New ship Saturday…

Yet again UDS seemed to have pulled off an amazing feat, right after becoming the greatest DSV owner and charterer in the world, with a record 4 out of 4 (or maybe 5) DSVs on long term charter, they appear to have Technip, McDermott, and Subsea 7 quaking with fear as they look at helping a company enter the deepwater lay market:

UDS Lay vessel.png

This is a serious ship. Roughly the same capability as the Seven Borealis.

Seven Borealis

Although the Seven Borealis  can only lay to 3000m, not the 3800m UDS are looking at. As depth is really a function of tension capacity then I guess they will have a significantly bigger top tension system than the Seven Borealis as well?

I can see why you would go to UDS if you wanted to build a pipelay vessel significantly more capable than any that the world’s top subsea contractors run. Sure UDS may never have built a vessel of such complexity, and actually haven’t even delivered one ship they started building, but they have ambition and you need that to build a ship like this. Not for this customer the years of accumulated technical capability, knowledge building, and intellectual competency, there is nothing an ex-diver can’t solve.

UDS is building vessels the DSVs in China. The closest the Chinese have come (that I know of) to such a vessel is HYSY 201:

HAI-YANG-SHI-YOU-201.jpg

But that only has 4000t system? No wonder this new mystery customer, who I assume is completely independent of the other customers that have chartered their other vessels, wants to up the ante. The HYSY 201 cost ~$500m though, which is quite a lot of money to everyone in the subsea industry, apart from UDS.

The last people I know who went to build a vessel like from scratch were Petrofac. There is a reason this picture is a computer graphic:

Petrofac JSD 6000.jpg

To do this Petrofac hired some of the top guys from Saipem, a whole team, with years of deepwater engineering experience… And when the downturn hit Petrofac took a number of write offs, and even with a market capitalisation in the billions, didn’t finish the ship. To be fair though, they hadn’t engaged UDS.

But I think the reason you go to UDS “to explore the costs”, you know instead of like a shipyard and designer who would actually build it, is because they appear to have perfected the art of not paying for ships. So if you go to them and ask for a price on an asset like this chances are you get the answer: the ship is free! It’s amazing the yard just pays for it. Which is cheap I accept but ultimately the joy-killing economist in me wonders if this is sustainable?

Coincidentally I am exploring the costs of building a ship. I have just as much experience in building a deepwater lay vessel as UDS. On Dec 25th 2017, with some assistance from my Chief Engineer (Guy, aged 9), we completed this advanced offshore support vessel, the Ocean Explorer,  from scratch!

Ocean Explorer.jpg

Ocean Explorer Lego.jpg

Not only that I had take-out financing for the vessel in place which is more than UDS can claim at this stage!

Now having watched Elon Musk launch a car on a rocket into space (largely it would appear to detract some appalling financial results, although far be it for me to suggest a parallel here) we (that is myself and my Chief Engineer) have designed a ship: It will be 9000m  x 2000m, a semi-sub at one end to drill for oil, a massive (the biggest in the universe) crane to lay the SPS,  j-lay, s-lay, c-lay, xyzzy lay in the middle, and two (Flastekk maybe?) sat systems at the other end in case we forgot something, and to make it versatile. Instead of launching a car into space we are having a docking station for the space shuttle in order to beat the Elon Musk of Singapore. It is also hybrid being both solar powered and running on clean burning nuclear fusion. Not only that the whole boat works on blockchain and is being paid for with bitcoin. The vessel is also a world first having won a contract forever as the first support vessel for Ghawar field. We are also committing to build a new ship every week forever.

I expect to bask in the adulation on LinkedIn forever once I announce this news, and it will feel like all the hard work was deserved at that point. I am slightly worried about the business model as my Chief Engineer asked “Won’t we have to get more money in for the boat than we paid for it?”. When I have an answer for that trifling problem I will post the answer.

DSV economics and finance 101.

The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating.”
BNP Paribas press release, August 9,2007

 

I don’t want realism. I want magic!

TENNESSEE WILLIAMS, A Streetcar Named Desire

 

“Reality is that which, when you stop believing in it, doesn’t go away.”

Philip K Dick, I Hope I Shall Arrive Soon

 

Right now is the toughest DSV that has existed since a massive DSV rebuild programme began in earnest in 2000. At the moment Toisa are in restructuring talks, Bibby have not made money for at least two years, Harkand are no more, and a host of other smaller companies have gone bankrupt. The cause was that there was too little work at profitable rates.

Currently there is a vast inventory of North Sea class Dive Support vessels mounting up: 2 x Nor Offshore, 1 x Vard, 1 x Bibby Sapphire, various assets of Technip and Subsea 7, and various Toisa, for non-comprehensive list. In Asia the number of underutilised DSVs is so vast, and the competition so intense from PSVs with modular SAT systems, that the new normal is OpEx breakeven if you are lucky. Keppel have a USD 200m DSV that can’t be sold  and another Toisa DSV is in the production line in China . As in Europe intense price competition is stopping anyone of the dive companies making any money.

By any traditional measure of economic and financial analysis this is not a good time to launch a new DSV company, either as an owner, where the market is oversupplied and no owner can even get his book value back on the boats, or as a dive contractor where an excess of capacity is driving the price of work to its cost or less. It is worth noting that the new build Tasik DSV, with a 365 five year charter to Fugro, could not get takeout financing from the yard.

Into this maelstrom is coming Ultradeep Solutions (“UDS”),Flash Tekk Engineering, and a Chinese yard…

The distinction between the North Sea fleet and the rest of the world is important as everyone knows in the market the North Sea environmental conditions demand a higher specification vessel and therefore day rates have always been higher. The ROW has never chartered tonnage of the same cost because they don’t need too, older vessels traded out of the North Sea and finished their days in Asia or Africa for lower rates but trading on the higher spec and build quality.

UDS is building North Sea standard tonnage when both Harkand and Bibby, pure IRM and diving companies, could not operate similar, less expensive tonnage, profitably. That is a statement of fact. In order to operate in the North Sea you need a certain amount of infrastructure that I estimate at a minimum costs c. £5-8m per annum for two vessels, to cover things like bidding, HSE, business development, plus the vessel running costs (detailed below). Or you could just charter the vessels to someone willing to pay. There is no middle ground here. Nor Offshore recently tried and got zero utilisation, it is not a product anyone wants, or needs, to buy.

The problem is there are no charterers, and companies like Bibby, who despite their capital structure still offer a very good product, cannot even break even on the vessels: this should be a word of warning for companies seeking to enter. No owner wants to accept there has been a structural change in demand in the North Sea as it means writing off tens of millions of dollars on asset values. Like the financial crisis, which began nearly ten years ago today, everyone owning a DSV claims their assets are impossible to value fairly, what they mean is the price they would get isn’t one they are prepared to accept (cognitively even if they had to take it financially). Just like the financial crisis securities the vessels are used as collateral, when the risks of ownership of these assets cannot easily be assessed, as with DSVs now, their price falls and they become in effect untradeable at any price.

Anyone raising money for a high-end DSV at the moment needs to explain how even if they paid the yard delivered price only why they wouldn’t then go down the road to Vard and offer 10% less for theirs, then the Nor bondholders and offer them 20% less, and then Keppel and offer them 50% less, and then start the whole cycle again. These are extremely illiquid assets with very high holding costs and the option value doesn’t look great. Yes maybe, a big maybe, these Chinese built vessels are operationally better, but does that add anything for the client or a way to charge more? No.

At the moment the Nor Da Vinci is steaming to Trinidad for c. 35 days work for BP, and it takes 25 (ish) days in transit time to get there. This vessel is a near sister ship of the Ausana that UDS have taken on. Unless you believe that every single dive contractor/DSV owner in the world has forgotten to bid for certain jobs then you need to accept the market is suffering from chronic oversupply at the high end.  Nor raised USD 15m in Nov last year, ostensibly to keep the vessels trading in the North Sea, they are not taking the vessel to Trinidad because the crane wants to go sunbathing, it is the only work they can get. Nor will need to do a liquidity issue soon and decide where to position the vessels again this November. Every single job UDS go for will have people just as desperate as them to win work for years to come. The last Nor propospectus also made clear that crewing costs, on a near identical vessel to the Ausana, at safe manning level only, were USD 350k per vessel per month + c. 100k for the dive techs and maintenance. These are very expensive assets to hold an option on.

I don’t want to spend a lot of time on  UDS, I admire anyone setting up a company and making a go of it, but its really simple for me: either we are going to see the company raise literally hundreds of millions of dollars to pay for some DSVs and working capital, in a market when asset values are dropping and no one is making  break-even money, or the yard is going to have to subsidise the vessels and the working capital question becomes interesting. Because someone still needs to pickup the tab for the OpEx which is around USD 10k per vessel per day. 30k per day is c. USD 1m a month with some corporate overhead included and unexpected expenses included. That size of fundraising is institutional money and will leave a documentary trail. I can’t find anything yet which leads me to believe they are undercapitalised (I am happy to be proven wrong here). Raising that sort of money without any backlog at all will I believe be impossible in current financial markets. The return required for hedge funds and other alternative investors to get behind this simply cannot be demonstrated.

It is just not possible in this market, where extremely good operating companies are struggling for work for someone to know of jobs that everyone else forgot about. It’s just not possible in this market to deliver dive vessels tens of millions in cost more than local competitive vessels and claim that you are the only person who can make money and all that is stopping everyone else is negativity.

The fact of the matter is unless those UDS vessels work at North Sea rates, and UDS commits to the sort of infrastructure required to do this or finds a charterer, the vessels will never make money in an economic sense. And even then UDS would have to explain what they are going to do that Harkand and Bibby didn’t or can’t?  No one builds USD 150m dive vessels for Asia because people won’t pay for them. That doesn’t mean UDS won’t make money, owe the bank 1m you are in trouble, owe the bank 100m and they are. The yard has a problem here and needs these vessels to work if they are finished off as DSVs. But even if UDS come up with the vast amount of working capital required it doesn’t make the vessels economic units and that will be bad for the industry as whole.

We will see. I could be wrong… But sooner or later the cash flow constraint is going to bite here because the numbers are so big. If I was a supplier I’d really be hoping my contract was with the yard.