![COLUMN | Drip, drip, drip: Marinakis orders eight PSVs; DSOC jackup moves; Paratus and Northern Ocean raise capital [Offshore Accounts]](http://media.assettype.com/bairdmaritime%2Fimport%2Fwp-content%2Fuploads%2F240624-Offshore-Accounts.jpg?w=480&auto=format%2Ccompress&fit=max)
There was only one story in offshore this week, the news that Greek shipowner Evangelos Marinakis has doubled down on this bet on the platform supply vessel (PSV) market by making the single biggest order in the entire segment in the last decade. His Capital Offshore has placed an order for four firm diesel-electric, DP2, 94.7-metre-long PSVs, which will be classed by Lloyd's Register.
In addition to the firm order for this quartet of ships at China's Fujian Mawei Shipyard, Capital also holds options for four more units. The price and delivery dates have not been disclosed, but we would estimate each vessel to cost around US$40 million, with delivery of the first ship into service two years from now. How significant is this order and what does it mean for the surging offshore market?
The move gives Mr Marinakis' company scale, following his entry into the offshore industry when Capital announced the purchase of seven PSVs from Standard Supply for over US$100 million. It quickly closed on Standard Viking and Standard Defender, and on four medium-sized units of Kongsberg UT755 LN design of 3,300 DWT units (FS Abergeldie, FS Braemar, FS Crathes, and FS Kristiansand). However, the sale of the 2008-built Standard Supplier was cancelled due to a delay with a repair in January, and the ship was subsequently sold by Standard separately on April 3 for gross proceeds of US$22.7 million. Standard estimated that it would make a one-off gain of US$12.8 million on the sale of the DP2, 5,150DWT ship with 1,060 square metres clear deck.
PSV asset prices are high, and secondhand candidates are scarce, except for Chinese units employed in the domestic market, where the owners and lenders now identify the huge leap in vessel values as an opportunity to sell. The order gives Capital optionality. The company can deliver the vessels into the market and achieve high rates, or they can flip them on the slipway before delivery if demand stays hot. Flipping undelivered newbuilds is a tried and tested Greek tactic in the tanker and bulk markets, and one that Norwegian speculators profited from with both rigs and PSVs in the last offshore boom of 2004 to 2014.
We have now reached a point in the cycle where the returns on newbuilds are now starting to make sense. We saw this with Petrobras tendering for twelve newbuild PSVs against long-term charters in Brazil, along with up to 26 other newbuild vessels of various types.
Now that there will likely be over twenty large PSVs on order, we can expect additional orders. Ship owners are herd animals, and fear of missing out will drive the replacement cycle.
Technically, the Capital order isn't the first PSV newbuilding, as in December, a new entry project company, Hercules Supply, announced it had placed an order at China's Fujian Southeast Shipyard for a new PSV and for two optional sister vessels, with a price of US$34.4 million for the first ship, plus project costs and supervision. The "as delivered" cost was stated as a mere US$37.5 million with 20 per cent down payment on order, Hercules said, then stage payments of 20 per cent and 10 per cent, with a final lump sum of 50 per cent on delivery.
UK's Fletcher Offshore, which manages the Capital Offshore fleet, appeared to be a partner in the project and announced it had secured US$21.65 million of project finance equity raised by Clarkson Project Finance. Norwegian analysts were a little dismissive of this contract given that the main engines had previously been purchased for an earlier order that was abandoned, so they argued that it didn't really reflect newbuilding costs.
That argument doesn't really stand up now. In September, we argued in a headline "Tidewater's triumph provides Chinese yards with boom" and it looks like China will be the major winner of the next offshore newbuilding cycle, just as Vietnam has emerged as Asia's windfarm service operations vessel building hub, mainly because the largest Asian market, Taiwan, forbids Chinese-built vessels to work there.
By Tidewater's own admission, there are around 400 PSVs of over 900 square metres of clear deck in the world fleet, so an orderbook of twenty ships in six months is starting to look material. It comes on the back of orders for offshore construction vessels from Norwegian players Rem Offshore and the pairing of Eidesvik Offshore and Agalas, as well as from John Fredriksen's Sea Tankers at Wuchang in China. There was also an order from Singapore's Vallianz for a 120-tonne bollard pull anchor handler last year.
Tidewater has a market capitalisation of around US$5 billion and a fleet of 200 anchor handlers and PSVs. We have argued that on a sum of parts basis, it is hard to justify a valuation of more than US$100 to US$120 per share. On Friday, the stock closed at US$95 per share.
We have circumstantial evidence that Mr Quintin Kneen, Tidewater's CEO, agrees with us about this cap on the upside of the company's valuation – whenever the Tidewater stock briefly gets over US$100, he and other members of the senior management exercise their options and sell their shares. Based on SEC Filings, we estimated that the CEO has sold over US$75 million in Tidewater stocks this year, as we reported last week.
Its two largest rivals, Bourbon (with a fleet of around 110 comparable vessels) and Edison Chouest (around 130 vessels), are privately owned and are still grappling with the debts they incurred during the last boom. So Tidewater does enjoy a market dominance and has been incredibly shrewd in its acquisition of fifty ships in the Swire Pacific Offshore fleet in 2022 and then 37 high-specification PSVs from Solstad (a gobble-up strategy we compared to Pac-Man)
Sometimes a little perspective helps. The graph below shows how completely unprecedent the rise in the Tidewater's stock price has been since 2021. Note that the 0-1 marker is the tombstone for the company's Chapter Eleven restructuring when the shares were briefly delisted. Tidewater has been through many offshore cycles before – it delivered the world's first supply boat, Ebb Tide, in 1955 – but its stock has never behaved over the last 37 years as it has over the last three years, now even in 2008 when rates were the similar to today's.
We have said it once and we will say it again: Tidewater has a fleet that has an average age of 13 years, exactly halfway through the estimated 25-year-life cycle of an offshore vessel, or two thirds through the 20-year age bar that many major international oil companies impose. This average fleet age of 13 years today suggests that seven to 12 years from now, Tidewater will meaningfully cease to exist as a business, unless it begins a program of fleet renewal.
Replacing the 140 PSVs in the Tidewater fleet will likely cost just under US$5 billion at an average price of US$35 million per vessel, and Tidewater has a decade in which to do it. That excludes the 60 or so anchor handlers in the fleet that probably have a replacement cost of another US$2 billion.
There are going to be more share buybacks from the company – the management's stock incentive plans are aligned around that – and there will be dividends, as the cash flow this year and in 2025 will probably be US$500 million every 12 months. But that only pays for 12 large newbuildings a year. Debt is going to have to go up – there is ample room for borrowing and Chinese yards will offer generous payment terms to a premium customer like Tidewater.
The company can defer newbuildings – as the drilling rig owners have deferred them – as long as more orders don't materialise. This benign case is starting to look less likely.
Unfortunately, the drip, drip of new orders will soon become a trickle and then a flood, if past offshore order cycles are anything to go by. This will then become an existential threat to the company. At that point, we can expect Mr Kneen to retire from Tidewater, and it ceases to be his problem. I would argue his retirement will mark a huge red flag for investors.
Remember that graph. It is a testament to Mr Kneen's achievements, but a warning to stockholders that future growth is likely to be much more slower, and may (gulp) even reverse.
Part of the problem is that in a boom – and offshore is in a boom – capacity is found in all sorts of unusual places. The previously arrested large PSV Martha's Pride is reported back into service in Nigeria after it was reportedly sold by its creditors, MMA Offshore has announced it will take a PSV and add a crane next year to turn the 2013-built, 5,000DWT MMA Valour into a higher value subsea and ROV vessel. The scallop harvesting former UT717 design PSV Arctic Pearl is reported to be sold for reconversion back to oilfield work as a PSV, and the 2010-built, 1,000-square-metre clear deck Havila Crusader was abruptly not converted to a luxury yacht but flipped back as a PSV, as we reported in 2023. Markets are incredible at making money for those with imagination and capital.
There were developments last week in the jackup market too. Borr's stock price has enjoyed a modest increase by Tidewater's standards, up only 600 per cent in the last four years, not 1,200 per cent. This has been premised on a sold-out jackup market and sustained high utilisation at high rates, a narrative the Saudi Aramco decision to suspend 22 rigs has slightly dented.
Now, Upstream reported that China's Dalian Shipbuilding Offshore Company (DSOC) has decided to complete one of its three unfinished jackup rigs by mid-2025, with plans to launch the remaining two by the end of next year. This is an incredibly bullish signal, but also indicates the willingness of Chinese state lenders to fund offshore projects again. The completions will support hundreds of shipyard and contractor jobs, but will likely require in total over US$100 million of capital.
DSOC was created from the restructuring of DISC Offshore when the latter entered insolvency proceedings in 2019 after its largest client Seadrill cancelled the contract for eight Friede and Goldman JU2000E jackups. These had been ordered in the glory days of 2013, but Seadrill walked away when it faced the first of its painful restructurings.
DSOC was taken over by its creditors in 2021 and recapitalised. It managed to sell four of the former Seadrill rigs to China Oilfield Service for a reported US$111 million each, and one to Sinopec, as per Xu Yihe in Upstream last year. The decision to go ahead and finish these rigs is a vote of confidence in the drilling market, but also the first drip, drip of Chinese capital back into the industry after the catastrophic losses inflicted by newbuilding cancellations in the last cycle.
And is not just Greek shipowners and Chinese state banks coming back to finance now-viable offshore projects. We reported last week how Ventura Brazil's Ventura Offshore Holding has listed on Euronext Growth Oslo stock market with a valuation of around US$170 million based on it owning and operating the drillship Carolina and the semisubmersible rig SSV Victoria.
Now there are two more intriguing capital raisings, one of which involves a company that was salvaged from the wreckage of Seadrill's second bankruptcy; the other is Northern Ocean, which owns a rig salvaged from the wreckage of Seadrill's first bankruptcy. At Northern Ocean, the dominant shareholder is former Norwegian and former salmon farmer, but very current shipping tycoon, John Fredriksen.
We now pose another question: who is behind the mysterious Paratus Energy that will shortly list on Euronext Growth Oslo?
You can find more Paratus Energy in its March investor presentation. Paratus owns five premium jackups working in Mexico through what was formerly known as SeaMex,but has been rebranded very blandly and very badly as Fontis Holdings (whoever throught of that should be shot, in my opinion). These are all contracted with Pemex at day rates of over US$100,000 per day.
Paratus also owns 50 per cent of Seabras Sapura Holding, a joint venture with Malaysia's "troubled" Sapura Offshore, which owns and operates six high-specification DP pipe-laying vessels in Brazil that are contracted with Petrobras but due for renegotiation. It also owns approximately 24 per cent of Archer, a rather random oil services company listed on the Oslo Stock Exchange and in which Mr John Fredriksen dabbled in the last boom.
Oh, and we should mention that Paratus is managed by and 32 per cent owned by Hemen Investments, which its own press release describes as "an entity ultimately controlled by trusts established by John Fredriksen for the benefit of his immediate family members."
Around 20 per cent is owned by funds and accounts managed by Lodbrok Capital (a hedge fund named after a Viking hero), and Melqart Asset Management (UK) also holds a stake. Melquart was established in 2015 by CEO and CIO, Michel Massoud. Paratus says it has net debt of US$597 million, which is probably just below the value of the Mexican rigs.
The acquisition of Paratus by Hemen and its partners was a masterful carve out of five rigs from Seadrill that flew under the radar for most observers (well me, anyway). The proposed listing positions the company nicely in the rising market, giving it stock as currency for future acquisitions, an exit vehicle for the London-based hedge funds, and the prospect of big dividends and cash returns to shareholders once the Petrobras contracts are renegotiated and extended at higher rates.
Don't be surprised if "troubled" Sapura sells its stake in Seabras back to Paratus, as Sapura urgently needs cash to complete its restructuring.
Northern Ocean owns two rigs, Deepsea Mira and Deepsea Bollsta, which are both harsh environment units based on the Moss Maritime CS60 design, capacity of drilling in water depth of up to 10,000 feet (3,000 metres). The rigs are managed by Odfjell, and one is offhire in Namibia. But not for long.
Northern announced last week that it plans to raise capital through a private placement of new shares, which will raise gross proceeds of around US$60 million. The share sale then facilitates a complete refinancing of the company, Northern claims, when a group of banks will provide a US$300 million loan facility and Sterna Finance, a company affiliated with…. (surprise) Hemen Holding, provides a loan facility of US$215 million.
Did I mention who is the largest shareholder in Northern? Oh, that would be Hemen Holdings, that "entity ultimately controlled by trusts established by John Fredriksen for the benefit of his immediate family members."
Mr Fredriksen is back in offshore big time. Mr Kneen's worst nightmare must be that rather than dabbling with rigs, he throws a speculative order in for ten or twenty more PSVs. Because he could.
This would also serve to remind Mr Marinakis that he is just a small-time newcomer to a segment where Mr Fredriksen has played and dominated for over two decades. Action at Paratus and Northern Ocean, and the Wuchang subsea vessel order for Sea Tankers, suggests that Mr Fredriksen has his eye on many more offshore deals.
Rather like the Tidewater stock price and the flow of new capital into the industry, this is ultimately a very bullish signal. Let's not squander this new boom like we did the last one. Oh wait…
Background Reading
It is worth reading the Barclays presentation that Tidewater made in September 2023. It highlights how the company has very successfully driven up day rates for PSVs and has consolidated the industry nicely – for now.
