COLUMN | Surprise, surprise! Saipem, Borr Drilling, The Metals Company, Impossible Mining and Olympic [Offshore Accounts]

Last week was a rollercoaster week for the offshore market. The North Sea spot market continued to sizzle, with Tidewater fixing the 235-tonne bollard pull anchor handler Pacific Discovery for a rig move of the jackup Valaris Norway for over US$100,000 whilst Island Offshore fixed its AHTS Island Vanguard of 227 tonnes bollard pull to move the Saipem semi-sub Scarabeo 8 at US$146,000. PSVs are trading consistently above £20,000 (US$24,000) a day out of Aberdeen.

The financial markets expect a recession, so for the first time since the Russian invasion of Ukraine in February, Brent crude oil traded below US$95 a barrel on Thursday. This has dampened investor interest in the sector and Transocean shares traded at a one-year low of just US$2.41 on Friday. The fears of a recession have also hit metals pricing, which has had a significant impact on the subsea mining sector.

The volatility has caught out several big players, including Milan’s finest: Saipem.

Saipem: rights issue goes horribly wrong

I guess we shouldn’t be surprised. Saipem managed to botch the installation of the 54 foundations for the Neart na Gaoithe windfarm off Scotland, leading to a profit warning in January (here), then the company messed up the testing of the Saipem 7000’s crane in an epic lifting fail in April (here), so perhaps it should come as no surprise that Saipem has now managed to fumble its efforts to rescue its finances.

We had earlier reported (here) that the company was raising US$2 billion in fresh funds from its shareholders through a rights issue, selling discounting shares to help stabilise its balance sheet. Since the Italian state, through the company’s two biggest shareholders, state oil company ENI and state investment company CDP Industria, had already agreed to the deal, how hard could it be? Some 44 per cent of shareholders were already in on the deal, and thus nearly half of the cash was already raised.

Unfortunately, the Milan-based company managed to bungle its rights issue, as existing investors decided they didn’t want to invest more funds in the construction and drilling player. This left the 14 banks (including Goldman Sachs, HSBC and Barclays) that unwisely opted to underwrite the deal, having to buy about €400 million (US$400 million) of new Saipem shares themselves – these being the new shares that the actual shareholders didn’t want. The consortium of banks had hoped to make around US$100 million as a fee paid by Saipem for raising the capital (a nice underwriting commission of 4.55 per cent, according to the FT here), but they now find themselves having to buy the unwanted shares themselves. The stock price of Saipem has plunged more than 70 per cent from over €3.50 (US$3.55) on July 12th to just over €1.10 (US$1.12) at close on July 13, as the new shares were dumped into the market.

Wasn’t the first time

Saipem is saved, yes. But its reputation is battered (again), and this isn’t the first time it has managed to fluff up a rights issue. In 2016, the company’s previous capital raising exercise had also gone horribly wrong. On that occasion, the company tried to raise €3.5 billion of fresh capital (over US$4 billion at the time) after the oil price crash. It needed the money to pay back loans to ENI. Then, the Saipem rights issue was 87.8 per cent subscribed, leaving the consortium of underwriting banks headed by Goldman Sachs and JPMorgan to buy €427 million (then worth close to US$500 million) of Saipem shares, which were later sold into the market.

Those who cannot learn from history are doomed to repeat it. Let’s hope the company doesn’t need a third rescue.

Borr Drilling: diluted

Also seeking new funds is Borr Drilling, the owner of twenty-something modern jackup rigs, as we reported two weeks ago (here). Borr was launched in 2016 by Tor Olav Trøim, John Fredriksen’s former right-hand man, with a vision to buy up distressed jackup rigs cheaply, backed by Schlumberger, which bought a large chunk of the company. Paal Kibsgaard, the former CEO of Schlumberger, became Borr’s chairman in 2019. The market would recover, Borr investors would make huge amounts of money, and everyone would hail Tor Olav Trøim as even smarter than his former mentor.

It didn’t turn out that way, however. Rather than being the smartest guys in the room, Borr lost US$91 million speculating in Valaris shares before Valaris went into bankruptcy protection in 2020, ended up committing to paying hundreds of millions of dollars to Keppel for a series of new jackups that it couldn’t afford to deliver, and contracted many of its rigs to Pemex, the Mexican state-owned oil company, which has been a slow payer. Paal Kibsgaard stepped down as chairman in February 2022 after a string of executive departures and profit warnings.

As a result, Borr has found itself with US$1.9 billion of debt even as all its major competitors are now nearly debt-free after restructuring in Chapter Eleven. Borr’s latest update on its refinancing (here) dated July 14, confirmed what we suspected: like Saipem’s shareholders, Borr’s shareholders are going to take a bath.

The update revealed that Borr’s lenders require the company to raise up to US$250 million in new equity by selling new shares. At current prices, the proposed offering would increase outstanding shares by approximately 65 per cent, driving the share price lower and diluting existing shareholders.

“Raising US$250 million in equity at an assumed price of US$2.50 per share,” Seekingalpha’s Henrik Alex observes, “would increase outstanding shares by more than 65 per cent, and with an estimated net asset value (NAV) per share of just US$1.25, there’s not much that would prevent the stock price from dropping even further over the next couple of weeks. Please note that restructured competitors like Noble Corporation or Valaris trade at substantial discounts to NAV despite much better liquidity and basically zero net debt.”

Additionally, the sale of four newbuild rigs that the lenders have demanded will result in Borr “lacking the earnings power claimed in recent presentations.”

Expect more drama as Borr struggles to get the cash it needs.

The Metals Company: ouch

One of the more unfortunate events when Isabel dos Santos was running Angolan state oil company Sonangol was that the company ran out of toilet paper in its headquarters in Luanda, as it faced a cash crunch (see here). We covered Angola’s woes here.

As we reported earlier, innovative subsea mining player The Metals Company also faces a cash crunch at the end of the year (here). The weakness in commodity prices and increasing hostility from environmental activists has seriously depressed the company’s stock price, which closed at just US$0.82 on Thursday, down by over 92 per cent since it listed less than a year ago in a reverse takeover by a special purpose acquisition company.

Macron says “non”

Despite making progress towards demonstrating the viability of its seabed polymetallic harvesting technology on board Allseas’ Hidden Gem vessel, the company has been buffeted by bad news. On June 30, French President Emmanuel Macron stated in public that he did not think subsea mining for minerals should be allowed.

“We have … to create the legal framework to stop high sea mining and to not allow new activities putting in danger these ecosystems,” Macron said in Lisbon, whilst attending the UN Ocean Conference. That puts France alongside the Pacific islands of Palau and Fiji, and Chile, which have also called for a global moratorium on all deep-sea mining activities. This makes life difficult for the International Seabed Authority (ISA), the United Nations body appointed to managing the seabed in international waters. As a staunch advocate for seabed mining, and the head of an organisation that stands to benefit financially from it proceeding, ISA secretary general Michael Lodge now finds himself under increasing pressure.

On the one hand, micro-state Nauru and its contractor The Metals Company want the ISA to authorise the commencement of commercial mining in the Clarion Clipperton zone of the Pacific Ocean as early as next year. On the other side, Macron and a growing number of states and a growing number of scientists are urging caution, citing environmental concerns and a lack of sufficient scientific data.

Noise abatement needed

Last week, more scientific evidence from researchers from the US, Japan, and Australia was published in the journal Science (here). This showed that noise from deep-sea mining activities would likely span the entire water column, from mother ship rigs at the surface, mining ROVs at the seabed, and pumps along risers to bring nodules to the surface. The researchers estimated that noise pollution from seabed mining operations could travel approximately 500 kilometres from one mine alone, which could affect the understudied species that live in the deep ocean. The researchers warned that there could also be cumulative impacts where multiple mines operate.

Such noise concerns in windfarm operations have led to the implementation of bubble curtains when the piling and installation of turbine foundations is performed. However, in the water depths over 3,000 metres where the polymetallic nodules are found, no such curtain technology exists, nor is likely in future.

Go slowly

So, we would be surprised if the ISA is able to reach a quick outcome on subsea mining regulations, and we would be surprised if Nauru and The Metals Company are able to proceed with commercial activities, as they hoped, in 2023. That leaves shareholders likely to be facing dilution when the company moves to raise fresh capital, as it must do so based on its current cash burn estimates.

Unless a serious mining partner like Glencore or BHP comes into bail out/support The Metals Company, those share certificates may end up as more useful in the Sonangol office tower bathrooms than for the stockholders. If The Metals Company’s boss Gerard Barron does find himself caught short, he could always issue himself some more share certificates on top of the US$5.7 million he and his top executives received in stock-based compensation in the first quarter.

Impossible Mining: Bacterial respiration. Seriously? 

One of the beauties of capitalism is that there’s no such thing as a bad idea or a bad investment: it’s all learning. So, we were not surprised to find a new startup following in the footsteps of The Metals Company with a subsea mining pitch.

The lure of billions of dollars of battery metals for electric vehicles lying on the seabed waiting to be “harvested” is simply too large for speculators, scientists, and financiers to ignore. Step forward, Impossible Mining (website here). I mean, if Impossible Meat can create meat-free, vegan burgers that minimise harm to the environment, why not Impossible Mining, which would also minimise harm to the ocean ecosystem?

On its site, Impossible Mining sets out its vision of “pick and place” robotics to gather nodules with a low environmental impact. The company says that its ROVs will avoid subsea fauna and gather the nodules with “no significant plume, no return water, no impact to sediment structure or sediment fauna.”

Impossible Mining then goes on to describe a process that employs bacterial respiration to “liberate” these metals from the nodules and some robotic technology that looks awfully generic. The company claims – and has a TED talk to back it up – that “early laboratory studies show that the bacterial strains are able to dissolve the nodule fragments, placing the metals into solution, within hours, producing only a neutral pH wastewater stream that can be recycled.”

It’s not enough

Techcrunch reported that Impossible Mining won a new funding round of US$10.1 million, led by angel investor Justin Hamilton and featuring a number of additional YC investors.

As we have observed with The Metals Company, tens of millions, and even hundreds of millions of dollars of investment are not enough to make subsea mining commercially viable and environmentally acceptable – billions of dollars will be required. Likely, Chinese state firms will be amongst the few with the resources and the lack of concern about the impact on the seabed fauna and flora to proceed.

Unfortunately, I suspect that like the Impossible Meat burgers, Impossible Mining will also bleed.

Ulstein and Olympic Subsea: No Union Jacks, just Norwegian action

On June 27, we reported (here) the plans of James Fisher and Sons and Graig Shipping to build a pair of Ulstein designed windfarm Service Operation Vessels (SOVs). The memorable graphic that accompanied the release showed the SX221 design ships painted like some kind of Conservative Party leadership candidate fantasy – all red, white, and blue in a Union Flag livery. The release was long on graphics and patriotism, and short on an actual building plan.

Now Olympic has announced that it is contracting two slightly larger Construction Service Operation Vessels (CSOVs) and two option vessels at Ulstein Verft, built to the very similar (but slightly bigger) SX222 design. The vessels have hybrid battery propulsion and are prepared for methanol fuel to enable zero emissions and are built with the Ulstein Design and Solutions Twin X-stern. The Olympic ships have a length of 89.6 metres and a beam of 19.2 metres and they can accommodate 126 people in 91 cabins. They are not painted in the colour of the Norwegian national flag, even if they will be Norwegian-flagged.

Financial Lazarus act

What’s amazing to me is how Olympic financed the deal. It’s last set of financial results (here) showed that the company’s fleet had shrunk to just seven vessels and that it had NOK1.7 billion (US$166 million) of long-term debt. Whilst Olympic was finally profitable in the first quarter, it warned that it was subject to a restructuring:

“The company reached an agreement in November 2021 with the majority of its bank lenders for a restructuring of the financial indebtedness of the group ending April 7, 2023. The terms of the transaction will result in a reduction in annual debt service, a sufficient cash balance and in sum an improved financial flexibility. In the board’s opinion the group will have sufficient time to carry out a long-term and robust refinancing of the group’s capital structure. For the remaining lenders not being party to the new restructuring agreement, a solution has been reached in 2022 which includes sale and repayment of debts. The company has started a new process with the lenders for a financial solution from April 2023.”

It is a sign of Norwegian optimism in the windfarm sector that these newbuildings have received financing and can proceed. Olympic and its lenders see renewables as the future. Good luck. This is great news for Norwegian shipbuilding and for Olympic’s recovery plan. Let’s see if troubled James Fisher can also get its Ulstein SX221 newbuilding over the line.