One of the first pieces I wrote for Baird's in early 2015 was titled Winter is Coming, warning of the imminent implosion of the offshore market, of bankruptcies and redundancies, and industry wide recession.
And thus, it came to pass. Today, the entire industry huddles immiserated and shell-shocked, with talk of recovery put off until next year (according to Borr Drilling’s very optimistic investor presentation) or the year after, according to most shipbrokers, or the year after that, according to the grey-haired industry veterans who understand the capital spending cycle better than junior investment bank analysts.
Self-interested entrepreneurs like Shel Hutton at Ultra Deep Solutions may be proclaiming the good times will soon be back, but the ongoing cycle of industry failures, fixtures at cash flow break even rates, and financial restructurings suggests that this is purely wishful thinking.
Many captains and officers on PSVs and AHTS are paid half what they were in 2014, lots of offshore workers have taken much lower paid work ashore to survive, like journalism, and perks like business class flights have disappeared for all but the C-suite at even the biggest companies, rather than being used to entice roustabouts and DP officers to work on drill ships in Angola.
A quick review of the broker Fearnley Offshore’s data from the industry recession of the 1980s suggests solid recovery probably won’t happen until 2024, but don’t let that spoil your morning coffee in the Premier Inn, or whichever two star your employer insists you now stay.
“The seasonal downturn is going to have a nasty impact on some of the more fragile players”
As the leaves turn brown across the northern hemisphere, the next six months are going to be even worse… Why? Seasonal factors and structural factors. The North Sea market goes quiet in winter. Construction work dries up in the offshore sector, as does decommissioning, which Maersk Supply Services has been touting as an offshore industry panacea, and critically, wind farm installation activity also grinds to a halt. In the last few years, both wind farm installation and decommissioning have absorbed a lot of high end North Sea tonnage, which would otherwise have been idle.
The seasonal downturn is going to have a nasty impact on some of the more fragile players, especially those with bad strategies. Swire Seabed decided to do a huge favour to Norwegian compatriot Siem Offshore by committing to bareboating the construction vessel Siem Stingray for two years from early this year, despite the fact that it had no firm work for the vessel, and that two of the three existing vessels in the Swire Seabed fleet were due off contract this year.
And thus, it came to pass. Now that Swire Pacific Offshore has unexpectedly changed its CEO for the second time in three years, with the departure of Ron Mathison, and is onto its fourth CFO in five years, and has wracked up cumulative losses in the downturn approaching two billion United States dollars, you might expect to see some changes there, when the chill of winter idleness bites.
Yes, that was cumulative losses of nearly two US billion with a “b”, an astounding fact that none of the industry press appeared to pick up on in August when it was announced. How long can the parent pick up the tab for a chronically under-performing subsidiary, which admitted it was still suffering negative cash flow in its first half 2018 financial report in Hong Kong, and which is seemingly plagued by accidents and operational misfortunes, as the recent high-profile crane incident in the Netherlands on one of its wind farm installation vessels, which injured four, demonstrates?
But at least Swire has a parent company with a market capitalisation in the tens of billions to sustain it. The surreal situation at Nordic American Offshore (NAO) might be a cause for further scrutiny. Its most recent financial report had more red lights flashing than the “entertainment district” in Bangkok. Claiming to be surprised and disappointed, the company reported that “the reactivation of two of our three laid-up vessels proved more costly than anticipated,” as everyone in the industry has always expected to be the case.
A quick review of NAO’s balance sheet suggests it is distinctly more Nordic (in the vein of Solstad Farstad) than American, as Jeremy Punnett has pointed out. The company has ten Norwegian-built PSVs, which it valued on its books at US$387 million at the end of 2017, when the company also had debt of US$137 million.
“This winter, cash will be king, again”
In what universe is a 4,000-tonne deadweight, DP2 PSV worth over US$30 million? Even with an X-bow and the Ulstein seal of build quality? How have the directors and auditors managed to look at the rest of the industry, and at recent sale and purchase transactions, and concluded that a massive write down of NAO assets is not needed?
Because NAO’s visionary management anticipate day rates of US$19,907 and 88 per cent utilisation from January 2021 onwards for every vessel in perpetuity, according to their annual report, which they claim is sufficient not to have to impair balance sheet valuation of the fleet.
Chartering coverage remains dismal for NAO. The spring spurt in the North Sea was not enough to make the company profitable, or cash flow positive, so how will it make it over the coming winter? NAO reported in August, “we have during the last few weeks entered into term contracts for four of our nine vessels ranging from two to five months, securing business for these vessels for the remainder of the present quarter and well into 4Q18”.
Most impartial observers would not describe a two-month contract as is any way being “term” and “well into 4Q18” will likely mean that the ships will be idle by the time you read this piece. Results for NAO for the second quarter 2018 revealed a net operating loss of US$7.9 million, coming on top of a net operating loss of US$8.3 million for the first quarter (GAAP measure). Expect worse over winter.
Watch NAO and if you are a shareholder, be braced for dilution or a cash call or both. This winter, cash will be king, again, and those that run out will have some painful reckonings, whether Nordic or American, or both.
The good news? The collapse of the Turkish lira by 40 per cent this year means scrapping old rigs and boats at Aliaga will be more attractive for the breakers than ever. So, do everyone a favour, take advantage of the Erdogan’s economic incompetence, and send those laid up hulks to the breakers’ yards of the Aegean.