reason the shares have dropped is the loss of the “acquisition premium” in their value), but it also needed to pay in shares only to keep its operating flexibility in this market. MDR was just big enough to raise the needle signficantly for someone else, but not large enough to buy an industry leader or number two. MDR had the choice of going on a shopping spree of SURF companies, maybe Aker Solutions or someone, and then trying to compete with Susbea 7 or FTI, and slowly over time getting materially bigger, risk being acquired as the industry consolidates, or buying something big and leveraging up so as to make it to big and risky to be acquired. The short-term risk was someone like GEBH, having failed to acquire an installation capability with SS7, deciding MDR was large enough to swallow. I’d love to know if the Board instructed one of the banks to sound out other bidders instead of this? I suspect instead that Goldman Sachs, lead adviser to MDR, was brought in with a specific mandate to keep MDR independent and CBI was the company they settled on.

Clearly, and having sounded out the shareholders as well, MDR management have decided that the least risky option, or at least the deal that could be done, was onshore US, a business about which MDR management have limited exposure. Whether consciously or  not, the fact is MDR management couldn’t find enough value, on a risk weighted basis, to carry on investing in offshore.

MDR management decided to diversify, a so called “vertical merger“. Financial markets generally dislike verticals, which have a limited range of situations when they are likely to be profitable, preferring to believe shareholders are better at diversifying individually than company management. However, financial economists have spent a huge amount of time studying M&A, and from what I can ascertain all they really agree on is that returns are hugely dispersed around the mean i.e. sometimes it works and sometimes it doesn’t:

[o]n balance, one should conclude that M&A does pay. But the broad dispersion of findings around a zero return to buyers suggests that executives should approach this activity with caution.

 

I get why it was done I think: scale. Cynical theories abound in economic research:

What, then, is the motive for the widespread and persisting phenomenon of conglomerate mergers? In this study, a “managerial” motive for conglomerate merger is advanced and tested. Specifically, managers, as opposed to investors, are hypothesized to engage in conglomerate mergers to decrease their largely undiversifiable “employment risk” (i.e., risk oflosing job, professional reputation, etc.). Such risk-reduction activities are considered here as managerial perquisites in the context of the agency cost model. [Emphasis added]

In this case the argument is really that increased scale will help the offshore business as a standalone unit with lower unit costs being spread over a large company. If management can make it work, and they prove to have swooped on CBI in a moment of weakness, then everyone will be happy. That isn’t really my point with this: it is my agreement that offshore contracting/SURF still has excess capital at an industry level and I agree with MDR management that in the current environment deploying more, even at current price levels,  looks hard to justify.

So rather than hold out for an acquisition premium, or try and build up slowly, MDR management have made the company virtually impregnable to being acquired, for a few years anyway, and if they can turnaround CBI as they have done with MDR the risk will be worth it.  But I also think it sends a signal that management have far more confidence in the lighter CAPEX onshore market than they do about the offshore market, and even though they had the opportunity to buy a string of assets and companies at rock bottom prices MDR management (with the support of the Board and shareholders) decided it was less risky to buy an onshore construction business. That is consistent with the investment profile of many E&P companies who are cutting offshore investment in favour of onshore.

I think that this M&A decision tells you a lot about what those actually making the investment decisions in profitable offshore companies think about the market direction and the risk weighted returns available from it, for the forseeable future. MDR are backing themselves to apply the lessons learned in the downturn to another business rather than applying it to more businesses in the sector.

GE and Subsea 7 …

The past few decades of leadership at GE has lessons for all companies. Stay focused on areas where you have differentiated skills (engineering, for GE) and avoid trends (financialisation). Set short-term expectations you can hit, but manage for the long-term. Take hard decisions. And hope for a little bit of good luck.

FT View, 21 October, 2017

There is a really easy explanation for why the BHGE and Subsea 7 talks broke off (aside from the fact that Kristian Siem probably likes owning and actively running a company with as many cool toys as Subsea 7)… Have a look at these results from BHGE last week:

BHGE 3Q 2017 Oil

BHGE basically turned over $3.4bn in oil field services and equipment and made no money on it (a 1% operating margin). Subsea 7 on the other hand has been a profit machine through the down turn:

SS7 5 year share price

Subsea 7 might be a much smaller company but it had operating income of $235m on $1bn of revenue. The only real worry Subsea 7 has is the size of the order book and Brazil exposure.  Subsea 7 really doesn’t need to expose it’s shareholders to the risks of a complex merger integration that isn’t going as quite as planned: Some commentary indicated the market was worse than when the merger was announced, not something anyone in the market I think really believes.  On those numbers Subsea 7 management would be taking over BHGE not the other way around.

The fact is that that the top end subsea execution companies have found a profitable niche. The OpEx is so high that competitors just didn’t last as the downturn hit, projects bid at the peak of the market got procurement at the bottom, a kind of natural hedge,  whereas the markets BHGE competes in might be bigger but they are structurally less profitable because more people can compete in them and the lower OpEx commitment means they just keep on doing so.

I still think the backlog is a huge issue. Financial markets are notoriously short-sighted and fickle, and I cannot see how the vast drop in demand in seismic and rig utilisation doesn’t eventually lead into dramatically lower offshore commitments. But I also accept that offshore oil isn’t going anywhere fast and it would appear Subsea 7, FMC Technip and a couple of others are pulling away. Saipem came out with some horrible numbers today with adjusted EBITDA in the offshore division down 17% YOY showing there is still pain to come. And everyone complains of weak order intake… But the larger companies appear to be generating more than sufficient cash to see off the weak and be in a great position for even a mild recovery.

I’m naturally scpetical that you can simply pick markets and keep acquiring companies on a “buy and build” strategy and this contrasts strongly with the very clear industrial strategy Subsea 7 has followed for a long time now. Exactly as the FT recommends GE should do whereas BHGE seems to be the combination of two companies facing ex ante growth limits who looked for a transaction to try and solve structural issues. Eventually you can probably cut enough cost to force it to work in a financial sense but industrial logic takes years to develop.

One thing is for sure: If BHGE are serious about getting involved in offshore execution only McDermott is big enough to move the financial needle and small enough to digest in a practical sense.

How good a deal was the Amazon? Pipelay demand and supply, change at the margin, and dynamic competencies

As all of us were taught, but most of us have long since forgotten, economic change occurs at the margin, where the action takes place… individuals who can think on the margin always have an advantage over those who cannot.”

-Arthur Zeikel

I have seen a lot of press coverage regarding the McDermott/ Amazon deal. The word “steal” has even been used. I’m not convinced. Let’s take the upper limit price of USD 80m. For that you get a big, a really big (200m), ship with enormous deckspace and two 400t cranes. I take it from the McDermott comments that they are ditching the G-lay spread and going for a straight J-lay spread. I don’t know how much of the Huisman system they can raid for the new system, but I bet not much, and a new system is likely to be in the USD 75m-100m range. On that basis they didn’t get the vessel at an 80% discount to new they got the vessel at c.50% to new. But as I said the other day the world is a very different place from when the order was placed, which tautalogically is of course why they got the fire-sale price. But USD 50-80m isn’t scrap value and this vessel has a very high operating cost which is essentially fixed.

As a heavylift vessel it’s clearly cheap. McDermott have enough work in the Gulf and Africa to utilise a mutlipurpose vessel like this, and if the market recovers put a J-lay spread on it, and they will have had a cheap option on a deepwater lay vessel. Over a 30 year period it will have been a good buy, and even if the market doesn’t recover they didn’t overpay, so its clearly a sensible transaction.

But since I got involved in offshore in 2005 no segment of the market has changed more than pipelay. In 2005 there were only two vessels that could lay rigid reel pipe (the Technip Apache and the Seven Navica) with the Acergy Falcon and its ancient S-lay system making up a triumverate of possible lay contractors in the North Sea. Vessels such as the Deep Pioneer roamed the Golden Triangle, but they were more riser installation and Allseas and Heerema were serious forces but only did risers and flowlines. There were a few options for spooled flexibles, but these were a niche product and these vessels could generally perform flexlay more efficiently for anything other than short jobs. And these vessels were essentially global assets that returned to the North Sea over summer after completing projects elsewhere.

Globally it was different, and there were options, but mainly because environmental conditions were different. For example in shallow water  you could use a barge in Asia, UAE, Africa and the US or use more S-Lay. But the bigger specialist vessels were global assets (the Apache went to NZ at about 8 knots once to build the Maui field!) and made a ton of money off a couple of jobs a year and then spent the rest of the year operating in a sub-optimal operational fashion (maybe doing small tie-ins or flexlay) to keep utilisation up an spread the OPEX cost.

Over the past 10 years however no class of asset has been built up more proportionally than pipelay, and for all the work these vessels used to do on a marginal basis there is now at least one (and often more) specialist assets. Not only that, modular spreads from Aquatic, MDL, and others, have become increasingly large and compete with dedicated spreads for small flowlines/risers and all sorts of umilical and cable lay jobs. If you doubt this check out the size of this MDL kit on the North Sea Giant.

This is a really complicated way of saying that there has been a massive increase in the supply of pipelay vessels and just as importantly an increase in the supply of competitive products at the margin which reduce the utilisation potential of said pipelay vessels. This at a time when the demand for their core services has plummeted. Since 2005 Technip has built a new Apache II (a replacement but with the old lay spreadand Deep Energy in addition to the Deep Blue; it also went out and brought Global Industries to get 2 x s-lay vessels to lay even more pipe (2011). In 2013 Deep Orient joined the Technip Asia fleet, in Africa the Skandi Africa (2015), and four vessels for Brazil with 2 more to come to join the Deep Pioneer. The are geographic assets to reflect the combination of flexlay and risers in the region. Subsea 7 has been just as extreme: Seven Oceans (2007), Seven Seas (2008), Seven Waves (2014), Seven Rio (2015), Seven Sun (2016), Seven Cruziero (2016). All 25 year assets on eight year contracts at best.

Yes there are few of the really utlradeepwater lay vessels around, but they all used to do less complicated work to keep up utilisation. At the margins now are the Normand Vision (Ocean Installer), the Normand Maximus (Saipem), and the Lewek Express (presently chartered by EMAS Chiyoda but soon to be owned by the banks and clearly going cheap). Yes, I get it, they all have their niches and can do things differently, but the number of jobs where they have a competitive advanatge on an asset basis is small, whereas the number where they overlap is large… not to mention Allseas and Heerema.

Pipes and risers need to be replaced infrequently and umbilicals perhaps more so. But nothing like construction demand. So if these vessels aren’t working on construction what can you do with them? They make expensive ROV vessels.

In the new world of pipelay, integration with subsea equipment manufacturer is also crucial. Technip-FMC-Heerema, and Subsea 7- Aker are clearly the two strongest alliances. McDermott-Petrofac just isn’t in the same league. A market only needs two serious competitors to keep margins down, three just keeps the pressure on. Meanwhile Saipem and and OI wait in the wings to keep margins down on less complicated jobs. The TechnipFMC and Subsea7/Aker alliances are spending serious money integrating subsea processing equipment with vessels to ensure that offshore installation (and therefore future vessel days used offshore) is reduced materially to lower project cost and execution risk. Again this adds to the capacity problem in the industry.

… and just when you thought I was getting over the bad news there is Brazil. Petrobras is redelivering some of the flex lay vessels it has gone long on. These will have to go somewhere. At the margin they compete with a large heavylift vessel with a modular installation system, despite costing 1.5x as much, these vessels will globally drive installation costs down. I don’t know if the number redelivered will be 2 or 4, worst case maybe 5, but relative the size of the market its a material number.

I get it: these are not comparable to J-Lay work. But few vessels work in J-lay mode for 365 days and they used this sort of work to split the cost base. Now the day-rates for this sort of “ancillary” work will remain low for years. This will drive lay costs down, and encourage projects that would have been marginal, but this will be cold comfort for you had you invested in a lay vessel in 2013 as the financial returns are likely to struggle to keep the debt holders whole.

So while McDermott may have got the vessel for much less than it cost it to build that cost is almost irrelevant. The assets simply don’t generate the cash they used to, or even likely have the potential to, so they must be cheaper to any rational buyer.

The other thing about pipelay that EMAS Chiyoda (“EMASC”) have shown is that not everyone can do pipelay well. McDermott have huge intellectual heritage, and long term are a credible tier 1 contractor, Technip, Subsea 7, Heerema, and Saipem didn’t wake up one day and have the ability to drop Steel Catenary Risers at 3000m: they have followed a path dependent process to develop what economists call dynamic capabilties:

Dynamic capabilities, unlike ordinary capabilities, are idiosyncratic: unique to each company and rooted in the company’s history. They’re captured not just in routines, but in business models that go back decades and that are difficult to imitate. Lynda Gratton and the late Sumantra Ghoshal called them “signature processes.” They are “the way things are done around here.”

It has taken these companies years, trial and error, and organisational learning to ensure that they can profitably and reliably do this, day-in and day-out. I mention this  to highlight that McDermott still has a long and costly process to go through before it can do this. Not only does it need the ship and lay system, it needs systems and processes, it needs to win customers (will the first customer need to be brought?), and in all likelihood it will make a few (affordable) mistakes along the way. Subsea 7, and I am only picking on them here as it has happened to every contractor, lost hundreds of millions on Guara-Lula by underestimating the weather complexity around the final stage of the riser installations in Brazil and the ability of the Seven Waves to perform the hook-up. EMASC are likely to have the dubious honour of never having made money off the Lewek Express for their entire (short) existence. Chances are McDermott will have a few similar issues should it compete in the ultradeep J-Lay segment.

Simply jumping into a market, even an adjacent one, where there are a small number of extremely high risk/ return (and maybe not even that given the competitive dynamics I have outlined above) projects is full of Knightian Uncertainty (i.e. an immeasurable risk). You can de-risk that by buying cheap but I’m not sure that makes it a bargain in terms of risk-adjusted returns.

So McDermott have clearly been smart buyers but very few people actually could credibly put themselves on a path to utilise the vessel and have the balance sheet to do it. If I owned a share on the mortgage of the Lewek Express I would be starting to accept the size of the writedown coming.

 

 

McDermott ventures into the Amazon…

Whatever the mind may hope for

The Future is in the hands of the Gods

Plautus

I’m skiing this week but clearly this news captured my attention over Aperol…

McDermott and the Amazon: I don’t have much to add here except to say that clearly McDermott did a sale-and-leaseback not because they have cash flow issues but because they are keeping their powder dry for a serious acquisition. Yes, the vessel came at a huge discount to newbuild, but no one in the industry believed in the pipelay system (issues with the pipe deformation and firing line ostensibly) and as I have said before the asset specificity is such that is it really cheap? Just because something cost a lot doesn’t make it valuable. These vessels are dedicated assets and if you are not doing deepwater work then a vessel of that size is hard to justify.

Don’t get me wrong OMP and Northern have a great deal as I think McDermott is going to be a real winner in the “new offshore”. McDermott have waited to spend large, but if deepwater doesn’t come back quickly, and all the stats highlight it is not (as does the McDermott commentary), then all they have done is brought an asset at fair market value with the option of deepwater work later. Its a great deal, but not a game changer, as McDermott were credible in that space anyway. There is currently more than sufficient deepwater lay capacity at the moment to drive pricing to marginal levels already and another potential competitor won’t take prices lower it will only lengthen the industry recovery time.

I understand the vessel is going to be fitted with a modular SAT system and used as a multipurpose vessel in Africa (bad for external DSV owners) as an interim measure, where McDermott have good backlog, as the moonpools mean it essentially becomes an integrated DSV with a massive crane. It yet again highlights that asset value is a nebulous concept in this market where the hold costs are high and future demand uncertain. The price has de-risked another industry downturn and offered signficant upside: but in an industry in this bad a shape that is how deals need to be structured.

Actually, it’s the Swordfish… Nor bondholders have a problem…

dsv-swordfish

Okay I was wrong…. it happens once in a while… McDermott it seems are going to go for the old Harkand Swordfish, since redelivered back to Veolia, and not one of the Nor Vessels to trade in the Middle East Africa. From an operational perspective it’s probably a better bet with the twin crane layout at the back to being a true multipurpose vessel, well suited to the regions. And the seller/ charterer was also realistic, or desperate (depending on how you look at it), cutting an unbelievable financial deal.

The Nor bondholders have a real problem now: they have two North Sea class DSVs in port at Blyth and no operational infrastructure at all. I have been told by two independent people over the last week that the new commercial managers are desperately trying to buy the Harkand management system off the receiver but don’t have a clue how to value it.

On November 7 2016 the bondholders did a liquidity issue where they raised USD 15m to fund the ongoing expenditure on the vessels. That money may have taken them through 2017, if they got one of the vessels away on a long-term charter, but if anyone wants a reminder of how expensive it is to own a DSV the bond documents showed they are spending USD 350k per month on OPEX per vessel. So the investors are c.10% through their liquidity in 8 weeks with no work on the horizon at all. Platitudes about not being forced sellers won’t mean much come June if a significant dent has been made in that cash pile through a lack of utilisation. Even worse in trying to secure potential charters the bondholders are now an extremely disparate group, ranging from the original investors (who in effect lent money to world’s greatest distressed debt house Oaktree Capital Management) to the distressed debt investors who have brought in. A second capital raising may not be so easy, something any potential charterer will have to consider as Nor’s cash buffer diminishes.

Quite why the vessels were brought to the North Sea in the first place remains one of the great mysteries… one of the most heavily regulated markets in the world, and only Technip  having the correct bridging documentation to use the Da Vinci as a DSV, with no guarantee the HSE regulator would accept the old Harkand system with new owners? Or even checking with the market if they wanted it? One would have thought the bondholders or their representative would have checked this most basic of points. I have been told the real reason was that the largest bondholder believed that the Port of Blyth was large enough to land a time machine which would take them back to 2013 and sky high day rates. The lack of appearance of the time machines not deterring the owners from continuing with this strategy.

In reality, the bondholders have a very difficult problem. They own something no one wants to buy that they desparately want to sell at a 2013 price. Just because something cost a lot to build doesn’t make it valuable. Markets are made where demand and supply meet not simply where supply provides. To use a hotel analogy the Nor bondholders have turned up in Aberdeen, which in the current downturn has lots of spare capacity in all the good hotels, with a half furnished hotel, no staff, no booking system, and no kitchen, and seem confused why no one wants to stay there when the Malmaison has loads of great rooms for £120 a night.

In the current downturn I see no market for these vessels in Aberdeen, and because I might be biased I have had a ring around some people I trust, and they confirm that this is their view as well (one of whom was rung by a shipbroker and asked how you valued a management system!). The problem at its root lies I believe in Knightian Uncertainty: a risk impossible to calculate. A kind of Rumsfeldian Unknown Unknown. This as opposed to risk which could be quantified by attaching probabilities and therefore measured and valued.

At the moment there are too many DSVs in the North Sea and given the safety focus why would any buyer, frankly at almost any price, take the risk of a new team, new contractor etc when they don’t need to? This has been acknowledged by Nor while saying they don’t intend to start dive operations. But there is no other credible dive contractor at the moment who is short of tonnage? Diving has relatively high entry costs for the North Sea, with a fair degree of asset-specific investment as a sunk cost, in a down market, there is no rational reason for anyone to make this investment. Particularly when a recovery looks like 2018 and an anemic one at that.

So the Nor investors are left with two ROV vessels with a medium crane and some deck space (with high fuel consumption);  who doesn’t even have basic ISO accreditation and a management system. There are a lot of competitive vessels (like the Grand Canyon and the Olympic Bibby) that are frankly better equipped and have more coherent teams. Why for the sake of a few thousand dollars would you charter a ship that has sat around for 7 months doing nothing and just have an agency crane driver? Crane maintenance history? When was the last time the wire was re-spooled etc.  Will the bondholders agree to see trials and crane trials before commencing operations? All this will eat further into their cash pile if they do but they cannot get work without doing so.

In the current market these, and an innumerable number more, are just incalculable risks that people just don’t need to take. For the same money they can get something better and safer. A decent risk assessment, the basis for any North Sea operator to take a new vessel, is going to have the auditors coming back with more a host more questions than answers, not just about the vessel but corporate structure and commitment as well.

M2 have some ROVs on board but it is very hard to see them committing that much to the vessels as they know the risks involved with such a dysfunctional ownership structure and the ultimate desire of the investors to bail out as soon as the market turns. Private equity companies traditionally don’t do favours for distressed investors and the logical reading here is M2 will just want to focus on getting their ROVs wet, they will want vessels they can build a business out of rather than just annoy Bibby with. I like the guys behind M2, and wish them every success, but they are a start-up. The Nor investors haven’t just taken market risk at the moment they have in effect taken equity risk (without any upside or financial gain) in M2 if they plan on them driving utilisation?

Can a DSV fit in the Tardis I hear you asking?…

Nor don’t have an operational problem they have a strategic problem: what are they and what are they going to do? Until they can answer those basic questions I would argue they are going nowhere.

Solstad today showed that the market for high-end CSVs is still hard and took a long term windfarm walk-to-work contract. When  WTW is strategically important for a vessel of that quality you know how tough the market is. The TSG connection may open up similar opportunities for Nor; but rates on those contracts have been as low as €14k per day, so a contribution to dry-docks etc is out of the questions. However, if you really believe the capital value will come back with high POB they would be praying for something like that to cut OPEX.

While the ownership units the Nor bondholders have are called “recovery bonds” they are in effect equity. The Nor owners are trying to start a shipping company without really being one and doing it on the cheap. It didn’t work for them last year and there is no real reason to believe it will this year with demand looking even worse.

Having had a rant I should note that the core point of Knight’s writing was that this uncertainty, as opposed to risks that could be insured, created the opportunity for profit and therefore the entrepreneurial enterprise or venture. Ultimately someone will make money off these vessels, I just doubt it’s the investors that lent money to Oaktree and frankly I doubt it will be in the North Sea. However, I also note with a degree of humility at the start of this post that I can be wrong… read into that what you will.

 

One of the Nor DSVs off to Africa?

da-vinci-port

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…