Pop star Britney Spears was so right when she warned of the dangers of repetition (here). Recent weeks in the offshore industry have seen several major players are doing it again on a massive scale.
Whatever "it" may be.
Last month we reported (here) that Transocean and Dolphin Drilling had made an unsolicited approach to buy some of Seadrill's drilling rig fleet, just as Seadrill emerges from the protection of its Chapter Eleven restructuring. With US$6 billion in debt, Seadrill needed the agreement of its debtholders to swap US$4.9 billion of that debt for equity, wiping out the old shareholders in the company.
The restructuring has attracted the attention of competitors, who see the opportunity to break up Seadrill and snatch its rigs for themselves. Already the eleven rigs owned by Aquadrill are now under the management of a range of competitors. Aquadrill was formerly Seadrill Partners, before it restructured and was taken over by its lenders, who renamed the company.
Well, having been rebuffed the first time, Dolphin and Transocean are now back again, just weeks later, for a second try. On Friday, August 20, Reuters reported here that Dolphin CEO Bjørnar Iversen has confirmed that the duo have submitted a revised bid to Seadrill to buy some of its rigs. Norwegian newspaper Finansavisen, reported here that the new bid values Seadrill's assets at US$1.7 billion.
Dolphin and Transocean (and a possible third, unnamed partner) have been very silent on how the deal works, what they are buying for their US$1.7 billion, and who pays what for the Seadrill assets. Since Seadrill owns 12 semi-subs, 7 drillships, and 15 jackups for a total of 34 drilling rigs, this figure seems a little light for the whole fleet. So, either Dolphin and Transocean are cherry picking specific assets, or they are offering this in equity, and keeping some of Seadrill's debt in place.
Dolphin has a fleet of just three rigs, so this is ballsy.
Transocean is also an unlikely buyer. Aside from Maersk Drilling (which has a strong A. P. Moller shareholding and US$1 billion debt load), Transocean is the only major rig company not to have gone bankrupt, and not to have restructured under Chapter Eleven. As a result, its major competitors, Diamond Offshore, Valaris and Noble Corporation are now all nearly debt free, and Seadrill's proposed restructuring will slash its debt load by US$4.9 billion, too.
Transocean's new debt load is over US$6.5 billion, and the company paid US$115 million in interest in the last quarter, so investors are very keen to see Transocean avoid taking on more debt. Transocean recently entered into a US$400 million agreement with investment house Jefferies to issue new shares. The US$400 million amount exactly matches the cash payments Transocean needs to make for the newbuild rigs Deepwater Atlas (US$50 million this December) and Deepwater Titan (US$350 million in May 2022) when the rigs deliver from SembMarine shipyard in Singapore (here).
Whilst Transocean reported a net loss of US$103 million for the quarter ending June 30, it did generate US$153 million in free cash flow from operations. However, one of its key legacy contracts is finally coming to an end. Total Angola exercised its one-year option to extend the charter of the drillship Deepwater Skyros from December 2021 to December 2022, but the day rate falls from a bumper US$573,000 under the old contract to a new day rate of just US$195,000, a loss of over US$100 million in annual revenue. The drillship Dhirubhai Deepwater KG2 won a new one-well contract in Brunei, which will start in December 2021, but at a day rate of just US$190,000.
Utilisation and day rates are nudging up for drillers, but there is still a long way to go for Transocean to pay down its debt, and avoid the total wipe-out of shareholders that its competitors experienced. This means that any acquisition of Seadrill assets will likely have to be paid for in stock rather than with cash, and that any debt taken on in the possible deal will need to be minimal, or ring fenced from the rest of Transocean's fleet.
Transocean and Dolphin will have to work out how to dismember Seadrill without jeopardising their own futures.
In 2019, we reported here how Transocean subsidiaries decided to "relinquish their respective interests in two drillships under construction at Samsung Heavy Industries" and throw back the keys of the drillships Ocean Rig Santorini and Ocean Rig Crete, saving Transocean an estimated cash outlay of US$1.1 billion.
One sign of the gradually recovering drilling market was that in June, as announced here, Italian drilling contractor Saipem put out a release that it would be bareboating the former Ocean Rig Santorini (now Samsung Santorini) from the Korean yard for two years starting this November. Saipem also holds a purchase option on the rig.
Then, on July 30, Saipem announced it had signed a contract with its parent company Eni for the drillship Saipem 10000 to work in the Mediterranean. Saipem then announced that Samsung Santorini would take over the contract currently held by Saipem 10000, and drill in the US Gulf of Mexico.
At the same time Saipem also announced that it had signed an agreement with Eni Angola for the semi-submersible Scarabeo 9 to drill three wells, plus three optional wells.
Winning contracts with Eni seems a forte of Saipem. They did it again.
But even as Saipem provided some good news for Samsung by taking the ex-Transocean newbuild off its books, compatriot Daewoo received some bad news about one of its abandoned rigs last week.
As we reported here in January, John Fredriksen's Northern Drilling had picked up two unfinished Seadrill drillships at Daewoo during Seadrill's first restructuring. Northern agreed to purchase West Aquila and West Libra for US$296 million each in 2018, and Northern paid US$90 million for each rig at contract signing, with the remainder to be paid to the yard upon delivery.
We noted then that "Northern's latest results report showed that it was simply paying preservation costs for the two units," and was "actively engaged with the shipyard to find solutions as contractual delivery dates approach in the first half of 2021." We commented that we took this as code to mean that Northern was seeking to delay delivery as long as possible, or wiggle out of the contract if it could.
Now it has. Last week Northern said that it had cancelled the contract for West Aquila, on account of a delay in delivery, as well as a repudiatory breach of contract by Daewoo.
Northern said it would claim a refund of the US$90 million installment already paid, plus interest and damages.
This is the second claim for repudiatory breach that Northern has made against Daewoo. When it bought the first two Seadrill units, Northern secured an option to acquire a third drillship, the cancelled Vantage Drilling unit Cobalt Explorer, which Northern renamed West Cobalt. Northern agreed to buy the drilling rig from Daewoo at a purchase price of US$350 million, of which around US$49 million was paid up front.
But guess what? Northern cancelled the resale contract for West Cobalt in October 2019 "due to various reasons, including repudiatory breach of contract by DSME."
That case remains in arbitration, and my guess is that the cancellation of West Aquila will also go to court.
We observed here that the courtroom or the arbitration chamber is the best place to see the leading offshore players. That remains true today.
Oops!
Also continuing a familiar trend was Swire Pacific. We reported here on Swire selling its joint venture stake in tug company Hongkong Salvage and Towage (HKST) and its dockyard parent Hongkong United Drydocks (HUD) to its partner, Hong Kong's CK Hutchison Group. The joint venture was founded in 1972 when Swire and Hutchison merged their docks in Hong Kong, but the predecessor businesses stretched back to the 1860s with the foundation of the Hong Kong and Whampoa Dock Company.
HKST had taken delivery of two latest generation 4,800kW ocean-going/multi-purpose tugs in 2019, and had built up its tug fleet to comprise 13 tugs and one multi-purpose rubbish transportation vessel, as recounted by my fellow columnist and former HKST General Manager Alan Loynd in his excellent memoirs All at Sea (available here).
No financial information about the sale was disclosed by Swire Pacific or CK Hutchinson.
This sale continues the shrinkage of Swire's marine businesses, a situation which has been ongoing since 2016. Selling HKST and HUD sees Swire Pacific's Marine Division lose its one consistently profitable company. In the first half results announced by Swire Pacific (here), Swire reported a modest US$1.5 million profit from HUD, whilst troubled Swire Pacific Offshore was once again burning cash from operations.
The sale followed hot on the heels of another set of poor results at Swire Pacific Offshore, which reported a recurring loss of just over US$10 million, and a net cash outflow of over US$15 million. The results were flattered by US$15 million in gains on the sale of some of its investment in wind turbine installation player Cadeler and US$12 million in gains on the sale of some ships. In the quarter, it sold the subsea vessel Pacific Constructor to Taiwanese interests, and an accommodation barge and several 140-tonne bollard pull anchor handlers to the UAE's Allianz Marine Services.
A year ago, Swire Pacific Offshore had reported a write-down of US$557 million on its fleet, so the modest gain should be seen in the light of that catastrophic write-down.
Don't try that at home, kids.
The half yearly results showed the continued shrinkage of Swire's offshore fleet. At year-end 2015, the company operated 92 vessels and had one of the youngest and most technically capable fleets in the offshore industry. By June 30 this year, its fleet had fallen to just 56 vessels through a combination of scrapping and second-hand sales.
"At least six more vessels are planned to be sold by the end of 2021," company CEO Peter Langslow warned investors. "At 30th June 2021, an AHTS, a seismic survey vessel and a high-speed catamaran crewboat were in cold lay-up."
This will take the company's fleet size at year-end to the same size as in 2000, when Swire Pacific Offshore also operated a fleet of fifty vessels (here). But in 2000, the business was at least reporting profits.
One company that has been engaged in a flurry of deal-making to grow is privately held Ocean Infinity, which has reported four deals in five months, buying, in order of purchase, Swedish survey company MMT, Portuguese software start-up Abyssal, British marine security and risk consultancy Ambrey, and now, this month, British wind farm consultancy Geowynd.
These deals come on top of announcing a joint venture with Gregg Drilling, and managing the fallout of the tragic death of one of Ambrey's security staff in the drone attack on the oil tanker Mercer Street off Oman, only weeks after Ocean Infinity bought Ambrey (here).
Anyone who has been involved in an acquisition can attest to the difficulties of integrating a company into the acquirer, agreeing on standard procedures, implementing reporting mechanisms and systems, maintaining staff morale, and retaining key personnel. There are cultural differences, there are the sensitivities of the sellers to manage, especially where they remain in their senior roles as at Geowynd, Abyssal, and Ambrey, and there are areas of costly duplication to eliminate.
Under which legacy company's safety management system will the group operate? Where should the accounting team be based? Can flags and classification societies be optimised?
Acquiring four companies in such a short space of time would stretch even a serial acquirer, let alone a company like Ocean Infinity, which operates only one vessel (Island Pride – last seen en route to Tampico in Mexico). At the same time Ocean Infinity is trying to manage a 17-vessel newbuilding programme at two shipyards on different sides of the world at the same time, plus building several remote operations centres for its fleet. In recent years the CCO of Ocean Infinity, the CFO, and the general counsel have all left the company, according to a search on Linkedin. So the challenge is formidable.
Since, to our knowledge Ocean Infinity had not previously undertaken any acquisitions in its five-year history, why is it making up for lost time by attempting to bring together four targets into its control in the space of a few months?
One wonders whether it is buying expertise (Geowynd appears to be just a small consultancy based in Oxford with all its value in its people.), track record (MMT has a long and storied history, but little evidence of profit.) or management competence (Ambrey's leaders are widely admired for their professionalism in the marine security business.).
Or perhaps a stock market listing is planned, where a bigger entity can command a premium and wow future investors with the diverse technical offering, even if the parts have not yet been bolted into a coherent and functioning whole.
What Ocean Infinity hasn't yet announced is the delivery of any of its first nine uncrewed surface vessels (USVs) in the first phase of its Armada programme. When the newbuild contract was unveiled with great fanfare at the Science Museum in London, the company was confidently stating that the first vessels of 21 metres and 36 metres length would be delivering from the Grovfjord Mek Verksted shipyard in northern Norway at the end of 2020.
Then the pandemic struck. So far, no deliveries have been announced. Maybe the programme is so secret and technologically advanced that the new vessels are being kept under wraps without a breathless public relations announcement.
Or perhaps they are just badly late and perhaps they face operational teething issues.
When we first ran our piece on the Battle of the Subsea Robots (here) in April 2020, we highlighted the progress Fugro was making in this area – progress it has continued to make by actually delivering USV Blue Shadow, which has been out in the field actually conducting surveys and delivering data to clients. Fugro has also revealed details of a RoboDock offshore charging station for its ASVs (here), which it will be testing in the North Sea in conjunction with the Royal Netherlands Institute for Sea Research.
Our follow-up on developments in the USV and AUV sector (here) prompted a letter from Duncan Mallace, the chief strategy officer of XOCEAN, who wrote to say that his company was "currently sneaking up on the inside" against his two much bigger rivals.
"When it comes to the number of USVs in operation we are currently winning 11-1 against Fugro and 11-0 against Ocean Infinity," Mr Mallace told us. "We are working with all the major oil and gas and windfarm companies, and have recently scored some big wins."
XOCEAN's approach is fascinating – smaller and cheaper units than Ocean Infinity's, focused on single types of survey, rather than claiming to be jacks of all trades. Dan Hook, the boss of Ocean Infinity's Armada unit, even told the BBC that he saw the company using its USVs for cargo delivery and shipping containers offshore to platforms and rigs in competition with supply boats.
Not so at XOCEAN. Its latest newsletter (here) reports how it is building up an impressive track record, including in May, when two of its USVs remotely controlled from shore travelled up to 40 kilometres offshore into the North Sea to undertake survey work for the Berwick Bank and Marr Bank Offshore Wind Developments, owned by SSE Renewables. "The USVs performed multiple nearshore and offshore cable route surveys in water depths ranging from 0m to 60m," XOCEAN reported.
The company has also been operating a fleet of four USVs in the North Sea to perform high resolution seabed surveys covering over 750 square kilometres in water depths ranging from zero to 70 metres. XOCEAN also performed 35 cable inspections between the Scottish mainland and the Western Isles, using its USVs in conjunction with uncrewed aerial vehicles.
Possibly, Ocean Infinity, with its fleet of over twenty autonomous underwater vehicles rated to over 6,000 metres of water-depth sees XOCEAN's smaller units as a shallow water distraction. Why should a giant building US$200 million in newbuilds and acquiring four new businesses be concerned by a company that moves its USVs around on trailers in the Highlands of Scotland?
But history teaches that often innovation comes from the edges initially, on a smaller scale, rather than with "big bang, big buck" investments like the Armada fleet.
The longer until Ocean Infinity actually delivers its Armada vessels, the more expertise its competitors gain.
France's iXblue boasts here that its 7.7-metre LOA DriX USV has "over 10,000 hours in operations around the world over the past three years. iXblue's DriX USV, along with its efficient launch and recovery system, is a seasoned asset in the environment of supervised autonomy."
Dutch player Deep has announced that it has conducted the first uncrewed bathymetric surveys with an USV in the Netherlands (here). In May, Van Oord announced that it was ordering a second small USV for coastal and inland waterway surveys (here).
Hit me baby one more time! The Battle of the Subsea Robots has barely begun.
Crazy, as Britney sings (here).
Background reading
Seadrill's first half 2021 results can be viewed here.
Transocean's second quarter 2021 results are here.
Saipem's first half results can be viewed here – there was a net loss of around US$940 million.
The details of Ocean Infinity's acquisitions can be found here. The last three acquisition press releases all begin with exactly the same wording: "Ocean Infinity, the marine robotics company is excited to announce that…."
BBC coverage of the Armada fleet is here.
More details on Fugro's USV Blue Shadow are here.