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.

UDS and Tiger Subsea… the mystery continues…

The image above is from the Tiger Subsea Services website. I was trying to find their address, switched on to Google Maps satellite, and helpfully noticed their office address, on which they (or their website designer) located their pin, is in the middle of intersection… Which along with explaining why they have no telephone (the desk being in a rather dangerous position that would conflict with an IMCA standard risk assessment) began to explain a lot of other things…

As a general rule, and please don’t take this as investment advice, chartering two of the world’s most advanced DSVs (with a capital value of c. USD 300m)  to a company whose head office is in the middle of an intersection, and doesn’t even have a telephone, is a bad idea. No good will come from this I predict.

Not only do they not have a telephone number but they also don’t appear to be registered as a business in the state of Louisiana (check for yourself: https://coraweb.sos.la.gov/CommercialSearch/CommercialSearch.aspx). Nor in Delaware which is the most logical place to register a business in the US.

I was driven to this because a friend of mine contacted me today to say that if you send an enquiry form regarding the vessels Shel will email back directly. Strange I thought. Another very UDS like quality also popped up on the TSS LinkedIn page:

ESV 301

This company, with no phone and an office in an intersection are building a self-elevating accommodation lift boat! 97m x 43m with a 250t crane! ESV is the nomenclature Ensco use on their jack-ups but they are not listing this unit and I can find no records of this ship anywhere. If someone can point me on the direction of this vessel, if it exists I would be very keen to hear?

I think we all know what is going on here. The audacity of this is astonishing, and coming from Downunder I appreciate this, like Stephen Horvarth’s car, but when all this ends, and the denouement would appear to be rapidly approaching, someone is going to have to work out what to do with these vessels.

UDS and Tiger Subsea…

So one, and maybe two (vessel specs), of the UDS vessels is clearly going to Tiger Subsea Services, a start-up based in Louisiana that appears to be made up of ex-Oceaneering staff. I wish the guys luck, starting a business is hard, and bringing a North Sea class DSV to the US hasn’t worked for Bibby (Sapphire), DOF Subsea (Achiever), and Oceaneering (Nor Da Vinci). Having said that of course those companies were seeking to make a return on the capital cost and maintenance of running such a vessel, and there is simply no way that this “charter” is done on a similar economic basis. And if someone offers you a brand new $150m vessel for a one way option I guess you take it? TSS will have taken these vessels on based on some sort of risk/utilisation based charter as they simply don’t have the capital to take on a traditional BIMCO Supplytime Agreement, and in this market no one needs to anyway.

The DSVs above  that have moved to the Gulf for other contractors have really only worked subsatantially as SAT DSVs in the tidal regions of Trinidad, and only really for BHP and BP, because no one in the Gulf of Mexico needs such a sophisticated vessel and is therefore prepared to pay for it. SAT diving in the Gulf is arguable the most price sensitive market in the world and handled by a lot of 4 point mooring vessels of questionable quality run by Mom and Pop contractors (with a couple of mid-sized players). There is no evidence that any of the major E&P companies want such sophisticated vessels and plenty of evidence that they will not pay for one.

UDS and TSS are essentially taking  a huge gamble, one that has been tried many times before and failed without exception, that if you put an asset in the market at well above the quality of local tonnage you will get work. The problem is in the Gulf of Mexico no one wants the Malmaison they just want to stay at the Travelodge, and pay accordingly. Building a Malmaison and only being able to sell at Travelodge rates is rarely a winning strategy. Maybe the strategy is to take the vessels to the US and sit it out and wait for a market recovery in other regions which could maximise the later value of the vessels, but I have my doubts.

The Chinese yards behind this, and there is no evidence of any take-out financing from the yards at all, are merely doing what the German yards and banks did in traditional freight shipping that caused over €100bn in losses: namely getting work for yards without caring about counterparty risk. Eventually, and it can take a very long time given delivery cycles and how these yards are funded, someone will put a stop to this, but it clearly has some way to go. But eventually, as the Germans found, reality catches up with you, and at least the yards had farmed the risk out to the banks (and therefore ultimately the taxpayer)

From an economic perspective this is all bad for industry profitability and residual asset values. Don’t get me wrong, again I admire the sheer audacity of UDS, the scale of their ambitions, and their ability to deliver vessels without actually paying for them in a traditional sense. Maybe they have soft deal with the Chinese where in exchange for teaching them how to build a DSV they don’t expect any money? I don’t know, it seems a long-shot, and the Lictenstein was clearly an opportune deal. But it is just not possible to believe that in this market, with established payers fighting for anything that moves, that UDS and TSS have discovered a well of work, above market rates, that no one else has managed to find, that would pay for these vessels in any objective economic sense. To be clear these vessels need to work at c. 270 days per annum at ~$120-130k per day in order for that to be the case. A lot of work in the Gulf goes out at ~$40-60k at the moment.

After a laborious process the investors in the Nor DSVs gave up in December 2017 and sold their (similar) vessels to a well capitalised industrial player en bloc for $60m for one vessel, and USD 4500 per day for the second, roughly averaging out at $45m per vessel. These vessels offer little more operationally (and indeed I would argue a DSV is at its most valuable ~5 years old after its first major dry dock), so Boskalis set up a similar business for c.1/3 of the cost with considerably less risk because of their backlog. Sooner or later that sort of finanical advantage will be important.

No one, even UDS, on any reasonable assumptions, or even speculation, should be building another North Sea class DSV and all these vessels are doing, by adding supply to a market trading at below cash break even in many cases, is destroying what residual equity DSV owners have in their vessels (unless you brought at the right time like Boskalis). You can lose money for a long time building market share, look at Netflix, but normally you need a large cache of diversified shareholders making a bet on a market that will grow exponentially,  not something you can make the argument for here. You can make a countercyclical bet, like John Paulson, but he did it with an asset that was highly leveraged with essentially no holding cost.

The delivery of these assets will arguably delay any sort of fleet upgrade that may have been going to happen. No one wants to build a $150m vessel when one for a near substitute in operational capability could appear on the market at a fire sale price. Having said that I don’t believe another North Sea class DSV beyond a Kestrel replica will be built for a very long time and only the Vard 801 needs a home (at Technip).

Everyone finds this fascinating because everyone involved in DSVs knows how hard it is to win work at the moment, and that it is even harder to do so at a cash flow positive margin. Although the amount of work is picking up a little oversupply remains chronic and new deliveries (e.g. Kruez Challenger and the Said Aletheia) continue to arrive.

Prior to 2014 everyone used to say that SAT diving had very high barriers to entry, and therefore would be profitable, and that was a reasonable assumption. But it is simply not the case now as there are a vast number of high-end SAT vessels that could cover any realistic short-term upswing in the market, and while setting up diving systems might be time consuming, a large number of people are doing it. That is going to mean structurally lower profits for SAT diving companies for a very long time and in all likelihood even poorer returns from owning DSVs as assets and shipowners/yards help dive contractors win work. This is a complete reversal of market dynamics and fortunes that drove the market post 2003.

I wish everyone luck, but the only realistic outcome is that this will ensure low profitability, and likely losses, for the industry as a whole, the longer this continues.

Hat-tip: GR.

A well intervention/lay-vessel or a DSV?

I’ve missed something with this… is it a Dive Support Vessel or a lay-vessel? News that UDS is building a new vessel left me confused:

The Salt 310 design vessel will be capable of well intervention, flex lay and rigid pipe lay operations in 3,000 m of water.

The vessel will be fitted with first-of-its-kind ‘3 in 1’ tower designed by Huisman in the Netherlands. It will also be fitted with a Huisman 600-1,000 tonne crane which can work in depths of up to 3,000 m and a 650 m hydrogen saturation diving system along with two integrated hydrogen refineries.

Either it’s the worlds most advanced DSV, capable of diving at an incredible 650m (no info on the Hs at that depth), and therefore it will need to travel and be a global asset as those jobs are so rare, or it’s a deepwater well intervention and lay vessel? In either mode of operation it will be overcapitalised, with one part of its functionality redundant? But it would still require dive techs etc even in pipelay mode and vice versa? I am perplexed… Questions abound… A 1000t crane is a monster… Who does 1000t lifts? How often? How much does this crane cost? How many days does it have to work to pay for itself? How much strengthening of the deck was required for the payload? This vessel will clearly be an astonishing technical achievement.

The economics on the other hand look more challenging: If you made the assumption that the dive system was worth $100m, not unreasonable comparing a CSV to a DSV price, then the dive system is depreciating at 11k per day (365 over 25 years), regardless of whether it is being used, and excluding OpEx (about 15% of a working DSV day rate in Asia). The lay system/well intervention system, at say $150m, would be depreciating at $17k per day (365 over 25 years), again excluding running costs. And I have a feeling this j-lay/ flexlay system is closer to $200m, with the tower giving you the well intervention capability for free (with another expensive Lego set).  This effectively adds that to the cost of diving or lay each day depending on what you aren’t doing? And that is without OpEx? I am struggling to see how that is economically efficient.  An economic value calculation would substantially increase those numbers. On a more realistic assumption of 270 days utilisation, given schedule gaps and transit, those numbers rise by a quarter.

Are UDS planning on being a EPCI contractor for rigid lay? There is no spot market for rigid lay vessels? Or do they have a charter for this vessel? Surely for a core delivery asset, such as this, a charterer would be intimately involved?

I could be wrong but this reminds me of the CSS Derwent. It could do almost everything possible (in the right region and water depth), and nothing economically efficiently. At a cost of USD 110m it ended up in Angola once Hallin folded, where I doubt the collective value of offshore shipping assets is USD 110m, and certainly caused a massive loss for the yard (STX).

CSS-Hallin Derwent

In an industry which requires standardisation and cost reduction I struggle to see this as the future. I have voiced concerns before about the willingness of the offshore industry to do something because it can, not because it is economically viable, hidden in a boom market it is a real issue now. But the great thing about capitalism is it’s not my money, and I don’t know everything.

Don’t get me wrong, I have huge admiration for UDS. They are delivering and ordering, by an order of magnitude, a DSV fleet bigger than Subsea 7, a company with a market cap of USD 4.8bn! It is an astonishing organisational and financing achievement, and when  the history of this period is written this will be one of the more interesting stories. By any rough calculation UDS must have ordered, and/or taken delivery, of ~$1bn in vessels.

This is all happening at a time when very good DSVs are underutilised or going into lay-up (Toisa Pegasus) and there is massive over capacity in the lay fleet. If I owned a DSV I’d be dreading seeing UDS pop-up in my LinkedIn feed, as they start delivering these vessels it will almost be call for an asset impairment review everytime. This is turning into a countercylical bet so large it will deserve a place in financial history whichever way it goes.

 

Business Sense versus Economic Sense… UDS and Say’s law …

A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest the value should vanish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is the purchase of some product or other. Thus, the mere circumstance of the creation of one product immediately opens a vent for other products.

Jean-Baptiste Say, Traité d’économie politique, (1802)

[Say’s law: Supply creates its own demand as Keynes described it. ]

 

Men err in their productions, there is no deficiency of demand.

David Ricardo in a letter to Thomas Malthus commenting on Say’s law (c. 1820).

 

More than one press appearence lately of the UDS Lichtenstein (ex Marmaid Ausana) in transit to the Middle East for Sat diving work in Iran apparently. I am a huge supporter of any new business, and taking over assets that others can’t work is a time tested model in cyclical industries. The question is: who is the winner here and who is going to make money? As anyone who has run a dive vessel in Iran, or tendered for work there, can explain the rates make India look attractive. A plethora of choice from around the region and customers who only care about price, and perhaps the size of the backhander, mean that even a 30 year old PSV with a portable Sat system can struggle to make money… Thus a newbuild 130m+ DSV is not a natural candidate for the region.

But there can be a real difference between business sense and economic sense: if you can convince a Chinese yard to build you a ship without having to pay for it I think it is a great business model, and UDS are well connected in certain regions to get DSVs working, I am just not sure of the longevity. I haven’t seen the deal UDS have agreed but if it is similar to others floating around then UDS will only be paying for the vessel when it is actually working, and even then a proportion of profit the job generates not a fixed fee. In Iran that is likely to be the square root of a very small number, and if it’s linked to actual payment then even that is a long way off.

UDS therefore is likely to be making money. How much it is impossible to say with certainty but it is possible to have a good guess…The beauty of this business model is its splits the oversupplied capital element away from the necessary cost of operating the service. It’s like a good bank/bad bank with Chinese yards operating as central bank. Cash costs are covered by the profitable service companies while asset owners hope The Money Illusion and the miracle of demand saves them. The Money Illusion is just that and this demand chart shows why demand is unlikely to help DSV owners:

Global E&P Capex

Near stagnant shallow water Capex for years meaning an oversupplied maintenance market.

One of the reasons new DSVs struggle to trade at a premium to old DSVs is the lack of functional benefits from a new vessel for the customer. 30 years ago people were diving at 300m below sea level and we still are now (in fact I have been told Tehcnip and Subsea 7 now call all dives over 200m “special” and need higher approval). Sure the newer vessels may use a bit less fuel on DP, carry a few more people, have a better gym etc, but for the customer, especially in a place like Iran, no one actually cares. The fact is an old banger can do pretty much what a new build Chinese all-singing all dancing DSV can do.

In brutal terms going long on a $150m doesn’t command any pricing premium, or only marginally so, it may just help you secure the work. When people are operating at cash breakeven only that may be a blessing for the company who operates the vessel but that extra capacity is curse for the industry.

Not only are customers cheap in every region outside the North Sea, they can afford to be! Environmental conditions are far more benign which means for a lot of jobs you can use a PSV with a modular system or one of the many $50m build cost Asian focused DSVs… they might not be quite as “productive” or “efficient” as a North Sea class but the owner just reduces the day-rate to the customer to reflect this.

What makes this important is this: for as long as UDS can convince (yard) shipowners that they are the best people to manage unpaid for DSVs, or their own, then they should make money. For the yards and DSV industry it’s a difference story…

In normal times people like to make a return on their capital. The reason you invest is obviously because you want to be paid back. Economists have a really easy way to calculate this: economic profit (which is completely different to accounting profit) and is derived by simply allowing for the cost of the capital in the investment. In crude terms SS7’s cost of capital today is ~12%. Assume a new DSV, with no backlog, all equity financed (a realistic assumption as what bank would lend on this (ignore fleet loans)?). So the “market capital cost” per annum of a new DSV for a recognised industrial player is c. $18m per annum ($150m * 12%); at 270 days utilisation the vessel needs to make $67k per working day just to pay the capital provider. No Opex, no divers, no maintenance, just finance. No one in Iran gets more than $85-90 in total, and it may well be substantially less.

Now UDS don’t need to pay that because the yard unfortunately had a customer credit event and got left with a vessel. Mermaid wrote of over $20m so the yard is probably exposed for $130m, and it maybe more because rumours abound of a fisaco with the dive system which will have been expensive to fix. But there is no doubt UDS have added great value to the yard by providing them with the technical expertise to finish this vessel. UDS just needs to cover their costs and the yard can get something which they probably feel is better than nothing, but it doesn’t mean this work is “economic”. The subsidy here is being paid for by the yard’s equity holders, effectively the Chinese taxpayer, who are involved in an extremely expensive job creation scheme… but times were different… who am I to criticise anyone for going long on OSVs in 2013?

The UDS new-builds are a somewhat different story. If a private equity firm were financing a new build DSV their cost of capital would be ~30% (in this environment probably a lot higher); so at 270 days utilisation that would be c. $167k per working day as a cost of capital. That is after paying for divers, maintenance, and OpEx, a market level of return commensurate to the level of risk of starting a new build DSV company would require that just for the vessels, ignore the working capital of the company. Each new build DSV needs to generate $167k per working day to make an economic profit for the investors. Rates have never been that high in the region, which maybe why economics is a “dismal science“, but it also explains why no one has built $100m+ DSVs for Asia: no one will pay for it!

Rates have been higher in the North Sea but never anything like that consistently and cannot realistically be expected to grow to even half that economic level.  There is also simply no realistic chance of any of the UDS vessels being a core part of the North Sea fleet where rates could traditionally support a capital cost appropriate to the investment in such a specialised asset. SS7 and Technip simply do not procure 25 year assets by chartering off companies like UDS, and frankly they could get a better or cheaper product in Korea or the Netherlands if they built now.  And even if the Chinese built the most amazing DSVs ever (a big if) no one in the North Sea would believe it and pay for it. Given the high profile problems of chartering North Sea DSVs it simply isn’t credible to have any scenario where any of these DSVs come North of the Mediterranean.

I haven’t even dealt with the most important problem: There isn’t enough work in the North Sea. People relax constraints in the region when they need to but at the moment they don’t. The UDS vessels when completed will not be North Sea tonnage… and the only market I think it’s harder to sell a DSV into than Iran is China…

The UDS startegy seems pretty clear at this point: to try and flag the vessels locally and take advantage of local cabotage regulations (like OSS did in Indonesia with the Crest Odyssey) to ensure some local regulatory support for utilisation. The problem with this strategy seems to be it doesn’t have a meaningful impact on day rates. Asian markets with strong flag state rules have never paid top dollar before and it is hard to see these vessels changing the situation. On a boring technical note it is normally impossible to get a mortgage over the vessel as arresting it can be difficult. It’s probably worth a punt for utilisation but it isn’t going to change the profitability of this and makes the capital commitment enduring for anything other than a token price.

I think UDS has great business sense don’t get me wrong. Owe the bank $1m and you are in trouble… owe the bank $100m and they are in trouble. UDS looks set to owe yard c. $450-600m, depending on how many vessels they take delivery of. UDS has great business sense because the yards have a problem way bigger than any of the shareholders in UDS and in an economic sense the yards are never going to make money from this.

All of which brings me to Jean-Baptiste Say, who in 1802 ennuciated a theory that dominated economics for over 120 years. Say’s law was actually the macroeconomy but that wasn’t invented until Keynes. Say looked at the incredible industrial development of the early 19th century cotton industy and thought the economy as a whole must work like that. Without people building something there would be nothing to sell, and therefore there could be no recessions. To anyone working in oil services Say’s further writings looks close prophetic:

Sales cannot be said to be dull because money is scarce, but because other products are so. … To use a more hackneyed phrase, people have bought less, because they have made less profit.

But this was a world away from when Keynes wrote The General Theory at the start of The Great Depression. Until this time Say’s law was the dominant theory of what Keynes later termed “aggregate demand”. We now know that at a macroeconomic level there can be a chronic demand problem, it took WWII for the world economy to recover from The Great Depression, and it is impossible to overstate the importance of the new view in 1936 when Keynes published The General Theory which intellectually overturned Say’s law. Say had confused what happens with companies for what happens to the economy as a whole.

I am reminded of UDS when I think of Say’s law: they might make money out of this, but whether this is economically rational for the whole economy is another story.  Say was wrong in micro and macroeconomics: supply doesn’t create demand.

All the UDS vessels will do is create extra capacity from sellers who are forced to accept lower than opex from anyone with an external financing constraint. The UDS vessels, and the Magic Orient, and the Keppel Everest, and the Vard 801, and the Toisa new build etc will simply wipe out the equity slowly of all those who stay at the table playing poker.

Sooner or later the funders of this enormous gamble will come out. Unwittingly China Yard Inc. is clearly going to be a dominant equity holder, they might think they have a fixed obligation at this point, but just as Keppel and others are finding out: at this level of leverage debt quickly becomes equity. For existing DSV operators in markets where these vessels turn up they are nothing short of an economic disaster. 2018 is going to be another poor year to be long DSV capacity.

DSV Lichtenstein to Asia…Show me the money?

UDS announced today that the DSV Lichtenstein has floated and is off to Asia. No huge surprises there.

Just to be clear the vessel is the old Mermaid Ausana. UDS haven’t commissioned or paid for this (the IMO number still with the yard), the vessel is available because Mermaid and the yard cut a deal. That is: a major and experienced Asian DSV operator didn’t think they could get work for the vessel and therefore wrote off millions to extract itself from the contract. Now admittedly the vessel was ordered at close to the market peak, so it is probably true that at old pricing levels it would have been hard to get an economic return, but the yard paid those costs as well proportionately.

To be honest I don’t blame UDS, nobody at the moment needs to buy a DSV, you can charter one for substantially less than the economic cost of owning one. Which makes it all the more suprising that UDS seem committed to three more DSVs they have ordered as the keel laying ceremony for the DSV Andy Warhol was also revealed today.

There is no reason to believe that UDS haven’t cut some clever, risk-based, charter with the yard over Ausana/Lichtenstein (just as Bibby appear to have done with the Volstad (bondholder) owned Bibby Topaz). The yard wants some money from an unsellable asset and UDS have the skills to deliver the vessel and potentially find some work for it. V-Ships are clearly being paid and a load of kit to equip the vessel from the bell out appears to be arriving. So far so good.

But where is the vessel going to work? No won work has been announced? The market is so competitive at the moment that no one is sole awarding work? How much work if any have UDS got? How long can their working capital last while ostensibly having commitments to USD 500-700m in CapEx for the two SALT design DSVs and the Andy Warhol (also an MT design)? The sort of capital needed to fund that sort of expenditure is institutional and yet no one seems to have heard anything about a fundraising? It would be major news one would have thought because its the ultimate contrarian strategy: DSVs are the most overbuilt tonnage in the world with some of the highest relative running costs.

Who is taking the risk with this deal? Are they yard putting in for OpEx? The Nor vessels claim that it costs USD 370k per vessel per month on marine crew and USD 109k for the dive system (which seems outrageous to be honest for the dive system and must include spares etc), and this vessel is a near identical spec. That doesn’t include commissioning costs, wet bell run trials, etc. These are likely to be in the low millions for a new DSV. Much will go to the yard account I suspect (if not originally contractually simply as a reality now), but I would be stunned if they wrote a blank cheque for vessel operations? Even in this market you should only take risk you can control…

Kruez don’t want to take delivery of their new build DSV and rumour has it UDS have been trying to strike a deal with the yard there as well. A DSV consolidator at the right price has something going for it, but only with investors committed to extremely high OpEx until the market recovers – whenever that may be. The pool of institutions large enough, and committed enough, to such a play is limited to say the least. I would have thought getting take-out financing for the final yard payments would be near impossible without a long-term charter, and they don’t exist at the moment?

Just at a time when Toisa went bankrupt as one of the largest owners of DSV tonnage, outside SS7 and Technip, UDS has arrived on the scene. The scale of the committed funds means sooner or later details are going to come out about this. There are only two alternatives: either there are some large institutional investors who have made an extraordinary counter-cyclical investment, at peak build prices nearly; or, a vast amount of credit has been extended to a start-up with good technical skills and vision, but without a balance sheet appropriate for this degree of risk. Cash flows are always the hard financing constraint that cannot be hidden forever… I’ll put my impatience to one side because the final story is likely to be very interesting here.

Whaam… Lichtenstein meets the market

“I’m interested in portraying a sort of antisensibility that pervades society”

Roy Lichtenstein

Roy Lichtenstein was known for his themes on parody. I’m going to file that under irony. I’m also going to be honest here and ask the questions everyone in the industry is asking but no one is saying out loud:

  1. Where on earth (and I mean that literally) is the UDS Lichtenstein, and the other new builds, going?
  2. Who is funding this?

The newbuild DSV UDS Lichtenstein, if the build quality matches the specification, will be one of the best DSVs in the world. Maybe not as good as the Deep Explorer or Seven Kestrel, as these have been commissioned by organisations with a strong track record of complex vessel delivery, but certainly a fine vessel. And at DP 3, and other specs, the vessels are well suited to the North Sea market… er… apart from any sort of demand or market need for them that is.

In order for the North Sea market for DSVs to return to healthy days for offshore contractors the construction market needs to return, and actually its really a sub segment of that: the shallow water, small field development, with flexible flowlines. Technip (Apache II) and Subsea 7 (Seven Navica) have the rigid reel construction market all to themselves and this is traditionally 80% of the total construction market. As the market has softened they have taken the lions share of the work available and made rigid reel cost effective over shorter distances. Bibby and DOF are hurting in the DSV market because the smaller jobs, which require longer flexibles, and therefore more diver days, are simply not being done. The market has ample DSVs for IRM work and Subsea 7 and Technip continue to redefine their position in this space as IRM contractors (until the construction market comes back). The thesis, that I used to subscribe to as much as anyone and maybe more, that maintenance work would keep everyone at OPEX neutral levels, was quite simply, wrong.

Day rates in the North Sea are still only just above OPEX once the divers and project crews have been stripped out, although this is likely to be higher for the peak summer months. UDS could be arriving in 4-8 weeks but without any infrastructure or project crew. The ex-Harkand DSVs provide a rare natural experiment in economics of complete financial irrationality, having sat in Blyth for nearly a year with no work (and now trying to win 100 days in the UAE), there is no reason to believe UDS would fare any differently. In order to have any hope of work UDS would need companies like Ocean Installer to start winning large scale construction projects in the UKCS that need DSVs, and there is no sign of that happening, and even then would they subcontract that to a newcomer?

For the rest of the world the UDS new-build DSVs are over specified (and therefore over capitalised) to an extraordinary degree, and this would not be reflected in the day rates. The UDS Lichtenstein would compete against anything with a modular system or above. The exception is Canada, but there is a reason no one dedicates a DSV to the region, apart from cabotage regulations… there isn’t much work. Certainly not enough to keep an investor interested or a bank happy… even a German shipping bank.

In short: DSVs globally are some of the most overbuilt offshore tonnage, that will rely on the ultimate bull-market scenario to come back to historically depreciated values. Relatively shallow water, capital and engineering intensive projects, with short production life, are some of the most economically unattractive ways of increasing oil and gas output at the moment. Yet these form the basis for a DSV recovery story… Especially now the domestic stability of the North Sea counts for little as the US ramps up production. Many of these developments were funded by raising capital on the London Aim, yet just £192m was raised for oil and gas companies in 2016 from this market, and most of that for exploration, and only two projects are currently sanctioned.

This is an industry that overbuilt DSV tonnage in a boom and the issue is that these assets last 25-30 years. The only economically rational adjustment here is one on pricing expectations for the assets unless there is a sudden, and dramatic, increase in demand.

Maybe the UDS investors are betting on a cyclical recovery with a scrapping of the old DSV fleet? The problem with this is the running costs. When Nor/Harkand did their USD 15m (“super senior”) capital raise  (nov 2017) they put the running costs per vessel at USD 370k per month (vessel) + USD 109k per moth (dive system) , and there is no reason to believe the UDS Lichtenstein will be any different. Incidentally, Nor listed their “low case” as no work for either vessel for the year ending Dec 2017, this would require USD 15.9m in funding, a situation that must seem ominously real now, and certainly more likely than their “base case” which had one vessel starting a charter at USD 15k per day in March.

Who is funding that sort of open ended commitment for UDS? In order to set up diving operations they face another quantum of costs for management systems, vessel audits, trial bell runs, business development, tendering etc. When people are making 60% operating margin on 350 days utilisation that seems logical, but at the moment the leading independent North Sea company, Bibby Offshore, looks set to report yet another serious loss on March 23, driven by poor utilisation and potentially a USD 15m write-off on EMAS.

I can find no details of the takeout financing from the yard or any other capital raising for UDS or the vessel. Rumours abound of Chinese money, but from who and on what terms? What is the strategic rationale here? Will UDS be another Toisa and just charter these vessels, or an integrated offshore contractor with a diving capability? Both are markets in chronic oversupply. UDS’ shareholders have sufficient personal wealth I believe to fund the working capital of one vessel, but not indefinitely. And more to the point: why would you? This is at a time when I believe the Tasik Subsea DSV financing to be in real trouble, and this has a contract with Fugro! Vard cannot give the Haldane away at a good (or any) price, and Mermaid have commenced operations with some good new Asian tonnage. I could go on…

Maybe I have missed something, as has everyone I have talked to. Maybe companies like Bibby, Technip, and Subsea 7, have been sitting around missing a large number of diving days that were there for the taking. I’d love to be wrong, But you need more than a degree of optimism when you start delivering USD 135m vessels: you need cash flow sooner or later. I really admire the optimism and verve to get these vessels built, but ultimately being a glass half-empty kind of guy I just really want some details?

Good luck UDS. If you can pull this off Roy Lichtenstein himself would be proud.