COLUMN | Forbear with me – MMA Offshore, Siem Offshore and Hermitage Offshore – Part 2 [Offshore Accounts]
One company that did deliver some success in its restructuring and buy some time for its shareholders was Siem Offshore.
On July 2, Siem announced announced that its wholly owned subsidiary Secunda Canada had entered into a settlement agreement with all three of its Canadian lenders. The banks agreed to take a haircut. Under the agreement, Siem paid 61 per cent off of the outstanding debt and the lenders agreed to walk away and eliminate the rest.
Since Siem’s Canadian subsidiary only owns a small fleet of just one PSV and two AHTS vessels, this doesn’t sound like a big deal. However, a 39 per cent haircut with Siem retaining control of the Canadian company is an excellent deal for its shareholders and sets an important precedent in an industry where banks have been reluctant to quantify their losses on offshore assets.
Siem Offshore – forbearance and forgiveness
On May 28, Siem announced that it had secured an extension to its previous standstill agreement with its banks until April 30, 2021. This enables Siem to defer both amortisation and interest payments on its total debts of nearly US$1 billion, and the company also achieved a waiver of its financial covenants under the loan agreements at the same time.
The standstill was contingent on reaching an agreement with its lenders in Canada and Brazil as well, so the Canadian deal was a welcome step forward. The standstill agreement is also conditional upon reaching an agreement with the company’s bondholders, who must also agree to defer payments and suspend acceleration rights until the expiry of the deferral period on April 30, 2021.
“The intention is for the company and its lenders to use the standstill period to agree a long-term plan to take the company through the prolonged downturn and preserve the earnings capability to allow for repayment of debt when the market recovers,” Siem said.
Three subsea wins for Siem
In addition, to sweeten the pill for lenders, the company announced a trio of contract wins for its subsea vessels entering the busy summer season, including six months of work for Siem Spearfish with long-time customer Subsea7, a four-month contract for Siem Stingray in the North Sea, and an 80-day charter off the Atlantic Coast of the USA for Siem Dorado.
Siem is clearly not out of the woods, and warned that 2020 was, “a downturn probably worse than we have experienced during the past few years.” As long as it can get the bondholders on board, it has nine months to find a solution. Meanwhile, its market capitalisation is only US$84 million.
Hermitage Offshore – stock surges on shortest forbearance ever!
Friday July 10 saw one of the most remarkable surges in the casino that is the equity market for the stock for OSV owners, ever recorded. Thinly traded Hermitage Offshore, controlled by the Scorpio Services Holdings, the tanker operator, is the owner of ten high-end PSVs, two anchor handlers, and a motley fleet of eleven crew boats in Africa. It is loaded with debt, and in June had warned that it faced “going concern” issues and might not survive (here).
However, on Friday, in that one trading session Hermitage’s stock price rocketed from US$0.49 to over US$3, before falling back to US$1.88 at close. If you bought on Thursday night and sold twelve hours later you could have made a 500 per cent return on your investment.
This remarkable surge was related to the news that Hermitage had executed a forbearance agreement on its US$132.9 million term loan facility with its Scandinavian lenders. The banks agreed to forbear from exercising any of their rights and remedies under the term loan facility and any other finance agreements related to the term loan facility in the event of a default by the company until July 31, 2020.
That’s right, a three-week forbearance sent the stock racing by 500 per cent, which tells you how dire Hermitage’s position is. The announcement even stated that, “the forbearance agreement does not address the long-term liquidity and restructuring needs of the company.”
Large debts, small prospects at Hermitage
We had previously warned that Hermitage’s position was precarious in 2018 (here) before Scorpio stepped in and executed a nifty reverse takeover in 2019. Unfortunately, the debt was not removed when Nordic American Offshore was transformed into Hermitage.
But the rise in stock price may enable the company to draw down the remaining on a US$10 million equity line of credit, whereby it issues stock to its parent Scorpio in return for cash, a deal which was contingent on the price of the company’s common stock (calculated on a daily volume weighted average basis over the preceding five days) not falling below $0.60 per share.
The company’s filing in June showed that it owed US$141.9 million and held $8 million in cash. In the depressed market it is difficult to see how 10 PSVs, two anchor handlers and some crew boats can possibly be worth more than $100 million, so the banks may be due a haircut.
The company chews through cash at current North Sea spot market rates of GBP5,000 for its PSVs, and some are in lay up in Norway. Scorpio must decide whether to keep funding Hermitage, or to walk away and make the problem the banks’ problem.
When Siem’s banks in Canada took their 39 per cent haircut, Siem kept control of the vessels there and the banks simply took their reduced pay-out and walked away. Hermitage’s shareholders may not be so lucky. Speculate on this vibrant penny stock at your peril.
Don’t trust the experts
But (for)bear with me. One of the more amusing moments in our research was reviewing MMA’s presentation at the Macquarie Western Australia Forum only in December (here). The “expert” testimony in support of a wonderful 2020 for the offshore industry has not aged well in the subsequent, brutal eight months:
Fearnley Offshore Supply was quoted as saying, “Demand trending higher – we see recovery towards c. 80 per cent [AHTS and PSV] utilisation in 2020,” whilst Clarkson Platou featured with the choice comments: “E&P cash flow generation has never looked better…oil companies are stacking cash even at $50 per barrel”; and, “Utilisation is improving from low levels, especially on the high end. With higher utilisation, high spec vessel segments are best positioned to see further pricing increases.”
The well-paid Norwegian geniuses who populate the sell side at Pareto Securities went so far as to say, “Capital expenditure budgets are up in 2019, for the first time since 2014, and are expected to grow another ~5 per cent in 2020.”
Wrong, wrong and wrong. As Yogi Berra put it: “It’s tough to make predictions, especially about the future.”