The order book for the wind sector just continues getting larger and larger, even as companies continue not to make much money.
Wind is the Augustus Gloop segment of offshore, gorged on investment, like the character in Roald Dahl's Charlie and the Chocolate Factory, but liable to fall into a chocolate river and meet an untimely end, unless it can deliver.
Investors and shipowners are continuing to try to create leadership positions in what is currently a low-margin and low-profit offshore wind industry in the hope that in five years' time, the market and the profits will be much, much larger.
Cadeler, Integrated Wind Solutions, and North Star continue to binge on spending.
Cadeler has ordered yet another DP2 jackup wind turbine installation vessel (WTIV) at Cosco Heavy Industries in Qidong in China, with a price tag of around US$400 million. The company says that the third A-class vessel will be built on similar specifications to the first two A-class vessels, with a deck space of 5,600 square metres, a payload of more than 17,000 tonnes, and, "a main crane capacity to be disclosed at a later date."
This is the seventh newbuilding WTIV that the company has on order, with deliveries staggered between this year and 2027.
I think it is safe to say that we can expect to see further equity raises from the Danish company, as the large newbuild book on order requires significant financing at delivery.
Cadeler previously raised over US$160 million in February. With over US$2 billion of vessels on order and an outflow of operating cash in the first three months of the year, Cadeler says it is on a "growth journey…with significant investments made this year towards [its] long term growth potential."
The problem with growth stories is that they gobble up cash today with only the promise of gushing cash flows tomorrow.
Who was it that asked "What if Tomorrow Never Comes?" Cadeler's administrative expenses increased from under US$5 million a year ago, to over US$13 million in the most recent quarter, as costs on the "growth journey" seem to be starting to spiral out of control.
The company operates just four WTIVs in service at an administrative cost of about US$35,000 per vessel per day – on top of the crew and operating costs that were also around US$35,000 per vessel. For every sailor onboard the jackups, there seem to be a cadre of pen pushers and bean counters in the head office costing the company a fortune. The costs of superintendency and overheads of the newbuilds can be capitalised, so this not an effective justification.
For comparative purposes, the main international drilling players spent half of that on general and administrative costs per rig in the same period (Transocean is just over US$15,000 per day per rig, Diamond at just over US$17,000). There may be one-off factors in the Cadeler quarterly numbers, but out-of-control costs would seem to be a major red flag for investors, especially after all the promises that the merger with Eneti would deliver synergies, not higher costs and bloated overhead.
Not unsurprisingly, Cadeler reported last week that in the first quarter of 2024, it made a loss of €21 million (US$22 million), which was significantly worse than the meagre profit of US$2 million eked out in the comparative period in 2023. There is a good explanation for these wretched results, in that three of the company's four operating vessels were undergoing scheduled drydocking and maintenance during the first quarter of 2024, so Cadeler could achieve only a combined 17 per cent utilisation.
Additionally, the business was hit by some of the costs of the merger with Eneti, which had closed in December, it claimed. Sometimes – after the tens of millions, cumulatively not far off US$100 million, which were paid out to the Eneti directors and largest shareholders for "change of control" provisions before the Cadeler closing, and bonuses for the achievement of buying Seajacks International (and then impairing three of the smaller WTIV assets later) – it is best to say nothing at all.
Another wind services company showing that investors need to be patient for profits is Integrated Wind Solutions (IWS), which has an active fleet of two brand new commissioning service operation vessels (CSOVs) named IWS Windwalker and IWS Skywalker, and another four on order in China for delivery in the second half of this year and the first half of next year.
As with Cadeler, IWS reported negative cash flow, with negative EBIDTA of just under US$4 million for from January to March, compared to smaller losses both the preceding quarter at the end of 2023 and the comparative quarter a year earlier. IWS said that the "result was impacted by the project-driven construction business and activities in the quarter prior to vessel operations from Q2 onward."
IWS Fleet reported that it took delivery of IWS Windwalker on March 26. The vessel arrived in Denmark on May 25, and is undergoing final quayside preparations before commencing its charter contract with TenneT TSO in June.
IWS Skywalker started its first charter contract at the Dogger Bank Wind Farm on March 31. The company said that the ship "has commercially performed to our full satisfaction up to the date of this report."
Just as we expect Cadeler will need to fund its newbuilding with equity raises, so IWS announced on May 27 that it has entered a strategic partnership with Sumitomo Corporation of Japan.
IWS said it will raise €60 million (US$65 million) in equity in its vessel-owning company IWS Fleet by issuing new shares to Sumitomo based on a pre-money valuation of €176 million (US$191 million). Upon completion of the transaction, Sumitomo will own 25.38 per cent of IWS Fleet.
This, of course, stabilises the balance sheet and provides equity towards the four vessels still to deliver. It's a good move for IWS, but what about for Sumitomo?
However, we once again highlight the incredible propensity of Japanese investors to mis-time the offshore market. Modec has been the only company from Japan with long term success in offshore so far.
In 2017, Emas Chiyoda Subsea, a subsea services firm jointly owned by Ezra, Chiyoda Corporation, and Nippon Yusen Kabushiki Kaisha (NYK) filed for Chapter 11 bankruptcy protection and its assets were sold to Subsea 7 and Saipem. The shareholders received nothing.
In 2015, Chiyoda bought 50 per cent of the shares in the joint venture from Singapore's Emas, and press releases trumpted that the business was worth over US$1 billion. The Ezra Group's CEO and managing director Lionel Lee said at the time that the JV "will allow [Ezra] to realise [its] vision of being a trusted partner and leader in the subsea construction business." The equity turned out to be worth less than US$1 in less than two years.
In December 2021 Japanese owner K-Line announced that it was exiting the entire offshore sector and dissolving its subsidiary in Norway after 14 years in the industry (our coverage here). K-Line sold its four STX PSV 06 design platform supply ships KL Brevikfjord, KL Barentsfjord, KL Brisfjord, and KL Brofjord, which were delivered in 2010 and 2011, to REM Offshore.
The DP2 PSVs are Norwegian-flagged and carry Clean Design Notation, with diesel electric propulsion, 1,100 squares metres of clear deck space, and over 5,000 DWT in cargo capacity. At the time, K-Line probably achieved a price of US$10 million per vessel. Today, they would be worth over US$20 million apiece.
The company also sold its two huge anchor handlers KL Saltfjord and KL Sandefjord to affiliates of Borealis Maritime, the private equity-backed owner.
KL Saltfjord and KL Sandefjord are powerful anchor handlers built in 2011 to the STX AH 12 design for operations in harsh environment. The vessels have a massive bollard pull of 397 tonnes, with large chain and fibre capacity. Both are also fitted with an IKM WROV in a hangar, which makes the vessels ideally suited for pre-lay and other high-tension work.
K-Line announced a stonking loss of JPY17 billion (US$150 million at 2021 exchange rates) on the sale of the offshore vessels, which we understood were sold for around US$100 million in total.
"If there is one sorry consolation for the sad tale of K-Line's liquidation," we wrote at the time, "it is that we can probably now officially call that the bottom of the offshore market has passed for this cycle."
We were exactly right.
As with Emas and Chiyoda and K-Line, other Japanese investors have proved many times to be the ultimate "buy high, sell low" stooges in offshore.
In 2001, Tidewater bought the offshore fleet of doomed Japanese owner Sanko (here), which had entered the market in 1998. The sale came just ahead of the longest and most sustained boom in the offshore industry, and Tidewater was able to flip six of the KMAR 404 design, 180-tonne bollard pull anchor handlers to John Fredriksen's Deep Sea Supply for a handsome profit of US$80 million in 2005.
Sanko then tried to re-enter the industry when the oil price peaked in 2008, but ended up selling its entire new offshore fleet once again as activity dipped. In 2010, Tidewater acquired five 120-tonne bollard pull AHTS vessels from Sanko, just two years before the latter went completely bust in 2012. Swire Pacific Offshore also picked up some high-end PSVs of the H-class in that liquidation, and Eastern Navigation acquired the 180-tonne BP anchor handler ENA Shogun (formerly Sanko Energy, now Kan Tan 222).
Similarly, the 150-tonne BP AHTS Sanko Birdie was purchased by Russian interests as Errie in the second great Sanko sell-off and is now SPM Neel Pratap 150 working in Africa. Sanko's track record is a cautionary experience.
Welcome to wind, Sumitomo. Let's hope your purchase of a quarter of IWS breaks a twenty-year losing streak in offshore for Japanese investors.
Another company hoping that wind investment will pay off is North Star. Last week, the British, private-equity-owned service operation vessel (SOV) and standby vessel operator announced it had secured a contract with Siemens Gamesa to build a hybrid SOV for long-term charter at the East Anglia three offshore wind farm development located off the Suffolk coast, England, and confirmed a newbuilding order in India at Cochin Shipyard against the contract.
This will be North Star's eighth hybrid offshore wind ship since the company expanded into the SOV market two-and-a-half years ago. The company says that this is, "another notable benchmark on its strategic journey to add 40 SOVs to the business by 2040."
North Star has already taken delivery of three of four planned SOVs ahead of schedule to the Dogger Bank wind farm, which is being operated out of Port of Tyne. The East Anglia three wind farm will have a total capacity of 1,400 MW and the vessel will work out of Lowestoft in the UK.
The new SOV will be built to the VARD 4 19 design at Cochin Shipyard. The Indian shipyard is already currently building a tailored SOV to a VARD 4 07 design for North Star. That ship will be delivered to EnBW on a decade-long minimum charter to service the He Dreiht wind farm off the coast of Germany.
At least North Star has some secured charters to provide cash flow for its newbuilds, even if margins are expected to be razor-thin.
Unfortunately, as North Star is a private company, it is hard to know how much money it is actually making or losing. The most recent accounts available at Companies House show that the business incurred a net loss of around US$20 million for the full year 2022, the most recent year for which accounts were posted.
Outside the highly successful Big Four of DEME, Jan de Nul, Boskalis, and Van Oord, it is hard to find any stand-alone wind players that are profitable. A diet of gruel today and riches tomorrow can only last so long.
All you need to know about IWS is summarised in the company's latest presentation.