COLUMN | Tidewater plays Pac-Man with Solstad’s 37 PSVs: will the ghosts ever catch up? [Offshore Accounts]
There was really only one story in offshore last week. However, it wasn’t Saudi Aramco reporting a net profit of US$161 billion dollars for last year, the largest single profit ever made by any listed company in the history of the world, equivalent of US$20 from every man, woman and child on the planet flowing into the Aramco coffers as profit. No, not that.
No, not Abu Dhabi state oil company Adnoc’s botched efforts to acquire Swiss oil trading house Gunvor, efforts that have dragged on for months and were stymied by the reluctance of Gunvor’s controlling co-founder to cede control to the Emiratis. Not that.
The big story, of course, was Tidewater’s purchase of 37 platform supply vessels (PSVs) from Norway’s Solstad Offshore for US$577 million.
A great deal
The universal consensus is that, like Tidewater’s acquisition of Swire Pacific Offshore’s fleet of fifty vessels for the bargain basement price of US$190 million only last year, this is a great deal for the Houston-based player. Tidewater has been on a roll since it emerged from Chapter Eleven almost debt-free in 2017, first merging with Gulfmark in 2018 and then loading the older and lower specification vessels from the combined fleet onto heavy lift vessels and selling them for scrap, in a dramatic illustration of capacity reduction in action, or flogging other unwanted ships in lay-up to the highest bidder.
Like a maritime Pac-Man, Tidewater has set about gobbling up dozens of higher specification vessels in a thirteen-month acquisition strategy that has catapulted it ahead of all its rivals in the offshore support vessel (OSV) business. Tidewater’s investor presentation on the Solstad deal shows how this latest acquisition builds on the Swire purchase last year to create a behemoth. Tidewater says the Solstad PSV purchase means it has added 86 “premier, high-quality vessels” to its fleet since February 2022, bringing its PSV and anchor handling towing supply (AHTS) fleet to 199 vessels, the biggest in the world. By contrast, the second placed player Edison Chouest has only 139 AHTS and PSVs in its fleet, whilst Bourbon has just 128.
After the Swire acquisition, Tidewater became the largest operator of active premium OSVs in both West Africa and the combined Southeast Asia-Middle East region. With the Solstad PSV deal, Tidewater now also becomes the biggest operator in the North Sea.
In the North Sea, there are 215 active PSVs of all sizes and 115 large ones with clear deck space of 900 square metres or larger. After the deal closes, Tidewater will operate 46 active North Sea PSVs, of which 36 are large units, totalling 31 per cent market share. In Europe as a whole, it will operate 53 AHTS and PSVs while another 51 will be operated in Africa.
This creates significant commercial opportunity for Tidewater as the newly dominant player.
Prices will go up for PSVs, higher in 2023
Such a large fleet of PSVs gives the company incredible pricing power. The company says that the vessels it will purchase from Solstad have “significant cash flow generation upside as over half of existing contracts roll over by year-end 2024 onto market day rate.”
This means that Solstad’s existing customers are going to be paying more–a whole lot more. Tidewater said that current “leading edge” day rates for 900-square-metre clear deck PSVs on term charter are US$24,000 per day, which seems a little low given the day rates we have seen in the market. That leading edge will probably rise to over US$30,000 this year. If all 37 vessels it bought from Solstad achieved US$24,000 per day, then Tidewater would generate US$200 million annual profit from them, the company says, implying operating expenses and overhead of US$9,000 per PSV per day.
Tidewater’s CEO Quintin Kneen states openly in the company’s press release about buying Solstad’s PSVs that his intention is “to create the safest, most sustainable, most reliable, most profitable high-specification OSV fleet in the world” (our emphasis).
He states that buying the 37 PSVs “further solidifies Tidewater as the leader in large, high-specification PSVs and as the new global leader in hybrid PSVs… This transaction is just the latest in a series of transformative steps Tidewater has taken to drive long-term earnings and cash flow generation.”
The oil companies are going to be paying a high price for this merger. Prices are going to rise for PSVs across the world in 2023, and more than they would if Solstad’s fleet had remained independent.
The tide is high, getting higher
Every indicator has shown that charter rates for PSVs and AHTS have risen dramatically already. Tidewater’s purchase of Swire’s fleet and the Solstad units will accelerate that market trend. Oil companies have enjoyed eight years of low day rates and being able to pick and choose vessels, playing off owners against one another. That changed in 2022 when the oil price hit US$100 after the Russian invasion of Ukraine and demand for rigs and boats internationally surged. Between 2021 and today, shipbroker Clarkson reported 110 per cent day rate increases for North Sea PSVs.
Tidewater’s CEO Mr Kneen told analysts that for this year, he expects the company’s vessel operating margin as a whole to be approximately 50 per cent, up about 12 percentage points from 2022. He reiterated this guidance in the briefing on the Solstad acquisition and saied that he expects Tidewater to make over US$1 billion in revenue in 2023.
Able to borrow again, at last
The company will be taking out extra debt of a three-year senior secured credit facility of up to US$325 million from its existing lender DNB Bank, and will likely raise another US$250 million in new debt prior to closing of the transaction, paying the overnight rate (SOFR) plus 413 basis points. SOFR stood at 4.55 per cent on March 9, 2023, so Tidewater will be borrowing at around nine per cent interest rates for the deal. When it bought Swire, it paid minimal cash and gave the lucky Swire Group warrants to buy Tidewater stock, so only negligible interest costs were incurred.
The fact that an offshore vessel owner can return to the market and borrow hundreds of millions is nothing short of amazing. Other owners should be cracking open the champagne just to celebrate this point alone.
“A pessimist sees the difficulty in every opportunity,” Winston Churchill famously said on the internet (not in real life).
In the spirit of contrarianism, I see three risks from the deal for Tidewater. They are not going to stop Tidewater from having a bumper 2023, but they will act as a brake on the company’s ambitions.
Number one: Future regulatory risk
Firstly, whilst Mr Kneen says he is “focused on bringing together the world’s best OSV fleets” and it is widely known that Bourbon, DOF and Vroon are up for sale by their banks, as we reported here, we suspect that competition authorities in the UK, EU, and Norway would act quickly if Tidewater were to make another transformative acquisition.
We can’t see Equinor, BP, and Shell sitting idly by as Tidewater squeezes rates further by buying additional PSV after Solstad’s. When Noble Corporation bought Maersk Drilling last year, we covered the tale of the five “Remedy Rigs” that the UK competition regulator compelled Noble to sell as a requirement for anti-trust approval of the merger. You can expect any further fleet deals to come with obligations to sell vessels to reduce market dominance.
Tidewater could possibly make an acquisition in the Gulf of Mexico, where its presence is limited – the company has just 36 vessels in the whole of the Americas, including Brazil and Guyana. It might be able to buy an Asia-focused player, since it has only 18 vessels in the whole of South-East Asia and Australasia.
But further acquisitions in Europe – and any attempt to buy the Vroon, Bourbon, or DOF fleets – would likely tie the company up in competition approval delays and result in it having to engage in lengthy and risky negotiations on what parts of the business it would need to divest.
Number two: High rates encourage newbuilds
Secondly, if Tidewater achieves its short-term goal of pushing up PSV day rates too high, then there will be an influx of newbuilds. This is what happens in the shipping cycle, when rates rise to high levels and the profits of ship ownership are so obvious, speculators or existing players will build new ships.
Barely any new OSVs have been ordered since 2014 and every ship that has been delivered since then was almost certainly ordered and then delayed at the shipyard or abandoned by the original owners and completed by the yard only much later. The trickle of 2022 and 2023 deliveries from China were actually all ordered in 2014 or earlier. There’s even a stranded vessel Tidewater itself ordered in China being touted for sale a decade later.
One of the most interesting slides in the Tidewater presentation states that the newbuild cost of the 37 Solstad PSVs it bought would be US$1.7 billion in total, or around US$46 million per vessel. If we assume that Mr Kneen’s margins are correct and that each large PSV has an “all in” operating cost of US$9,000 per day (which will be lower internationally and higher in Norway), then rates of over US$30,000 per day can start to make newbuilds very attractive to other owners, offering a five-year payback after delivery.
Higher rates needed
Despite being almost completely debt-free (net debt of just US$9.6 million at year-end), Tidewater managed to produce net income of only US$10.6 million from October to December 2022, although it was hindered by paying out US$5 million in severance payments as it squeezed the final staff from Swire who had stayed to year-end.
Tidewater generated only US$50 million of free cash flow during 2022, not exactly impressive for a company that even then had close to 200 active vessels. This free cash flow equates to less than US$1,000 per vessel per day, which is really nothing special.
Tidewater had a pretty disappointing 2022, given the size of its fleet and the doubling of day rates across the industry. In 2023, it should deliver much higher returns. In fact, it has to make bumper profits in order to meet Wall Street expectations.
Juicing the rates will juice some newbuild orders
Of course, Tidewater can enjoy two or three years before any newbuilds come into the market. However, if Mr Kneen “juices” the rates too much, he may find large oil and gas companies offering long-term newbuild contracts as a way of reducing long-term costs. Even without long-term contracts on offer, there comes a point when newbuilds become economically compelling again. That point will arrive sooner than many of us in the industry expect.
As every dominant player in a market learns, if you are too greedy, you invite competition into your segment unless you have a powerful barrier to entry. In the offshore business in recent years, a complete lack of available financing due to poor economic returns has been a major barrier to entry, but as prosperity returns, so will speculation. We mentioned two weeks ago that if speculation in shipping assets were an Olympic sport, Norway would clinch the gold medal.
Norwegians are going to look at Tidewater’s higher day rates and high margins in 2023 and order new vessels. After all, finance is how Oslo became the pre-eminent casino centre for OSVs and rigs.
Deep Sea Supply was born of such speculation in 2005
The last time PSV day rates seriously surged after a long period of industry doldrums, in 2005, tanker magnate John Fredriksen was quick to enter the OSV business to capitalise. He created Deep Sea Supply in 2005 and listed it on the Oslo Stock Exchange to build up a portfolio of North Sea and international supply vessels. The first acquisition was six AHTSs from Tidewater, which Tidewater had bought from troubled Japanese owner Sanko, followed the next year by the purchase of an order of 22 newbuilding contracts from his own Sea Tankers Management, mainly PSVs and medium sized anchor handlers in India and China. Mr Fredriksen already owns some subsea vessels and PSVs.
With tanker rates once again touching around US$100,000 per day for very large crude carriers (VLCCs), he can easily afford another punt on a few dozen newbuild PSVs to spoil Mr Kneen’s party.
Number three: Fleet maturity profile
The final risk is one that will only become evident in a decade. By acquiring 200 high-specification PSVs and AHTS with an average age of 11 years, now one of the youngest in the industry, Tidewater appears to have a youthful fleet. In reality, however, it has a huge spike of vessels that were delivered in 2012 to 2015, with very few younger than 2015 build, and very few older than 2010 build. This means that when the fleet needs replacing, it will need replacing all at once, in a massive programme.
Tidewater has been there before. In 1998, the company’s revenues topped US$1 billion for the first time – a level that it hopes to achieve again now in 2023, a quarter century later, and net earnings reached what was then a record US$315 million, doubling 1997 earnings and quadrupling 1996 earnings. That is probably more than what Tidewater will make this year.
The lesson of the 1990s
That revenue growth in the 1990s came as a result of Tidewater becoming the industry consolidator in that decade, as it has become today, buying up Zapata Gulf Marine in 1992. Then, in 1996 Tidewater acquired Hornbeck Offshore Services, pushing the company’s vessel count to more than 600 ships, and in 1997, Tidewater acquired O.I.L. Ltd., increasing its fleet to more than 700 vessels.
This gave Tidewater short-term pricing power, but led to a horrendous fleet age profile for the company in the 2000s. Ships age, and having a fleet age profile with dozens of vessels built in the same year creates a replacement challenge, which will become a problem for Tidewater at the end of this decade.
Newbuilds in the offshore industry are inevitable as the fleet ages and new technology – particularly technology around future fuels and future power sources – advances.
Buying the Solstad PSV fleet means Tidewater now possesses the world’s largest hybrid fleet, surpassing American rival Seacor at last, as Tidewater will now own 14 battery hybrid and two LNG power-capable vessels, addressing a major technological gap in the Tidewater fleet and the Swire fleet it bought last year. But at some point in the next decade, a new technological standard will arrive that will make the existing fleet as obsolete as all Tidewater’s 1990s acquisitions were when DP2 emerged as the new industry standard in the 2000s.
The human cost
As a reminder that these mergers and acquisitions are not just about revenue enhancement and topline growth, Tidewater reported that it spent more than US$19 million on severance and redundancy payments in total in 2022, mainly slashing the management team it acquired when it bought Swire Pacific Offshore. At least one manager was asked to leave, Texas-style, in just fifteen minutes, and handed a cardboard box in which to take his personal items home from the office.
A lot of senior sea staff, experienced anchor handling masters, and chief engineers have been let go, we hear, in the name of cost-cutting by Tidewater as it seeks to drive down its costs on the Swire fleet. Outside unionised Norway, we would expect to see similar things happen on the former Solstad PSVs.
Let’s hope that these high profits don’t come at the cost of safety. Mr Kneen has said he wants Tidewater to be “the safest, most sustainable, most reliable, most profitable high-specification OSV fleet in the world.” Those shouldn’t be incompatible or mutually exclusive objectives.
Where does this leave Solstad?
Finally, many in the industry were blindsided by the sale, which takes Solstad completely out of the PSV segment. I had heard the rumours, but I did not believe them. Solstad has been such an integral part of the North Sea PSV market for so long that the sale seemed inconceivable.
In its fourth quarter 2022 results, Solstad had reported its first net profit for eight years was NOK442 million (US$42 million), more than Tidewater, ironically. The company is back in profit at last, but says it will record no exceptional gains on the sale of the PSVs.
Solstad will have a fleet of around 50 anchor handlers and offshore construction vessels left. Its debt will shrink significantly. It says that the PSVs it has sold are focused mainly on the oil and gas market and that they are the most commoditised units in its fleet. If floating offshore wind takes off, Solstad’s high-power AHTS will be in demand.
However, the sale of the PSVs leaves the company in a niche, but should guarantee its long-term survival after the years it spent trying to restructure, slimming down its fleet, and seeing its shareholders (and founder Lars Peder Solstad) suffer large equity losses.
Tidewater is now the industry leader. Solstad has survived. Let’s see what the wheel of fortune throws up next.
For readers who are unfamiliar with Pac-Man, you can play a back-engineered version of the original, highly addictive 1980s video arcade game here. Rather like running an offshore supply vessel company, the principle is simple: you control Pac-Man, who must eat all the dots inside an enclosed maze while avoiding four deadly ghosts. When Pac-Man eats a large flashing dot called a “Power Pellet,” the tables are turned, the ghosts to temporarily turn blue, and Pac-Man can eat them for bonus points.
Our coverage of the Tidewater acquisition of Swire Pacific Offshore is here – we warned that the deal would create deep uncertainty for the Swire staff involved and that it was a great deal for Tidewater. On January 3, 2022, Tidewater shares closed at US$12 each. Last Friday, March 10, they closed at over US$45, having nearly quadrupled in value in less than fifteen months.