COLUMN | Four restructurings: Saipem saved, DOF goes to the line, Havila un-impairs and Siem surges, plus Maersk enters the wind turbine installation business! [Offshore Accounts]

Photo: Saipem

Whilst the Malaysian government dithers over how to rescue its domestic oilfield services powerhouse Sapura Energy after it reported a cash crunch and a loss of US$2.1 billion last year (here), the Italian government has acted decisively to muster its state-owned companies to save embattled Milan-headquartered offshore contractor Saipem.

Saipem is the biggest value and highest profile restructuring of 2022. But there are others, and we shall look at what’s happening in Norway, as well as update you on the biggest order in offshore wind so far this this year.

Saipem’s shock US$2.6 billion loss

Last Friday, Saipem announced its 2021 results (here). The results were horrible, with the company reporting a net loss of €2.382 billion (US$2.6 billion), even worse than the loss of €1.136 billion (US$1.243 billion) reported in 2020.

This was not unexpected – Saipem had shocked the market in February by announcing that the botched execution of a North Sea wind farm installation project and seven other projects would lead to an exceptional loss of US$1.1 billion on those projects alone, with the majority of the unforeseen losses coming from offshore wind projects.

At that time, Saipem had announced that the magnitude of the losses was such that the company would need an emergency recapitalisation from its shareholders, in line with Italian corporate regulations. The shares plunged 46 per cent in less than two months.

Got Eni money?

However, amongst all the red ink in the results on Friday came news that the Italian government was acting quickly to support the company. Together, Italian state-controlled energy group Eni, which is one of Saipem’s biggest customers, and Italian state investment house CDP, own 43 per cent of the shares in Saipem. They have agreed to a speedy rescue of the company ahead of a bond repayment due by Saipem next month.

Eni and CDP will make a contribution of €645 million (US$706 million) of capital to Saipem as an advance on a future cash call by the company on its shareholders. At the same time, a consortium of banks will provide €855 million (US$935 million) as a bridging loan to the company to prevent Saipem falling into a catastrophic cash crunch of the sort that has enveloped Sapura Energy in the last few months. Eni will guarantee the bridging loan – it is the largest single shareholder in the company, and owns just over 30 per cent of Saipem, according to Reuters (here).

Eni is also the charterer of five of Saipem’s six deepwater drilling units, plus the high specification jackup Pioneer in Mexico, whilst Eni’s Egyptian affiliate Petrobel is also chartering the Saipem jackup Perro Negro 4. Eni recently completed a drilling campaign off Mozambique with the drillship Saipem 12000 as well as a dry exploration well off Kenya, and Saipem has been central to Eni’s upstream drilling success.

Saipem expects to refinance the bridging loan with a new one provided by the same banks, but in the medium term the facility would be guaranteed by SACE, the Italian export credit agency, through the government-backed Guaranzia Italia programme, rather than being fully backed by Eni.

Everywhere you look, the helping hand of the Italian state is rallying to support Saipem!

Saipem’s contribution to the sale of the century

For its part, the company has committed to raising additional cash by selling off assets, including its onshore drilling fleet of 66 active land drilling rigs, plus another 17 land rigs that are laid up and stacked in Venezuela. Saipem describes this sale strategy as “value unlocking” from the onshore drilling unit. With rigs working in Saudi Arabia, Morocco and Kazakhstan, we wondered whether the business might be attractive to one of the many Saudi Arabian wealth funds with an interest in oilfield services. ADES, controlled by Riyadh’s Public Investment Fund, already has a large fleet of land rigs, which would be a good fit with Saipem’s units. Alternatively, Helmerich and Payne or Nabors might also be interested in increasing their international exposure.

Saipem also plans to “monetise” identified fixed assets, although it didn’t state which units it had in mind, and it also plans margin improvement from selected contract re-negotiations with clients. Renegotiating contracts because you are losing money is always a bold call, but if the client in question is Eni, that may be possible. It will also scale back its offshore wind ambitions to focus on “lower-risk” projects in the short term.

Finally, there will be grinding cost reductions. Saipem will be rationalising its construction yards and ruthlessly examining its international offices. The quid pro quo for being bailed out by the Italian state is the need to protect jobs in Milan, in particular. Saipem targets US$165 million in savings in 2022 compared to 2021 and has a savings target of US$330 million in 2024 against the baseline.

The net result is that whilst Saipem expects to continue to bleed free cash in 2022, it hopes to be generating over US$800 million of free cash flow in 2025, and that by 2025, it will have close to no debt (It uses “towards zero,” a suitably vague wording.), having paid down its bridging loans, and other outstanding bonds.

So, the message to investors out of Milan is to be patient, the good times are just ahead, with Saipem anticipating surging demand for both offshore engineering and construction projects, as well as offshore drilling and offshore wind.

With an extraordinary general meeting scheduled in May, and a rights issue to raise more capital by the end of the year, investors don’t have much choice. Eni and the Italian government have made it clear that Saipem is not going to fail. A strong parent company can shield a company against the worst of the market cycle, and the worst adverse shocks fate can throw, allowing them to reap upside when the market finally turns.

DOF on the edge

The restructuring of DOF in Norway has been one of the industry’s longest and most painful. The problems are familiar and predictable. At the top of the cycle, the company binged on debt and embarked on an impressive newbuilding programme both in deepwater anchor handlers and platform supply vessels (PSV), and in subsea units.

Photo: DOF

At the end of 2021, the total DOF fleet included 59 vessels (of which eight were under management or hired in), being fifteen AHTSs, fourteen PSVs and thirty subsea vessels. Two owned vessels are in lay-up, and the company agreed to sell two vessels – Geosund, which was delivered to its new owners in January 2022, and Skandi Neptune, which has a planned delivery in the third quarter of this year. Skandi Neptune is an MT 6016 design ROV construction support vessel, equipped with a heavy-duty active heave compensated, 250-tonne crane, along with two 3,000-metre rated WROVs.

The DOF fleet has gradually shrunk, with another five vessels sold in 2021. Around 75 per cent of the company’s revenue comes from the subsea fleet.

DOF has bluntly warned investors that its “financial position is not sustainable, and a long-term financial solution is necessary to continue as going concern.”

DOF has been in a standstill with its lenders for nearly two years, paying interest only on some of its debts, and not repaying any capital. It had requested and obtained approval for a new bond debt structure, as part of a comprehensive refinancing in December 2019. We wrote (here) at the time that:

“DOF is torn between a dominant shareholder (Helge Møgster) who doesn’t have deep enough pockets to refinance the company properly, and banks and bondholders, who don’t want the chaos of a disorderly collapse. DOF proposed on December 5 that it would raise new equity in January 2020 with expected gross proceeds of between NOK200 million and NOK500 million (US$22 million to US$55 million). You don’t need a PhD in advanced finance to wonder whether such a small equity raising is sufficient for a company with debts which run to over NOK24 billion (US$2.7 billion dollars).”

The collapse in the oil price in 2020 led the abrupt suspension of the efforts to raise new capital. There have been some changes in the two years since we wrote that, but not significant ones. The latest quarterly report (here) shows that the main shareholder, Møgster Offshore, now controls 31.6 per cent of the company. Some bonds have been converted to equity and DOF’s main secured debt is in US Dollars, so whilst its total interest-bearing debt has fallen to NOK18.6 billion (US$2.1 billion), some of the drop is due to the stronger Norwegian currency.

At the time of writing, once again DOF’s creditors have rolled over the standstill for another month, to the end of March. “There are certain issues pending,” the company warned, “hence the outcome of the restructuring process is still uncertain.”

Clearly, the question of the US$2.1 billion of debt remains unresolved. It is much  too much for the company to service and pay down, even in an improved market. Now the market is rising, however, and DOF is generating free cash flow, the situation for the lenders is starting to look better. But rolling over the standstill on a month-by-month basis is not sustainable.

Expect a debt for equity swap to happen shortly, and for Møgster Offshore to be diluted. But not to zero.

Havila writes back assets

Photo: Havila Shipping

After the dismal decision of Swire Pacific to further impair the value of Swire Pacific Offshore to the tune of US$205 million and to sell the business for less than half the broker’s appraised value (here), Havila Shipping provided further evidence that this was a dumb decision (here).

Havila reported a robust profit of NOK237 million (US$27.5 million) for the fourth quarter of 2021, almost entirely because it wrote back previous impairments on the value of its fleet, assessing the ships to be worth NOK260 million (US$30 million) more than it had previously believed. Along with every other player in the industry, Swire included, Havila had been aggressively marking down the value of its offshore vessels, including by NOK1 billion (US$116 million) in 2020. But by the end of 2021 the market had turned, asset prices were rising, and the company could “un-impair” some of the value of its fleet, adding US$30 million to its bottom line.

Now we need a sustained recovery in 2022 to see whether this is a one-off, or a long-term trend. My bet is that it is, and Swire’s shareholders will be left crying into their dim sum.

Siem’s surge

The evidence from Norwegian compatriot Siem Offshore is that Havila’s experience is by no means unique. Siem’s fourth quarter results (here) were also very positive, with the company reporting a profit of US$8 million for the quarter, (compared to a US$41 million loss for the same period in 2020), and that, “no impairments were identified in fiscal year 2021.”

Siem still owes over US$624 million, but reduced its debt load by US$269 million in its 2020 restructuring, and none of its debt will mature till the end of 2024, so it has a good “runway” to manage its capital requirements. In 2021, Siem’s fleet shrank from 31 vessels to 28 ships, but the company has joined compatriots Eidesvik, Island Offshore and Solstad in investing heavily in hybrid technology, now that it has the resources to do so.

In late 2021, Siem announced (here) that the dual fuel LNG PSV Siem Thiima is being upgraded by Kongsberg Maritime with a hybrid battery package, including shore power facilities. Similarly, the dual fuel LNG PSV Siem Pride will be fitted with a hybrid battery package, and one other construction vessel will also be fitted with a Vard Electro hybrid package. Siem Symphony, the third LNG-powered PSV, was upgraded earlier in 2021 and Siem now boasts that these ships are each fitted with a “tribrid propulsion setup.” That’s a nice new word to drop into conversation.

“The increase in offshore activities and demand for offshore vessels that we have seen lately is positive, and gives hope that the market will recover faster than earlier expected,” Siem chairman Kristian Siem wrote in his report to shareholders.

Maersk joins the wind farm stampede

We have already observed how there is a frenzy of investment in wind turbine installation vessels (WTIVs) as demand for offshore turbine installation surges. Some of the hottest names in shipping have been at the forefront of the investment trend, with the Lauro family converting Scorpio Bulkers into Eneti, a sexy, pureplay WTIV company, and the Swire family joining forces with the Sohmen-Paos to list Cadeler on the public market, and raise capital to order two more new WTIVs for Cadeler in China, and to upgrade the cranes on the company’s two existing WTIVs.

Now, no lesser figure than Maersk Supply has joined the fun. For most of 2021, Sembcorp Marine of Singapore was in the news for all the wrong reasons – endless deferred payments from its drilling rig customer Borr Drilling, a huge cash call from its Singaporean state-backed shareholders as it staved off a liquidity crunch, and a slow-moving attempt to merge with Keppel’s fabrication business, which remains unresolved.

Then, last week, Sembcorp Marine announced (here) sensational news. It had won its first ever contract to build a WTIV, with delivery slated for 2025. But the company was silent on whom the buyer was. This sent the industry press into a frenzy of speculation.

Finally, yesterday, March 27, Energy Facts broke the news we had all been waiting for… claiming that Maersk had confirmed that it was indeed the buyer who had placed the order for the WTIV (here).

Strategic consistency

There is now a kind of consistency developing around Maersk Supply’s offshore strategy. Maersk has just sold its drilling rig fleet to Noble Corporation, and sold Maersk Oil to TotalEnergies in 2017.

Maersk Supply is a major investor in subsea minerals producer The Metals Company – earning sweat equity chartering anchor handlers in the Pacific to Gerry Barron’s rollercoaster venture. Maersk Supply has also developed an innovative electric charging buoy that will enable ships to charge their hybrid batteries offshore directly in the wind farm, or using shore power at the anchorage, called Stillstrom. Stillstrom boasts that its aims to “remove” 5.5 million tonnes of carbon dioxide from the atmosphere in the next five years. We think they mean, “prevent the emission of,” but let’s see.

Now the company seems to be joining the race to own and operate WTIVs, adding a third leg to its renewables and electrification agenda. We have long speculated that the WTIV market is ripe for consolidation. Maersk’s entry provides a sixth player with deep pockets and green ambitions on top of the Big Four Low Countries players and Subsea 7.

If Energy Facts is correct, and Maersk is entering this market, I would expect there to be a move on Cadeler in the next two years, just before the Maersk unit being built at Sembcorp Marine enters service.

Anyone for a cup of fat-zapping, diet tea with a sexy influencer to celebrate (here)?

Background Reading

Saipem’s strategic update and results presentation is here.

For comparative purposes with the other Norwegian players, Olympic Subsea’s fourth quarter report is here.

Stillstrom’s website and technical information are here.

We too were surprised that Gerrard Barron is now styling himself as Gerry, but it’s here in plain sight in the company’s results transcript from last Friday. The key result to note that that The Metals Company had a cash balance of US$85 million as of the end of December, which it claimed “remains sufficient to fund operations into the third quarter of 2023.”

Hieronymus Bosch

This anonymous commentator is our insider in the world of offshore oil and gas operations. With decades in the business and a raft of contacts, this is the go-to column for the behind-the-scenes wheelings and dealings of the volatile offshore market.