COLUMN | Cadeler stock price soars, Swire sells down to Sohmen-Pao [Offshore Accounts]

Further evidence of the growing speculative bubble in offshore wind came from Cadeler, the wind turbine installation company formerly known as Swire Blue Ocean, which listed on the Oslo Stock Exchange in November. Then, the shares were priced at NOK23.50 (US$2.76) per share. On Friday, they closed at NOK39.80 (US$4.68), a 70 per cent capital gain for shareholders in less than five months, despite the company announcing a miserable set of 2020 results, which you can read here. Wow!

Loss-making Cadeler’s got history

For every one of the last four years, Cadeler has lost money, despite increased activity in offshore windfarm installations in Northern Europe. In 2019, it lost just under €24 million (US$28.55 million), and in 2020, it lost €27 million (US$32.11 million). In both years, it consumed cash from operations.

The annual report makes it clear that there were liquidity issues with the business until Swire Pacific Offshore, its 100 per cent parent company at the time, “made a non-cash contribution of €200 million (US$237.8 million) of equity and provided an intercompany term loan of €49 million (US$58.2 million)” in September 2020.

These funds were used to acquire Cadeler’s two wind turbine installation vessels (WTIVs), now known as Wind Orca and Wind Osprey, (then Pacific Orca and Pacific Osprey) from Swire Pacific Offshore itself, “for a total consideration of US$290 million.”

The wind arms race will require big investment

That is half the price of the newbuild WTIVs units contracted by Eneti, the former Scorpio Bulkers, at Daewoo Shipbuilding and Marine Engineering, which we covered here, but Cadeler’s vessels are already nine years old. However, it seems that any profits Cadeler does make from operations in 2021 and 2022 will quickly be consumed in an arms race to stay relevant in a fast-changing and fiercely competitive market.

In December, Cadeler signed a contract with Houston-based NOV to replace the main crane on Wind Orca, and has negotiated an option to replace the one on Wind Osprey as well.

“The total sum of the contract for replacement of both cranes is US$102 million,” said Cadeler, “including decommissioning of the old cranes, as well as the design, manufacturing, and installation of the new cranes.”

The new crane will have a lifting capacity of 1,600 tonnes at a radius of 40 metres, with the main hook at a height of 159.7 metres above the main deck. This is a substantial upgrade of the vessel capacity today, which is 1,200 tonnes lifting capacity at a radius of 31 metres.

That order means NOV hoovers up all the cash raised by the company at the IPO (NOK883 million US$104 million).

X-class ambitions

But the bigger hit is the plan to invest in Cadeler’s new “X-class” WTIVs. These are “the only vessels in the world able to carry up to seven sets of +14MW turbines” and which may even be able to “transport five 20+MW turbines,” the company boasted.

Despite identifying that “the X-class would have industry leading lifting height and payload capabilities” and announcing the development of the project in September, no contract has been signed to build the first X-class yet. Instead, we were told “the Group is discussing a construction contract with reputable shipyards.”

It’s a relief to see that CEO Mikkel Gleerup skipped the disreputable shipyards in his newbuilding plans. Phew. But such high-capacity newbuilds in an overheated newbuild market for WTIVs will likely cost US$300 million apiece. Let’s brace ourselves for an aggressive expansion of the balance sheet.

ThreeX versus the X-class? Who has the X-Factor?

As wind turbines get bigger, there is increasing competition from new and different designs that may make the X-class dynamically positioned jackup WTIVs obsolete.

In February, there were reports of an order for the world’s biggest catamaran for offshore wind turbine installation at CMIC Raffles, from a little-known and seemingly website-less Dutch company based in Dordrecht called ThreeX. It is also known as Three Times from the graphic that accompanied the news report, but why not just write “XXX” and be done? The reports from the Oslo renewables press (here) stated that this catamaran will have a 7,500-tonne crane equipped to lift structures to a height above sea level of 178 metres for the auxiliary hoist and 160 metres for the main hoist.

ThreeX and Vuyk Engineering Rotterdam are said to have collaborated on the design. In March, Royal IHC announced it was selling Vuyk to Royal Doeksen (here). Vuyk has been contracted by Cadeler for the engineering works supporting the crane upgrade on the Wind Orca and is a recognised leader in windfarm crane engineering.

Catamarans coming into play as WTIVs

China Merchants Heavy Industry has already delivered one catamaran, OOS Serooskerke (here), to another Dutch owner, Overdulve Offshore Services, in 2020, with a sister unit OOS Walcheren, also fitted with a 4,400-tonne crane, expected to be delivered later this year. OOS Serooskerke has been reported in the industry press to be contracted by China Railway Major Bridge Engineering to work on windfarm installations offshore China, but this has not been confirmed by OOS.

Catamarans offer bigger clear deck than jackup WTIVs and longer-term may threaten the dominance of jackups like Wind Orca and Wind Osprey, and their rival units from Eneti, OHT and Fred Olsen Windcarrier.

Sell, sell

It’s increasingly evident that the future of the wind industry in five or ten years is less and less Swire Group’s concern.

At the end of last year Swire Pacific Offshore Holdings held 46.5 per cent of the total share capital in Cadeler, and BW Wind Services held 20.3 per cent. On April 6, the company notified the Oslo bourse (here) that Swire planned to sell down some of its shares to BW. It seems likely that BW will step its stake up to 33 per cent.

As a result, the ironically named Chairman of Cadeler, Richard Sell, will be stepping down from the board and will be replaced by Andreas Sohmen-Pao of BW as the new chairman of Cadeler after a vote at the Annual General Meeting of the company on April 29.

However, Swire can’t sell its stake below 25 per cent and BW can’t increase its stake above 33 per cent without triggering the change of control provisions in the company’s €75 million (US$89.2 million) of bank debt. Expect to see BW stepping up to the plate later this year to release Cadeler and Swire from this restriction.

Bonuses all round

Unfortunately, there was lots of evidence of poor management in Cadeler, if you cared to read the small print of the report. The executive leadership team filled their boots with large bonuses of up to eight months of salary, for having stuck around for the IPO of the company, even though the business remained loss-making. No surprise there.

The key managers have also managed to award themselves further bonuses of up to four months of salary if they stick around until the end of this year. You will recall that McDermott was a great fan of “still breathing” bonuses for its hard-working management team, which led the company to bankruptcy (see here).

Oh, how we miss McDermott being a listed company, making disclosure of all its management shenanigans in the all small print! But Cadeler does a good line in shenanigans too, as the report makes clear.

Unlawful loans to managers

Despite receiving such largesse of bonuses, for some reason Cadeler also felt the need to loan four managers amounts ranging from €1,000 (US$1,189) to €6,000 (US$7,136) in October 2020. It was then discovered in February 2021 that such loans were “in violation with section 210 of the Danish Companies Act.” And so, they had to be repaid in full, with punitive interest “of 10 per cent per annum as specified by the Danish Companies Act, Section 215.”

Not being able to comply with basic Danish corporate law is a sign of weak governance and raises the question of who approved the unlawful loans with Cadeler, and who is responsible for compliance in the company. With the executive management being paid hundreds of thousands of dollars each, why did they need such loans, anyway? They are not exactly badly paid from the evidence of the remuneration report. What were the loans for? The timing might suggest some connection to the IPO a month later. Were the loans to help senior managers buy shares in the company and support the stock price? Who knows?

Gender equality and token appointments of women

The report also contained some jarring non-sequiturs.  Page 16 states “Cadeler had set a goal of having at least one woman included in the Board of Directors before 2020. This target was achieved in 2020, as Connie Hedegaard was appointed as a member of the Board of Directors.”

As a reminder to Cadeler’s board, if you set a target of something happening before a certain date (“before 2020”), you haven’t achieved the target if it happens later (“in 2020”). You simply missed the target. End of story.

To really highlight to readers that the next woman to advance to the board of the company will be a token appointment made simply to tick a box, and probably trigger a diversity award for the CEO, the report continues “Cadeler have set a goal to increase the number of women on the board to two by the end of 2022.”

Higher headcount and higher costs

Perhaps the company might be better focused on cost control? The average number of staff in the company’s offices in Denmark increased from 33 in 2019 at 42 at the end of 2020, even though the company’s fleet and operations remained completely unchanged. The company’s administrative costs increased from €7.4 million (US$8.8 million) in 2019 to €9.6 million (US$11.4 million) in 2020, a 30 per cent increase.

Is it time for Cadeler to consider opening back-office operations in a lower cost jurisdiction than Denmark? I would say so. Instead, it opened a second office in Denmark.

Happy at Work Committee

Scandinavian efforts at social justice and social democracy in action can verge on parody, and sometimes resemble the worst excesses of the 1970s Soviet Union, without the redeeming Olympic triumphs, the cosmonauts, and world class vodka. So too, in Cadeler. Privileged white women with MBAs are prioritised for promotion over disadvantaged men from religious or ethnic minorities or difficult social backgrounds in order to hit mandatory gender-equality quotas, as we have seen. Cadeler claims to have a workforce of 17 nationalities, but the senior management team, if not the board, appear to be all Danish citizens from their biographies.

I have made several criticisms of Cadeler’s management here. I do hope that I have not upset any employees. The company’s Happy at Work Committee would not be, er, happy.

In the words of the company, the Happy at Work Committee “empowers employees to have direct influence on the workplace environment. All departments within Cadeler have at least one representative in the committee which is a forum for suggesting new initiatives to improve the social environment at the workplace and raise any concerns on behalf of their colleagues. Activities organised in the past include yoga, crossfit, and ‘lunch and learn’ – a lunchtime meeting focused on knowledge sharing.”

No further sarcastic comment is needed on any company with a Happy at Work committee, I fear.

Put the boot in (into a shoe cover)

Finally, there is the pressing issue of why Cadeler can’t provide space on its jackup WTIVS for a proper changing room with decent-sized lockers, where the crew can change into indoor footwear without the need for boot covers of any kind.

The company’s Sustainable Development report claims that in 2020 Cadeler used two and a half tons of plastic shoe covers on its two vessels, a figure many of us would find hard to believe:

“In 2020, our onboard crews were going through an average of a few pairs of disposable plastic shoe covers every day, resulting in the use of over 250,000 shoe covers, producing approximately 2,500 kilograms of plastic waste during the course of the year. In 2021, we are switching to reusable shoe covers onboard, reducing consumption per seafarer from a few pairs every day to a few pairs every month. Going forward, Cadeler expects to use approximately 5,100 pairs of reusable shoe covers per year, avoiding 2,450 kilograms of plastic waste.”

Heard of socks and indoor shoes, anyone?

Conclusion

The surge in the Cadeler share price is great news for Swire as a seller, and should help Cadeler raise additional funds for the equity required for the X-class WTIVs, and probably for further stocks of reusable boot covers as well, and more yoga classes to keep the head office staff happy at work.

The soaring share price will also encourage further new entrants and competitors to list and raise equity, however. There’s an army of investment bankers bearing slideshows showing rising demand for WTIVs, high charter rates, and a supply crunch. And Norwegians are now firmly engaged with the opportunities to speculate in windfarm vessels, along with the mysterious ThreeX and OOS.

Offshore windfarms are on a roll. Whether Cadeler will generate any cash returns or dividends for its shareholders in the next decade is not clear. There’s a rush to build to take advantage of the soaring demand for turbine installations, and the company is fighting to maintain its relevance as DEME, Boskalis, Van Oord, and Jan de Nul sweep into positions of industry leadership with more diversified fleets, stronger balance sheets, and greater geographical reach.

Under the new leadership of BW and the Sohmen-Pao family, Cadeler will need to spend, spend, spend just to keep up.

I suspect that the Swire Group is relieved to have offloaded two thirds of the cash-hungry company to external investors in the well-timed IPO. Nobody ever lost money taking a profit. Can those who have jumped onboard the bandwagon profit, however?

Background Reading

More information on the Happy at Work Committee in Cadeler and its bizarre foot cover problem can be found in the company’s Sustainable Development report 2020 here.

The Happy at Work committee bears unhappy echoes of the Strength through Joy movement to those with a sense of North European history. More information on the Strength on Joy movement is here

Maersk Drilling’s 2020 sustainability report is here. There is no mention of plastic shoe cover consumption in this report, but, like Cadeler, Maersk Drilling has clear targets for the number of women in its senior management team, even though 98 per cent of its offshore staff are male. Maersk Drilling says it has set targets for female onshore leadership levels at 30 per cent across leadership levels, 25 per cent for senior leaders, and 20 per cent for the Executive Leadership Team by end-year 2023. At what point does this demographic disjunct between the offshore workforce and the onshore management have an impact on the business? Are such quotas even fair?

That heaven on earth, the UAE, has created a Ministry of Happiness – here – so Cadeler’s staff are in good company with this idea. Unfortunately, the ministry has now been merged into Community Development, but the former minister is still a member of the board of trustees of the oxymoronic Museum of the Future (here).

DNV’s joint industry project to consider the limitations of jack-ups in the WTIV sector is here.