This week, we cover a quartet of updates from our favourite sectors: offshore, subsea mining, and the wind industry.
Good news from Norway. DOF is back in the black in the first quarter of the year – well, kind of. Average utilisation of the fleet from January to March was 82 per cent (up from 67 per cent the year before), and DOF has only one vessel in its fleet of 55 still in lay-up.
Last Thursday, the company announced its best quarterly operating profits for more than six years, announcing that it had made NOK321 million (US$33 million) before interest payments of NOK382 million (US$39 million). But then, miracle of miracles, a stronger Brazilian currency delivered a NOK1,055 million (US$108 million) one-time boost of "unrealised currency gains" to carry the company into net profit.
A round of aquavit shots to everyone! Unfortunately, DOF's situation remains precarious. All the big international players have now restructured: Tidewater, Bourbon, Solstad, Hornbeck, even Pacific Radiance and MEO in Singapore. But DOF remains resolutely unrestructured.
Every month it continues to roll over a standstill agreement with its banks and bondholders, and every month it discusses how they will swap their debts for shares in the company. And every month, there is no resolution.
It's Groundhog Day, but without Bill Murray, or the laughs.
DOF continued to shrink its fleet. It agreed to sell four additional older vessels so far this year. The 2002-built PSV Skandi Foula was handed over to new owners in April, and the company also disposed of the 2002-built PSV Skandi Rona, and the 2003-built PSV Skandi Sotra.
The fourth vessel to be offloaded is the multipurpose survey vessel Geoseas, which has been purchased by the Dutch subsea company N-Sea. N-Sea has been on a bit of a roll recently, also announcing the long-term charter of the DP2 Braveheart Spirit, a 2009 subsea vessel originally built for Bourbon (here).
DOF also took a NOK93 million (US$9.5 million) impairment on the book value of one of its anchor handlers. It is the guarantor of a NOK453 million (US$46.5 million) loan against the magnificent anchor handler Skandi Iceman (built 2013, 319 tonnes bollard pull). However, the PSV and anchor handling vessels in the fleet are increasingly marginal to DOF, with the 53 per cent of the fleet that is the subsea vessels generating 83 per cent of DOF's cash flow.
Expect to see more disposals of PSVs and anchor handlers from DOF in the coming months.
Even though the offshore markets have improved, and both fleet utilisation and cash flow are increasing, DOF's announcement gave several stark warnings:
"The group is not in a position to pay its debts without a significant conversion of debt into equity and thereby continue as a going concern. The group's financial position is not sustainable, and the equity is lost. The restructuring proposal currently discussed with the creditors include conversion of a significant amount of debt to equity and soft terms of the existing loan facilities. The dialogue with the lenders is constructive, but a refinancing solution is not yet in place."
DOF still has NOK18.64 billion (US$1.913 billion) of debt. It is making some interest payments on some of the debt, but such a debt load is clearly unsustainable. DOF remains publicly listed, albeit subject to restrictions from the Oslo Stock Exchange due to "circumstances that make pricing of the shares particularly uncertain."
The main shareholder, Møgster Offshore, controls 31.6 per cent of the company, and the board clearly hopes that the improved markets will allow Helge Møgster to retain some value.
By hanging on for far longer than his peers, Mr Møgster has played a consummate waiting game. But as markets rebound, surely there has to be some resolution of the complex web of loans and notes?
In 2007, English songwriter Kate Nash stormed to number two in the UK charts with her single "Foundations," a quirky song about falling out of love:
"You said I must eat so many lemons, 'cause I am so bitter. I said, 'I'd rather be with your friends, mate, 'Cause they are much fitter.'"
Now Danish wind farm specialist Cadeler has announced a large capital raising to fund its own wind turbine foundation installation vessel (WTIV) in China. On May 5, the company announced it had raised €86 million (US$91 million) in a private equity placement, which – surprise, surprise – "attracted strong interest from Nordic and international institutional investors."
Indeed, Cadeler does appear to be much fitter than its peers, Eneti, where the stock price has fallen 68 per cent over the last year, and Fred Olsen Windcarrier, which aborted its efforts to list in Oslo earlier in the year (here), even before the Russian invasion of Ukraine.
If Fred Olsen Windcarrier found it hard to list earlier in the year, it will be even harder now as the stock markets have retreated sharply.
Then on May 9, Cadeler announced that it had signed a US$345 million contract with COSCO Heavy Industries to build the first "F-Class" jackup installation vessel in China, with an option to build a second. Specifications are a tightly held secret at the moment, but Cadeler says that the F-Class unit will be able to be quickly transformed to into a standard WTIV if it is not performing foundation installations. The ship will have a higher capacity crane than the 2,600-tonne units installed on its previous order of its two X-Class WTIVs.
The decision to build in China is an interesting one, given the huge problems China's zero-Covid policies have inflicted on the country, with widespread lockdowns continuing and difficulty for foreigners to enter the country. Will Covid problems in China lead to delivery delays?
Cadeler already has two X-class WTIVs under construction at COSCO yards for delivery in 2024 and 2025, as we reported here. Cadeler is now committed to spending one billion US dollars in China, and has ordered three large WTIV units funded 75 per cent by debt.
For all its green credentials, clearly human rights don't rank in the company's much vaunted Environmental, Social and Governance criteria. If pressure between the West and China increases, as my colleague Trevor Hollingsbee has warned in many of his Naval Gazing columns here, Cadeler CEO Mikkel Gleerup could find himself and his company on the wrong side of history.
Investing in countries that run concentration camps and where the supreme leader seeks absolute power for life is typically out of fashion, even if wind energy is in vogue.
Even as Cadeler and Maersk Supply Services add new WTIV orders, their customers, the big turbine manufacturers, Siemens Gamesa, Vestas, and GE Renewables, remain deeply mired in losses. Their results in the first quarter were again horribly bad, as all three demonstrated an alarming inability to manage their costs, and to pass higher raw materials and logistics prices onto their customers.
Vestas reported a loss of €329 million (US$347 million) for the period, whilst Siemens Gamesa reported a net loss income attributable to shareholders of €403 million (US$425 million), and GE Renewable Energy also lost US$400 million. That's more than a billion dollars bled in just ninety days.
We have already warned (here) and (here) that unless the private-sector turbine manufacturers in the west can make profits, they risk being squeezed out of the business by state-owned competitors in China. Investment bank Jeffries estimates that Chinese state-owned manufacturers have a 40 per cent cost advantage over their western rivals.
In July last year, we already warned that cost increases and inflation in the wind turbine business might be general, rather than transitory, and that, "the western European and American manufacturers are going to have to get very political to ensure that jobs and technology in wind stay at home. Otherwise, wind turbines both fixed and floating can go the way of solar panels, an industry which Chinese companies completely dominate globally with a completely integrated domestic supply chain."
Guess what? They have started the political process.
In a letter to European Commission president Ursula von der Leyen, which you can read here, lobby group Wind Europe and the leaders of turbine makers Vestas, Siemens Gamesa, GE Renewables, Nordex, and Enercon warned that they were losing ground to Chinese manufacturers. Perhaps the European Commission could help?
The letter authors highlighted that in 2021, the EU added only 11 GW of wind farms, less than a quarter of the amount installed in China. Rather than awarding offshore wind farms on price alone, the turbine manufacturers said that European governments should consider other factors — such as job creation in Europe — when awarding auctions for new wind farms.
The Russian invasion of Ukraine has made Europeans very aware of the dangers of dependence on Russian oil and gas. Indeed, this weekend Russia decided to cut off gas supplies to Finland as punishment for its decision to apply to join NATO. But it has also highlighted, as per former NATO secretary general Anders Fogh Rasmussen (here), that democracies that rely on dictatorships and authoritarian regimes for any element of their energy or food needs are vulnerable.
At Baird Maritime, we are against government subsidies and "corporate welfare". However, the bankruptcy and disappearance of European wind turbine makers and their replacement by Chinese ones would be a serious strategic mistake.
Expect to hear for more calls for "local content" in Europe to be included in offshore wind auctions, just as it is in the United States. See here for Scotland's efforts in this respect.
The situation at Siemens Gamesa is now so dire that parent company Siemens Energy in Germany has announced that it will make an offer to take the entire company private, and buy out the minority shareholders. The presentation by Siemens Energy sets out the rationale here – the company says that it will cut around US$300 million of cost "synergies" within three years, and that it expects 28 per cent per year compound annual growth in offshore wind energy outside China between now and 2030 – we love a good hockey stick-shaped graph!
Siemens Energy has an investment grade credit rating, which should enable it to borrow more cheaply than its floundering subsidiary. However, Siemens claims that most of the cost synergies will come from what the German parent company describes as "project execution excellence." There's no mention of protectionism, government subsidies or enforcing local content requirement, let alone raising prices to customers. The synergies over three years are equal to just three months of losses at Siemens Gamesa. If the European producers are going to survive, a few savings in shared research and development and "value-add through data driven capabilities" will not be enough.
The European wind turbine makers need higher prices, and probably consolidation, plus vigorous protection by the EU from Chinese competitors. But you won't hear Siemens say this out loud until after the take-over of Siemens Gamesa is complete.
Pioneering subsea mining player The Metals Company announced its first quarter results here. Last week it also announced the successful deployment of a riser system and flexible jumper hose from the mining mothership Hidden Gem, a converted deepwater drillship owned and operated by Allseas. The company wrote:
"Engineers aboard the Hidden Gem vessel deployed the flexible jumper hose, connected it to the base of the riser and then launched the pilot riser, lowering the assembly to a depth of around 650 meters. Using the remotely operated vehicle (ROV) installed on the Hidden Gem, engineers then made a sub-sea connection between the jumper hose and collector vehicle which was previously deployed to the seafloor in 745 metres water depth. Allseas used the derrick onboard the former drillship for at-sea construction of the pilot riser system."
In April this year, Allseas deployed the pilot nodule collector vehicle from Hidden Gem in the North Atlantic and lowered it to the seafloor at depths of 2,470 metres. This was the first time the vehicle had been subjected to ultra-deep-water temperatures and pressures. It drove on the seafloor for one kilometre, but was not connected to the riser system at the time. The riser system will transfer the polymetallic nodules (and any creatures living on the nodules) from the collector on the seabed, and transport them to the mothership.
Allseas and The Metals Company now plan to test the collector vehicle and the recovery capabilities of Hidden Gem in the four-kilometre-deep waters of the mineral-rich Clarion Clipperton Zone of the Pacific Ocean later this year. So, technically, Allseas is making progress.
But the financial results of The Metals Company also revealed a small problem: cash burn. The company reported a quarterly net loss of US$21 million and declared that it held total cash of approximately US$69 million at March 31, 2022. "We believe [this cash] will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months from today," the company said.
One of the reasons why the formal net loss was so large was that the management team couldn't resist handing out more shares to themselves. CEO Gerard Barron told investors that the net operating loss was "mainly driven by non-cash share-based comp of US$5.7 million."
At the same time, the company reported that, "excluding non-recurring items, free cash flow for the first quarter of 2022 was negative US$15.7 million, compared to negative US$7.4 million in the first quarter of 2021."
The company paid Allseas a lump sum of US$10 million for the progress with the pilot system and Hidden Gem in the quarter. Worse, Barron announced "we would expect, at some point to have capital spending of US$55 million."
You don't need to be a genius to work out that with US$69 million of cash in hand, and quarterly cash burn of US$15 million, plus US$55 million of future capex expected, but no revenue from commercial mining yet, The Metals Company is going to have to raise cash, probably later this year. The shares are down 85 per cent since the company listed, interest rates are rising, and stock markets have crashed. A cash call and the dilution of existing shareholders of The Metals Company will be painful.
However, insiders have awarded themselves lots and lots of stock, but I suspect that many of the outsiders who bought in at US$10 per share last September are humming Kate Nash's lyrics to themselves:
"My fingertips are holding onto the cracks in our foundation, and I know that I should let go, but I can't…"
Background Reading
N-Sea's press release on the purchase of Geosea is here.
The video for Kate Nash's Foundations single is here.
Cadeler's 2021 results presentation is here.
GE's first quarter presentation is here.
You can read the transcript of the full earnings call by The Metals Company earlier this month here.
