Offshore is a cyclical industry; when assets are at their cheapest, nobody wants to buy them, and nobody will lend money to acquire offshore vessels and rigs.
If only I had had the foresight to buy Tidewater stock in May 2020 when it traded below US$5 per share, as opposed to US$68 on Friday. But I am no Robert Robotti, sadly.
In early 2021, the brave investors/Norwegian speculators behind Deep Value Driller bought the seventh-generation drillship Bolette Dolphin in lay-up for US$65 million from the creditors of the former Fred Olsen Energy, which had ordered the rig for an all-in construction cost of US$750 million. In that world, only thirty months ago, deepwater rigs were being fixed at around US$200,000 and the whole sector was mired in gloom after the shock of US$20 oil in Covid. Now 7G rigs are being chartered for close to US$500,000 per day and conservative estimates of the value of the Deep Value Driller rig put it around US$250 million. I can see why the Deep Value Driller board chose to be paid in warrants for shares in the company, not in cash.
Paradoxically, when assets cost the most, banks queue up to lend to shipowners, investors throw money into shipping and offshore stocks, and newbuilds are ordered with abandon, only to be abandoned when the market invariably crashes shortly thereafter. Offshore is lucky: it has historically had longer cycles than the tanker and container trades, with one aberration in 1997-1998, so we can hope that this current good fortune lasts another five years at least. Pity the volatile container trades, where in two years, MSC and Maersk and the like made more money than the preceding fifty years combined, but now look set for billions in write-downs and business losses for the next decade.
Now both segments of offshore – oil and gas, and offshore wind – are sizzling together. The latecomers are rushing to the party, and those with bad hangovers from the last party are finally leaving the sector. This was evident all over the sector last week.
When is a takeover not a takeover? When it's a restructuring, obviously. The news that Solstad Offshore has embarked on a complicated refinancing with Aker took the markets by surprise.
Aker was already a 25 per cent shareholder in Solstad, following a convertible loan to the company in 2020, which it converted into shares. Usually when companies are taken over by their largest shareholder, the stock price surges and the acquiror pays a hefty premium for the privilege. Not so in the case of Solstad, because this is not a takeover, even though 72 per cent control of most of the company's assets is ceded to Aker Capital, controlled by Norwegian tycoon Kjell Inge Røkke.
As a reminder, Kjell Inge Røkke controls around 67 per cent of Aker, and the company's industrial holdings include half of the Norwegian oil producer Aker BP, and control of subsea equipment maker Aker Solutions, with which Solstad had formed the Windstaller Alliance for offshore wind work, as well as Akastor and Kværner. The Swiss-resident businessman has a net worth estimated at US$4.6 billion, and now Aker seems to also have control of the majority of the Solstad fleet.
Solstad Offshore shares fell nearly 30 per cent at opening last Monday morning when the company announced this complicated deal with Aker, a deal that effectively dispossesses it of control of most of its remaining fleet of construction vessels and anchor handlers. The shares bounced back midweek and then sank back to lose 27 per cent on the week at close Friday. The shareholders have voted… with their feet, including DNB Bank, which ditched a large proportion of its shares, although it remains a major lender to the new company that is being formed in this deal.
Over the last year, holders of Solstad shares have lost money, with the stock down eight per cent, even as the company sold 37 platform supply vessels (PSVs) to Tidewater for US$577 million in an effort to resolve its longstanding over-indebtedness. Few other listed offshore companies have performed so badly in the past 12 months.
I hate complicated deals, because you can never be quite sure of what is going on. In this case, Aker seems to have done everything possible to avoid putting the deal to a shareholder vote at the listed company level.
If we unpick the deal we see that Aker and its partners are taking 73 per cent of a new company that will own 22 of Solstad's construction support vessels (CSVs) and 14 anchor handling tug supply (AHTS) vessels. The existing shareholders in Solstad Offshore will own only 27 per cent of this company.
The current listed company will retain Solstad's Brazilian-built fleet, which consists of the 2012 delivered, converted PSV Normand Carioca and the UT728-design AHTS vessel Normand Topazio, and the UT-722L design AHTSs Normand Turquesa and Normand Turmalina, which were built in 2005 and 2006, respectively, so are not exactly modern ships. These four ships are all financed by the Brazilian state bank BNDES.
Additionally, the current company holds onto the CSV Normand Superior, which is working on a North Sea wind farm project as part of a firm contract with Ocean Infinity until 2026, with two optional years thereafter, and the CSV Normand Tonjer, which has been working for Magseis Fairfield since 2018, supporting ocean bottom node seismic surveys, and has received extensive modifications for this role. Normand Carioca was explicitly excluded from the Tidewater deal despite being a PSV. The ship has been under contract with Equinor Brazil since 2017, and has just commenced a new, long-term scope of work as a well stimulation vessel to support drilling activities at Bacalhau field in fulfillment of a contract valued at US$100 million.
The current listed company also gets to keep the very large CSV Normand Maximus on bareboat from the new company that Aker and its partners have formed, until October 2027, and it keeps a purchase option on the ship.
So, the current shareholders get three old Brazilian anchor handlers, one converted STX 09 CD design well stimulation vessel, a seismic support conversion, and a CSV on charter with Ocean Infinity, plus 27 per cent of the other 36 vessels that they previously owned outright and a purchase option on a large construction vessel under bareboat.
Solstad Offshore is now a rump company, and I can't imagine it is long before there is either a full takeover by Aker, or a reverse listing by the newly formed Aker-controlled company into the old listed company, to give Aker liquidity and access to public markets.
The current Solstad Offshore will retain net debt estimated to be around NOK3 billion (US$267 million) at year-end 2024, including the obligations associated with the Normand Maximus lease. The company also keeps its 50 per cent ownership in the Normand Installer joint venture together with SBM. This is pretty thin gruel.
Aker and its partners say they deserve the 36 vessels because they have developed and negotiated NOK9.7 billion (US$865 million) in new credit facilities, underwritten by DNB and Eksfin, to fully refinance the current fleet loan, which matures on March 31, 2024, and they are investing significant new equity in the new company.
So, the deal is essentially to bid goodbye to 36 vessels and excessive debt. In a normal company, faced with a wall of debt maturing, you might expect the company to issue new equity through a rights issue and then refinance with its lenders supported by the fresh equity. Even if the rights issue was at a massive discount, it is hard to see it inflicting more damage on current shareholders than the 27 per cent loss they endured last week.
And investors are interested in issuing new equity to offshore companies – Borr Drilling announced it would raise US$50 million in a private placement last week, floating accommodation owner Prosafe raised NOK350 million (US$31 million) in a discounted placement six days ago, and Shelf Drilling raised NOK640 million (US$57 million) through a share issue at the end of last month. Now that the market is sizzling again, offshore companies can raise capital in the public markets, after eight years of being shut out.
But unfortunately, many of the holders of Solstad shares were the company's former creditors. They never wanted to hold shares in the company and they certainly didn't want to invest fresh capital. So, Solstad first sold its PSV fleet to Tidewater, the only willing cash buyer in the market, then ended up selling 73 per cent of its most modern and best vessels to the Aker-controlled new company.
We have said it before, and we will say it again now. Banks make terrible shareholders in offshore and shipping companies and companies with equitised creditors on their shareholder registers are chronic underperformers.
As part of the Refinancing, Solstad will establish a parent company for a new corporate structure (imaginatively called "Solstad NewCo"), in which a total of NOK4 billion (US$357 million) of new equity will be raised, where Aker will contribute a minimum of 55 per cent (NOK2.25 billion = US$200 million) and underwrite an additional portion.
Aker correctly states that this will significantly improve the financial position of Solstad NewCo, but it is hard to avoid the conclusion that there might have been different solutions available that might have been less Aker-centric. In addition, AMSC, in which Aker is the largest shareholder with ~19 per cent of the shares, will contribute the owning entity for the CSV Normand Maximus against issuance of NOK1 billion (US$89 million) equivalent of new shares in Solstad NewCo.
So, a company in which Aker is a major player will swap its ship for equity in a new company in which Aker is the majority shareholder, and continue to bareboat that asset to a company where Aker holds 25 per cent of the shares. This starts to look like an Ouroboros, the mythical circular snake devouring itself.
The transaction sees a new senior secured term loan of NOK9.7 billion (US$865 million) issued by NewCo. The company says that the proforma 2023 Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) for Solstad NewCo, including CSV Normand Maximus contributed by AMSC, is estimated to be in the range of NOK2.6 billion to NOK2.8 billion (US$231 million to US$250 million), so it can comfortably support this new debt and pay out dividends.
Let's give Aker the final word on this complicated deal, which is either a life saver for a heavily indebted company, or a great opportunity for the largest shareholder to take control of the company's best assets on favourable terms:
"The refinancing will establish a robust industrial platform positioning Solstad NewCo as a global leading offshore operator with one of the most modern fleets of high-end vessels and a healthy balance sheet including NOK4 billion of new equity," said Øyvind Eriksen, President and CEO of Aker, in the company's press release. "I would like to extend my appreciation towards DNB and Eksfin for their support in the Refinancing. The strong market outlook and the immediate deleveraging provides a solid basis for increased value creation with a clear ambition to initiate quarterly dividend payments from Solstad NewCo in 2024. This will further strengthen and diversify upstream dividends in Aker. Aker strongly supports the Solstad group, Solstad NewCo, its management team, and its competent organisation."
Finally, after the euphoric excitement engendered by the negotiations at the International Seabed Authority to approve commercial seabed mining of polymetallic nodules earlier this year, which saw the share price in The Metals Company shoot up to close to US$3, the fun is over. The stock is back to 83 US cents now, down 14 per cent over the last year, but it can't be long before another round of negotiations in Jamaica over the future of commercial mining sees yet another frenzy of penny stock activity in this US$250 million market capitalisation company.
Someone is optimistic. The Metals Company just agreed to sell some new shares accompanied by Class A warrants that entitle the holder to buy more shares at an exercise price per share of US$3. Each Common Share (currently worth 83 US cents, remember) and the accompanying Class A Warrant to purchase 0.5 of a Common Share were sold at a price of US$2. The approximately US$24.9 million of expected gross proceeds to the company includes the two additional closings for US$2.5 million and US$6.5 million expected to occur on or before November 30, 2023 and January 31, 2024.
So who is positioning themselves for the next spike in a company that has so far destroyed 90 per cent of the value of those who bought into it when it listed on the public markets?
Background reading
See the Forbes portrait of Kjell Inge Røkke. Note that Ocean Yield was sold to KKR in 2021.
Our previous coverage of Solstad is available in the Baird Maritime archive here.