After last week's Quick Updates (here) we turn our attention to one of the biggest and most important players in the North Sea and Brazil: Solstad Offshore. Solstad just announced the scrapping of a further seven vessels from its already depleted fleet (here), billed as "recycling" the AHTS vessels Sea Tiger (built 1998), Normand Atlantic (1997), Normand Borg (built 2000), Normand Neptun (1996) and Far Sovereign (built 1999) along with the two PSVs Sea Pollock (built 2008) and PSV Far Strider (built 1999).
The vessels had been in long-term lay-up, and the company described them as "non-strategic" and "irrelevant for present and future markets." Selling the flotilla left the company with just six laid-up ships, based on its public filings, including the large anchor handlers Normand Ivan, Normand Master and Normand Mariner, all with 240 tonnes bollard pull or more.
One of the biggest trends of the recent years of the downturn has been the major owners all getting smaller, a process we have billed as "the Sale of the Century" (here and here). Solstad exemplifies this grinding capacity reduction. In late 2019, shipbrokers Fearnley called for the scrapping of over five hundred OSVs from the global fleet of around four thousand, to bring the fleet into balance.
In Solstad's first half 2021 results announced in August here, the company told investors that it had sold 12 vessels in the first eight months of the year, but still had 25 vessels held for sale. The recycling of the announcement reduces that backlog to just 18 ships "held for sale".
The disposal of the seven recycling candidates came hot on the heels of the earlier decision to scrap the KMAR 404 design AHTS Sea Panther (built in 1999) in August 2021, and the sale of the small AHTS Nor Tigerfish (built in 2007) in the same month in South East Asia. I was surprised that the laid-up KMAR 404 design sister AHTS to the scrapping candidates Sea Panther and Sea Tiger, the 1998-built Sea Leopard, was not part of the recycling programme, as that ship has been laid up in a Norwegian fjord for half a decade and must be considered technically obsolescent as well.
As markets improved over the European summer, Solstad reactivated five vessels on the back of contract awards, and its focus seems to be on shedding vessels it doesn't see as marketable and shrinking to a position where the full fleet is operational. Solstad also announced it was boosting its presence in West Africa, a market where it has never been a meaningful player. In September, it declared that it had won over a thousand firm vessel days or for seven PSVs to work for clients understood to be in Senegal and Angola in the face of strong competition from Swire, Bourbon and Vroon.
Can the company shrink its way to relevance? What does Solstad's situation tell us about the future of the offshore industry?
In 2017, Solstad CEO Lars Peder Solstad pulled off one of the most audacious mergers in the history of the offshore industry, a three-way tie-up of his own company with Farstad Shipping, and with John Fredriksen's Deep Sea Supply. This created a company that owned a fleet of 154 OSVs and claimed to be "world-leading in its segments," with a higher specification fleet than its other global rivals Tidewater (which was shortly to merge with Gulfmark a year later), Bourbon, and Swire Pacific Offshore.
Now Solstad has just 86 vessels, having disposed of 68 ships (nearly forty per cent of its original fleet), including three AHTS to the Brazilian Navy (here). Today 90 per cent of its fleet is working, and most of the fleet is either PSVs of 3,200 DWT minimum or anchor handlers with over 180 tonnes bollard pull each. Now nine of Solstad's ships are fitted with hybrid power systems, following the announcement that the construction vessel Normand Ocean would be upgraded with a 1MWh battery system and a shore power connection, part of a wide-ranging transition to hybrid power across the industry, as we reported here.
Unfortunately, the merger was driven more by the desperation of the three companies, which were all heavily indebted, and the despair of their Scandinavian lenders, rather than any strategic vision. Both Farstad and Deep Sea Supply were in default on their loans ahead of the merger.
"If the banks really thought they could sell the vessels for the outstanding debt and be made whole they would have done so long ago," as analyst and investor Jeremy Punnett put it succinctly here.
The merger offered some scope for cost-cutting and savings in overheads and management, but those synergies alone could not save the company.
The new, enlarged Solstad-Farstad started life with debt of over US$3 billion on its balance sheet, and at the end of 2017 more than sixty vessels in its fleet were laid up (here). The recovery in OSV day rates and utilisation that the company needed to prosper never came, and in 2020, the collapse in the oil price after the first Covid lockdowns made Solstad's position unsustainable, as we reported here.
Finally, the banks and the shareholders had to recognise reality. The company restructured, with US$1.4 billion in debt being swapped for equity, and the former significant shareholders also reached into their pockets to contribute to the recapitalisation.
Today the company holds more than US$250 million in cash in its accounts. This is significantly more than Tidewater, where CEO Quintin Kneen presided over a cash balance of US$150 million at the end of June.
In 2020, when it trumpeted its role as sole adviser in the "34 billion kroner restructuring" (here), Arctic Securities mentioned that Solstad had a "liquidity runway of four years." When the company restructured, it did not wipe out all its debt, like Tidewater and Bourbon effectively did.
Instead, "new" Solstad still has long- and short-term net debt of over US$2 billion, after taking its cash balance into account. This still equates to over US$20 million per vessel. At Tidewater, on the other hand, a fleet of 162 vessels (of which 118 are operational) provides security against gross debts of around US$200 million, and negligible net debt.
So the easy work of cutting crash burn by selling aged clunkers like Sea Tiger is over for Solstad. Now the core fleet of high-specification vessels has to deliver and pay that debt down before it is due in 2024. Even after six years of write-downs, cost-cutting, and losses, Solstad's second quarter results showed that the company was at operating break-even, with a small positive cash flow, and lost US$30 million after its financing and interest costs were taken into account.
Despite the huge improvement in the OSV market as oil tops US$80 per barrel, it is clear that CEO Lars Peder Solstad has work to do.
After years of selling vessels for scrap rarely (if ever) disclosing where the vessel would be broken up or by whom, Solstad used the occasion of its seven-vessel recycling deal to herald its efforts to be in the forefront of sustainable and environmental operations. The company announced the seven laid up ships would be recycled at the Green Yard Feda and Green Yard Kleven shipyards in Norway.
In a high fuel price environment, this saves on expensive towage or heavy lift vessel costs by minimising the mobilisation time and distance to the scrappers' yard. It also avoids the risks that saw two Maersk Supply Service anchor handlers lost in the Bay of Biscay whilst under tow to a Turkish scrapyard in 2016 (here). Scrapping in Norway also provides much greater visibility of the safety and labour standards of the workforce engaged in the ship scrapping. And the yards have "Green" in the title, so they must be environmentally friendly!
To be fair, the two Green Yards in Norway work within the EU Ship Recycling Regulations and the currently un-ratified Hong Kong-convention on ship recycling. Activist charities continue to highlight the tragic fatalities and appalling safety records of ship breaking in South Asia. In August alone, "five workers were killed and three severely injured in seven separate accidents on the infamous shipbreaking beach of Chattogram, Bangladesh. The fatalities were caused by explosions, falls from height, falling steel plates and exposure to toxic fumes," reported The NGO Shipbreaking Platform (here). How long can the industry accept this human cost in its scrapping calculations?
Even Turkish yards compliant with EU rules – where some of the major drilling rig operators and cruise lines have chosen to scrap their ships to higher standards – have seen recent fatalities. The same NGO report highlighted, "In Aliaga, Turkey, last weekend, two workers lost their lives when a rope broke during dismantling operations. Veli Bal died on the spot, İlyas Bıdık died on the way to the hospital due to his injuries. The accident occurred at Metas ship recycling yard where not even two months ago another fatal accident killed two workers, Yılmaz Demir and Oğuz Taşkın."
European banks, in particular, are alert to the reputational risks of ship scrapping as the safety record of yards in India, Pakistan, and Bangladesh continues to disappoint. Dutch, German, and Norwegian lenders have signed up to the Responsible Ship Recycling Standards (here). Solstad's decision is certainly in line with the decision of lenders, but so far, the French banks that control Bourbon appear not to be so concerned about scrapping standards as their north European peers.
As Environmental, Sustainable and Governance (ESG) investing increases to attract attention, companies dependent on bank financing, like Solstad, increasingly have to play by the banks' rules.
As well as undergoing a comprehensive financial and operational restructuring, Solstad is also committed to a massive reduction in its emissions. The company is aiming for zero emissions by 2050 (a bold call given that the volatile nature of the offshore industry makes it hard to know which companies will exist in 2030, let alone in 2050). Its target is to reduce emissions from its fleet by 50 per cent, compared to 2008 levels, on or before 2030. How this is calculated is not clear, especially when in 2008, Solstad was a stand-alone entity and much smaller than the current "triple merged" company that came into existence in 2017.
Again, this net zero target is aligned to the ESG views of many of the major shipping lenders in Europe, which have committed to the Poseidon Principles (here for an explanation). A total of 17 leading banks, representing US$140 billion in shipping finance (about 30 per cent of the global ship finance portfolio), are signatories to the Poseidon Principles, says shipping legal firm Clyde and Co.
This matters because, "The signatories will have to disclose whether their portfolios are in line with the climate goals of the framework agreement." This effectively means that, "bank liquidity will be prioritised for those clients supporting IMO target levels, which means that shipowners seeking external financing will need to address decarbonisation," Clyde's lawyers say.
Where Solstad and its lenders are heading in ESG, others in the offshore sector will likely have to follow, even if they are unaware of this today. If you want loans, you need to comply.
Solstad represents the future of the offshore industry – shrinking, as it sells older and technically obsolete vessels, moving towards to a more environmentally friendly fleet, and dependent on the goodwill of its lenders even after its restructuring. It is clear that ships of twenty years of age are now not worth holding onto, given the slow pace of the industry recovery and clients' demands for younger ships.
The future for Solstad and many of the other industry leaders seems to be smaller, more cautious, and dedicated to sweating existing assets, rather than taking risks or investing in new tonnage. Activating tonnage from lay-up speculatively is a "no-no," but faced with the seasonal weakness of the North Sea market in winter, the company is now actively pursuing work in Africa and the Mediterranean.
Finally, the move to battery hybrid diesel-electric power systems looks inexorable across the OSV industry. Increasingly, the banks' ESG priorities become the ESG priorities of those who lend from them. That means safe scrapping and lower emissions.
If only he had shown such foresight and restraint in the boom years, Lars Peder Solstad might not have had to endure the pain of the last few years, and see lenders dilute his share of his company so much. But Solstad is still in business, as the market brightens.
Background reading
You can read the detailed stock exchange announcement of the Solstad, Farstad, Deep Sea Supply merger here.
See recent BBC coverage of ship breaking here.
The Green Yards Group website is here.
For a detailed academic analysis from Masters students at Copenhagen Business School from 2017 that showed that Solstad should not have gone into restructuring and that 2020 should have been a great year for the company, see here.