The Memoirs of Sherlock Holmes by Sir Arthur Conan Doyle features the short story Silver Blaze, about the disappearance of a famous racehorse of that name, and the murder of the horse's trainer. The British detective solves the mystery because he recognises that no one he spoke to during his investigation remarked that they had heard the watchdog barking during the fateful night when the thoroughbred was stolen.
Gregory (Scotland Yard detective): "Is there any other point to which you would wish to draw my attention?"
Holmes: "To the curious incident of the dog in the night-time."
Gregory: "The dog did nothing in the night-time."
Holmes: "That was the curious incident."
Just as in detective tales, so too in offshore, what is not said and what is not done is often more important that what actually happens. So, which hounds have not been yelping?
McDermott is one of our favourite case studies of corporate malfeasance, executive incompetence and management abuse of stakeholders. The venerable offshore construction company crashed into bankruptcy in February following a strong of losses following the calamitous acquisition of a scandal ridden onshore engineering company, CB&I (see here).
Upon entering bankruptcy, McDermott's senior leadership team had adopted the tried and tested mechanism of promising themselves massive retention bonuses because only people of the incredible calibre as talented CEO David Dickson could possibly run the company. See here how Dickson was promised another US$6.3 million as a bonus for 2020 if he hits his targets during bankruptcy, and over US$12 million if he exceeds them, on top of his egregious retention bonus of over US$3 million, which he received last October.
A key part of the restructuring was the sale of McDermott's Lummus Technologies petrochemicals division to two private equity companies, which was agreed in March and approved by the company's bankruptcy judge in Houston that same month, for the handsome sale price of over US$2.72 billion. McDermott confidently reported that the buyers had placed a US$200 million down payment as a deposit on March 31 in its filing with regulators here.
Finally, on July 1, McDermott announced (here) that it had closed the sale of Lummus, and completed its restructuring. The company unveiled a new board including a representative who was previously 32 years at Goldman Sachs, and one from private equity powerhouse the Carlyle Group, and a previous director of Gucci, the fashion brand.
The company announced that it had paid back its debtor in possession financing and emerged with nearly all of McDermott's US$4.6 billion converted into shares. The company emerges from Chapter Eleven with $2.4 billion in letter of credit capacity and $544 million of funded debt. It will desperately need that liquidity, and no comment was given on cash burn or future prospects.
Indeed, we know that the situation at McDermott has deteriorated, operationally, as we can see when the company gave a presentation to its long-suffering lenders in May (here).
Most contractors have been laying off 10 per cent, 20 per cent or even 30 per cent of their staff, as the oil and gas industry has slashed investment in the face of lower energy prices and falling demand. McDermott too told staff in Asia that they face the axe. McDermott's regional Senior Vice President Ian Prescott wrote to staff in June to say, "Our workload has decreased dramatically. Unfortunately, this means we have had to make some very hard decisions including the reduction of our workforce to reflect these impacts to our business."
What's surprising is not that McDermott is making staff redundant, but that it has taken so long. The results the company announced in May were diabolically bad, yet again, with a loss of over US$1 billion for the quarter, mainly through yet more write downs on McDermott's property, plant and equipment, plus another US$246 million of reorganisation expenses on top of the first billion.
Yes, going bankrupt cost McDermott nearly a quarter of a billion dollars in just the first quarter. McDermott paid out US$87 million in credit facility fees and another $58 million in cash on professional fees relating to the bankruptcy filing in just ninety day (see page 18 here), plus a mysterious $35 million in "transaction costs" apparently relating to the sale of Lummus, reminding us that to make a buck you have to spend a buck, as the old adage goes. Or many millions if you are McDermott.
This massive payout to its lawyers, accountant and assorted consultants of over $600,000 per day came even as McDermott's new order book collapsed, the Covid-19 virus swept through its worker dormitories in its Jebel Ali construction yard, killing one, and free cash flow from operations shrank to just US$19 million.
How much did closing the restructuring cost? Let's wait until the second quarter numbers come out, but we can expect further millions to have been extracted from the company, and a big bonus to the CEO, as usual.
The press release noted that, "Kirkland and Ellis is serving as legal counsel to McDermott, Evercore Group is serving as the company's financial advisor and AP Services, an affiliate of AlixPartners, is serving as operational advisor. Jackson Walker is serving as local legal counsel, Baker Botts is serving as corporate legal counsel and Arias, Fabrega and Fabrega is serving as Panamanian legal counsel. Prime Clerk is serving as administrative agent."
That's a lot of professional expertise and if it cost $58 million in the first quarter when the company was only in bankruptcy for a few weeks, look out for further massive charges in the second.
The offshore industry has been cruel to many who have emerged from bankruptcy. Both Pacific Drilling and Seadrill, which completed earlier Chapter Eleven restructurings, look like they may have to have a second bankruptcy filing because their debt is just so large.
McDermott's re-emergence from bankruptcy was premised on a robust recovery in the second half of 2020. That looks like completely wishful thinking now that the pandemic has turned the oil and gas industry into a wilderness of misery, cancelled projects and delayed operations.
The business plan that restructuring specialists at the AlixPartners attached in the McDermott Chapter Eleven filing in February showed that in 2020 the company still expected to burn US$550 million in free cash flow. Unfortunately, McDermott managed to burn US$686 million in just that first quarter alone, according to the SEC filing, before the worst impact of the pandemic really hit the offshore sector.
The mystery of how this once great American company was laid so low doesn't require a pipe-smoking detective in a deerstalker hat. Elementary, it's the management, dear Watson. But no dogs bark on how long the company can maintain such a large cash burn even after restructuring.
Another dog that is not barking is James Fisher and Sons, which we highlighted as having such a remarkable financial consistency that it raised some hackles back in January (see here).
In March, we reported on a large and unexpected write off from the company relating to the failed acquisition of Murjan Al-Sharq Marine Contracting (MSMC), a Saudi Arabia-based construction and maintenance services provider (here).
A week after our article, Fisher announced that Fergus Graham had stepped down from the board and from his role as director of Marine Support Division, with immediate effect. No reasons were given for his departure, and the company was at pains to point out that, "Graham will remain an employee of the company until March 19, 2021," because, you know, a year's pay when you leave mysteriously is a just reward.
So, what happened? That dog ain't barking at all. Fergus had joined James Fisher in January 2017 as the director of the Marine Support Division and was appointed to the board in March 2018, so this clearly wasn't a planned retirement or a sudden desire to spend time on the golf course.
The statement went on, "Graham was also responsible for international business development in emerging markets and the development of the group's value proposition in the offshore renewables market."
With Sphynx-like chill the chairman Malcolm Paul declared, "I would like to take this opportunity to thank Fergus for his contribution to the group and wish him every success in the future." Telling us precisely nothing about why Fergus was singing the blues and out the company (here).
A few days later Fisher announced that it would suspend the payment of 2019's final dividend of 23.4p per share until further notice, that it was deferring capital expenditure, freezing hiring and deferring senior management and director's salaries by 20 per cent (here). It is not clear when the deferred pay will be released.
Fisher also suspended any earnings guidance for 2020. This is important, because it means that nothing has to be disclosed to the market until the release of the first half results, probably in July or August, because there is no guidance on what those earnings might be now. It might simply be prudence in the face of the uncertainty Covid-19 has engendered, or it could be because something nasty has happened in Fisher's Marine Support Division.
A quick flick through the 2019 annual report for the company (here) shows this intriguing piece of information about Mr Ferguson's responsibilities and this division:
Diving and subsea services for the oil and gas sector in West Africa and the Middle East continued to grow and the group invested £56.2 million [US$70.1 million] to acquire two dive support vessels, Subtech Paladin and Subtech Swordfish, specifically for the saturation diving market in West Africa. Though the vessels went into service later than expected, the Paladin was operational during the final quarter and the Swordfish will be available for work in the first quarter of 2020.
A US$70 million investment in two second-hand saturation diving vessels might not in fact be the best investment in the current market, and trading Subtech Paladin in Nigeria might not be the easiest market in which to collect the revenue and remit it back to the mother company.
With McDermott writing down a billion dollars of construction assets, Fisher might also want to be looking at whether its two shiny dive vessels are correctly valued on its books, especially after so much was spend on docking them and bringing them up to the Fisher standard.
Two other possibly pertinent facts also came to light in the last few months. Firstly, the Fisher Foundation increased its shareholding in the company from 17.5 per cent to over 22.5 per cent, a significant increase. Who knows what motivations the trustees may have?
Secondly, the company's debt may have increased, even though it didn't pay out the dividend. Fisher didn't say as much directly. Instead, in the company's "Covid Update" of April 30, Fisher reported, "On an IAS 17 basis, net debt at December 31, 2019 was £203 milliom, with c.£42 million of headroom. Committed facilities were increased by £30 million in March 2020 to £280 million and headroom at March 31, 2020 was £64 million, with a further £13 million of headroom on uncommitted overdraft facilities."
Doing the maths, if the credit facility increased by £30 million but the "headroom" only increased by £22 million, then the debt may have gone up by £8 million, which implies some deterioration in trading conditions, or in cash collection. Or maybe there is just some other factor….until the first half results come out, however, we'll be none the wiser.
But we should be open to the idea that maybe, just maybe, there is something fishy going on at Fisher, and that shareholders should be prepared for some adverse surprises in the next set of results. The company's exposure to offshore oil and gas contracts, and to sickly African markets makes it almost inevitable, whilst the unexpected departure of the board member responsible for those activities seems a remarkable coincidence were this not the case.
The fact that the dog did not bark when we would have expected it to do so enabled Sherlock Homes to solve the mystery of the theft of the racehorse Silver Blaze. Often the dogs that don't bark tell you more than those that do. Keep your ears pricked.
You can read the full Conan-Doyle story online here: http://www.eastoftheweb.com/short-stories/UBooks/SilvBlaz.shtml