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Offshore Support Journal

Subsea market recovery is a tale of two tiers

Mon 20 Nov 2017

Subsea market recovery is a tale of two tiers
DOF Subsea’s revenue was down 11% on the same period last year and EBITDA was down 6%

The subsea market is said to be recovering more quickly than others, but evidence to date suggests that whilst tier 1 contractors are coming out of the downturn in decent shape it remains very tough indeed for tier two players

 

Recent weeks have been busy ones in the subsea market, with rumours that Subsea 7 had been approached about a merger with Baker Hughes and some disappointing results from DOF Subsea that only recently entertained the idea of an IPO.

In October, Subsea 7 issued a firm ‘no comment’ and its shares were briefly suspended following reports that Baker Hughes had held talks to discuss acquiring the company. Subsea 7 said only that it was aware of press speculation and the subsequent share price movement.

“The company has a policy not to comment on speculation or rumours. As a listed company, Subsea 7 is subject to and complies with disclosure obligations,” it said. According to The Wall Street Journal the companies met to discuss a possible takeover, but the talks foundered after a price could not be agreed. It was said that the deal valued Subsea 7 at US$5.4Bn. More recently, it has been suggested that GE, which only recently married its oil and natural gas unit to Baker Hughes’s technical services business, hinted that it was seeking “exit optionality” re its stake in Baker Hughes – a development that is likely to stifle for the time being any thoughts that Baker Hughes might have about revisiting the Subsea 7 scenario.

Not long afterwards, Subsea 7 entered into an agreement with Solstad Farstad to acquire the remaining 50% stake in the Aker OSCV 06L-designed Normand Oceanic for a nominal cash consideration. Effective from the date of the transaction, Subsea 7 will become the sole owner of the 2011-built flexlay and heavy construction vessel, which is currently managed by Solstad Farstad. Subsea 7 will assume all obligations related to an outstanding loan of approximately US$100M. Normand Oceanic AS and Normand Oceanic Chartering AS will become wholly-owned subsidiaries of Subsea 7. The vessel, which has a length of 157 m, a 400-tonne crane and accommodation for 140 people, is currently on a three-year charter with Typhoon Offshore in Mexico.

In another move, Subsea 7 agreed with Sapura Energy to discontinue the SapuraAcergy joint venture. SapuraAcergy’s projects have been completed and its entities will be liquidated in due course. SapuraAcergy’s derrick pipelay barge Sapura 3000 has been sold to a subsidiary of Sapura Energy. The derrick pipelay barge can lay shallow and deepwater pipelines, and she is also fitted with a fully revolving mast crane suitable for lifts of up to 3,000 tonnes. As a result of the cessation of the JV and the sale of Sapura 3000, Subsea 7 expects to receive approximately US$100M in cash dividends and will recognise a loss of approximately US$10M in its third quarter results.

In November 2017, Subsea 7’s chief executive Jean Cahuzac said the subsea market is “picking up” and early 2018 could see more contracts awarded. Describing the company’s third quarter, Mr Cahuzac said “Strong execution and continued focus on cost control in all three of our business units drove good financial performance for the group in Q3.

“Our actions to strengthen and grow our business have diversified our income by adding significant new revenues in the conventional and renewables market segments,” Mr Cahuzac said. “Our project portfolio composition is changing as we complete the remaining subsea, umbilical, risers and flowlines projects that were awarded prior to the downturn. Major awards to market in the last three years have been more price-competitive and relatively few in number. As a result of the change in our mix of activity, our adjusted EBITDA percentage margin has begun to decline from the exceptionally high levels reported since the second half of 2015.

“Our differentiated service offering, collaborative approach and early actions to reduce costs have enabled our clients to sanction and award several offshore projects despite the lower oil price. Although the market environment remains challenging, we are seeing a gradual recovery in tendering activity and continue to expect the number of awards to the market to increase in H1 2018.”

In Q3, Subsea 7 had an adjusted EBITDA margin of 24%, which reflected the fact that fewer large projects were in the final stages of completion. New awards and escalations of US$538M contributed to an order backlog of US$5.3Bn. Effective fleet management resulted in an active vessel utilisation level of 78%.

The news from subsea company DOF Subsea was not as promising. It reported numbers that were, frankly, terrible. As recently as Q2 2017 DOF Subsea was hoping to launch an IPO, a move that Jeremy Punnett, a seasoned observer of the subsea market described as “a good reminder, as if anyone needed one, that when insiders are selling out you should be wary of what you are buying.”

Mr Punnett, founder and managing director at Stamford Maritime, which provides strategic advice to companies in the offshore sector, said it was “very hard not believe that early in 2017 insiders at DOF Subsea – that is, private equity owners – looked at DOF Subsea’s vessel schedules and the likely win/loss ratio of the tender pipeline (not the amount of tendering), and decided that if they could dump some stock they would. You should always be wary of financial presentations that start with highlights that don’t include any financials,” said Mr Punnett.

DOF Subsea’s revenue was down 11% on the same period last year and EBITDA was down 6%. “Luckily, they are doing more tendering,” said Mr Punnett.

“Without the long-term chartering business with Technip, which is really just a risk diversification move by Technip, there is no business: the 10% EBITDA on the projects side wouldn’t cover the economic costs and, frankly, potentially the cash costs either,” said Mr Punnett.

“This is a business where unrealised gains from derivatives (probably interest rate and/or currency swaps) were 6 x the operating loss for the period. In the year-to-date DOF Subsea had to turnover NKr 2.8Bn to get a mere NKr 45M in profit.

Mr Punnett highlighted DOF Subsea’s exposure to Brazil as a potential issue. “You need a very good return on vessels on long-term charter in Brazil because if their contracts aren’t renewed – and no one believes they will be on anything like the current terms – then the value of the vessels will drop like a stone.

“In its third quarter results DOF Subsea made clear that while tendering activity is robust project work is dismal and made a comment about it that amounted to a profit warning about it,” said Mr Punnett.

As he noted, Subsea 7 and Technip are booking dive support vessel days at less than £120,000 for 2018 in order to get utilisation. “They can clearly keep this up virtually indefinitely,” he said. That makes it all the more difficult for supporting players in the DOF Subsea tier to pick up work.

Boskalis plans further foray into subsea market

Boskalis, which has transitioned from being a pure-play dredging company into a diversified offshore operator in recent years, is planning to venture further into the subsea vessel market, and is hoping to acquire a dive support ship.

In an update about its current situation, the company noted that an objective stated in its corporate business plan 2017-2019 is to strengthen the group’s market position in subsea services.

“In a persistently challenging market there tends to be interesting opportunities for anti-cyclical investments in companies or equipment that will result in Boskalis being well-positioned when end-markets recover again,” the company said.

“In mid-August Boskalis took a first step in this direction with the acquisition of subsea survey specialist Gardline.

“In addition, Boskalis recently acquired the dive support vessel (DSV) Constructor for around €40M (US$47M).

Boskalis recently exercised an option on this leased vessel to acquire it and said it is in advanced stages of negotiation for the acquisition of a modern, high-end DSV.

Earlier this year the company was linked with dive support vessel owner Bibby Offshore, and was said to be talking directly to Bibby Offshore’s bondholders.

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