![COLUMN | Offshore wind update: Eneti, Cyan Renewables, Purus/HST, Vallianz and Marco Polo [Offshore Accounts]](http://media.assettype.com/bairdmaritime%2Fimport%2Fwp-content%2Fuploads%2F220926-Offshore-Accounts1.jpg?w=480&auto=format%2Ccompress&fit=max)
The Ukraine war rumbles on, with Russian seafarers and oilfield workers now in danger of being drafted into president Putin's meat-grinder of death and mayhem in Donbas, the oil price tumbled below US$85 per barrel on Friday, and the new UK prime minister seems determined in following policies inspired by the Peronists in Argentina, with the pound crashing as Ms Truss gave tax cuts to the rich using billions of pounds of borrowed money.
Amid the spiking electricity prices, higher inflation and higher interest rates, and the talk of a cold and dark winter in Europe due to natural gas shortages, one sector stands out as a shining opportunity. Not LNG, not arms shipments to Ukraine, and not airlines flying draft-dodging men out of Russia (Although these are, of course, booming businesses now).
It's offshore wind. The Ukrainian crisis has exposed the world' dependency on fossil fuels, and many see the rise of renewables as unstoppable. There was already a gold rush into offshore wind before Covid, so this week we look at the latest developments from this hot sector, with a special focus on Eneti.
Some companies are badly run because the management is simply incompetent, others are badly run because what is bad for the shareholders is good for the management. With Eneti, the company formerly known as Scorpio Bulkers, its management claim to be geniuses and pay themselves like they are running a hedge fund rather than a second-tier offshore contractor with a serious operational cash flow problem.
After years of lacklustre returns in the commoditised dry bulk industry, Eneti's management has a found compelling story in offshore wind, which was again on display in the company's presentation at the Pareto Energy Conference earlier this month (here). We all know the story of wind turbine installation growth, and we have all seen the hockey stick graph of exponential offshore wind turbine installations (here).
Eneti claims that there will be 14 per cent compound annual growth in offshore wind capacity between 2021 and 2027, and that in 2025, the demand for large wind turbine installation vessels (WTIV) will exceed the demand.
Eneti CEO Emanuele Lauro and President Robert Bugbee have not had a happy time in their previous offshore ventures. In December 2018, the Lauro family took control of Nordic American Offshore, which owned a fleet of ten mainly Ulstein-designed and Ulstein-built platform supply vessels (PSV), some of the most modern and fuel efficient PSVs in the world.
"My focus in the coming weeks will be to ensure that this great enterprise can appropriately position itself for the improving fundamentals to come," Mr Lauro said at the time (here).
Spoiler alert: it couldn't.
Mr Lauro appointed himself Chairman and CEO, his brother Filippo Lauro was given the job of VP, and Mr Bugbee was elevated to the board of directors, and to the office of President of the company. Nordic American Offshore was quickly renamed Hermitage Offshore Services.
Unfortunately, this deal rapidly ended in tears just 18 months later, with Hermitage going bust in the summer of 2020 and creditors taking control of the ten PSVs in a deal that valued each ship at US$8 million. Recent sales of similar PSVs suggest the fleet would now be worth around US$200 million today.
Timing is everything, and Mr Lauro's timing with Nordic American Offshore/Hermitage was terrible.
Having crashed their offshore vehicle a year a year before the PSV market surged back with a vengeance, Lauro and Bugbee performed similar strategic magic with their bulk business. They somehow managed to pivot out of dry bulk and sell their entire fleet of bulk carriers mere moments before the biggest dry bulk boom in more than a decade. The timing of selling the bulk fleet was, er, unfortunate.
Instead of profiting from soaring panamax and supramax charter rates, which tripled between September 2020 and September 2021 (See the nice Fearnleys chart here.), Lauro and Bugbee sold the lot, often for a loss, and bought into offshore wind.
Eneti ordered two newbuilding WTIVs, which will be named Nessie and Siren, at Daewoo in Korea last year. It also bought troubled WTIV owner Seajacks and its fleet of five smaller WTIVs in 2021 for approximately 8.13 million Eneti shares, US$299 million in assumed net debt, US$74 million in newly-issued redeemable notes, and just US$12 million in cash.
In February, the company announced it had cancelled its efforts to try to build a third WTIV in America to deliver Jones Act-compliant installation in the Atlantic Ocean (here). Instead, Maersk Supply Service seized the initiative (here), announcing it was building a new WTIV at Keppel in Singapore, and had won a contract with Empire Offshore Wind, a joint venture between Equinor and BP, for the installation of US offshore wind farms Empire 1 and 2.
Maersk also announced it would partner with Kirby Corporation, which is one of the largest US-based operators of offshore barges and towing vessels, so that Kirby would provide a feeder barge spread to supply the WTIV in compliance with The Jones Act. Eneti's lunch had been eaten.
Eneti's management paid themselves a large bonus upon the closing of the Seajacks deal – US$30 million (here), an unbelievable jackpot for a team of Monaco-based clowns managers who went on to preside over a 55 per cent crash in Eneti's share price in the last 12 months, and who had previously seen Scorpio Bulkers' shares collapse from over US$60 per share at the end of 2020 to just US$15 when the Seajacks deal was announced.
Bugbee and Lauro may be clowns unlucky with their timing, but their clown car is a Rolls Royce, clearly.
"But, wait, you are being unfair," their supporters will say. Eneti's profit and loss shows an incredible net income of US$56.9 million for the first half of 2022 – as you can see in the company's results here.
Unfortunately, most of these profits were completely unrelated to the wind installation business. The net income included a gain of approximately US$46.8 million and cash dividend income of US$0.4 million from Eneti's equity investment in Scorpio Tankers. Scorpio shares went up, and Eneti booked the increase to its profits.
Looking at cash flows over the first six months, Eneti's results were dreadful. The company's cash flow statement shows that it burnt US$4.7 million in cash from operations. Yes, despite operating five WTIVs, the company was burning cash.
You might say that this does not matter because Eneti has low debt – only US$70 million at the end of June – and it held US$43 million in cash. Then, in August it sold all its shares in Scorpio Tankers, and raked in US$83 million, giving it a net cash position.
If previous examples of Lauro's genius with timing are anything to go by, one might expect the tanker market to hit a peak in 2023, but no-one lost money selling shares for a profit, and the decision to sell has improved Eneti's liquidity.
Only for the board of Eneti to get up to yet more crazy stuff.
No sooner had the Scorpio shares been sold than Eneti was buying back its own shares. On August 31, Eneti announced that it was buying back 2.3 million of its own shares for US$17 million. The company's board authorised further share buybacks up to US$50 million in total.
Whilst the share buybacks are great for people remunerated with stock options, such as the company's management (strange that), they are an awful use of the company's cash.
"The most important feature of buybacks is not that they return capital to shareholders, or that they support stock prices and earnings per share," Robert Armstrong has written (here). "It is that they change a company's capital structure and increase leverage. When a company buys back its own stock, cash and shareholders' equity goes down by the same amount. Assuming assets are greater than equity, that leaves the company more financially leveraged, for good or ill."
Looking ahead, Eneti faces a major financing issue in the next few years. The company has to find 90 per cent of the cost of the two newbuild WTIVs.
WTIVs are not cheap. Eneti needs to find US$590 million. The aggregate contract price for Nessie and Siren is approximately US$655 million, of which US$65.4 million has been already paid by Eneti to Daewoo, leaving a balance of US$590 million.
The vessels are scheduled to be delivered in the third quarter of 2024 and second quarter of 2025. Neither has a contract. Having no contract is going to make borrowing hard for Eneti – and you will note that both Cadeler and Maersk Supply have announced new contracts of their under-construction WTIVs.
So, in the next three years Eneti needs to raise US$590 million. It has a market capitalisation of just US$301 million at the time of writing. In the short term, these stock buybacks will provide a sugar high for Eneti's stock price, but in the medium term, the company is staring into an abyss and every cent of cash should be conserved. Its operations of five existing WTIVs were not generating cash in the first six months of 2022. It has sold its Scorpio Tanker shares for a profit to release liquidity, but its current cash in hand is a drop in the ocean compared to its future financing needs.
US$33 million is due to be paid to the shipyard later this year as a milestone payment on the first newbuild. The company can obviously meet this from its cash on hand, but then Eneti estimates it faces payments to Daewoo of US$98 million in 2023, US$263 million in 2024, and US$195 million in the second quarter of 2025.
Time flies when you are having fun, and time flies when you face a cash crunch – as we have seen with The Metals Company, another company where the management pay themselves handsomely for dreams of future prosperity which require massive cash injections to make possible (here).
Asset sales are one possibility, and Mr Lauro highlighted at the Pareto conference that Eneti was considering the potential sale of its three lower-specification NG2500-design WTIVs (Seajacks Kraken, Seajacks Leviathan, and Seajacks Hydra) which are fitted with only 300-tonne and 400-tonne capacity cranes. These small cranes limit them to installing only outdated 4MW turbines and to performing turbine maintenance. Realistically, finding a buyer would be difficult, and Mr Lauro said that a sale of the trio was dependent on "a further improvement in underlying asset values."
In Greek mythology, sirens were alluring female figures who enchanted sailors to their doom with their beautiful singing. The plan to build Nessie and Siren may yet lure investors in Eneti to their doom, as a capital raising and the dilution of the existing shareholders is all but a foregone conclusion, to my mind.
This company needs to stop paying Mr Lauro and his cronies senior executive colleagues US$30 million bonuses and start generating cash from operations, winning new contracts for the unfinished WTIVs, and getting some financing in place.
Or it could just flip the WTIVs in the yard, before delivery.
Fortunately, help could be just around the corner. Seraya Partners, a Singapore-based private equity fund chaired by James Chern, with Ivan Chern as CEO, launched Cyan Renewables. They appointed former POSH boss Lee Keng Lin as Chief Executive Officer.
Cyan immediately stated that it aims to buy, own, and operate US$1 billion in offshore wind vessels over the next three years. As we have seen from Eneti, US$1 billion doesn't buy you very much in this already crowded and capital-intensive space. That amount would only really stretch to three WTIVs, and the company has wide ambitions, saying it plans to invest not only in WTIVs, but also windfarm service operation vessels (SOVs), offshore cable laying vessels, and crewboats.
The Cherns both worked at Morgan Stanley in Asia before branching out into different private equity ventures over the last decade. Seraya has already invested in a company that owns data centres and Astrid Renew, a company that operates electric vehicle charger and storage infrastructure. It is touting its green credentials, and with an expected surge in offshore wind farm installations in Asia in the coming decade, it can't be long before it is rolling out those familiar hockey stick-shaped graphs to its own investors.
So, if Eneti needs cash, Cyan would be one place to start looking to find it. The announcement of such a large fund only gives further upward momentum to renewables vessel valuations.
Others are now rushing in to take a piece of the pie with open chequebooks.
Last week, Purus Marine announced the acquisition of HST Marine. HST operates a fleet of five crewboats working in the UK, including one of the industry's first battery hybrid crewboat, HST Ella. A sister vessel HST Frances is on order, along with two Bartec-design 30-metre vessels designed for lower emissions and performance in sea states of 2.5-metre wave heights.
"With the acquisition of HST, Purus Wind is well positioned to be a leader in providing integrated C/SOV and CTV offshore wind support solutions," said Julian Proctor, CEO of Purus Marine, in the obligatory press release of the purchase (here).
Purus is owned by EnTrust Global, a US$19 billion private equity investment company, which, like Seraya Partners, is focused on infrastructure. In 2021, Purus bought a newbuild SOV in Norway and purchased two 180,000cbm LNG carriers for delivery in the second half of 2024. Both the SOV and the LNG carriers have multi-year time charters.
Lloyd's List reported that Purus has plans for a 100-vessel fleet (here). By my reckoning, that leaves eighty-nine vessels to go. Get the chequebook out, Mr Proctor. You'll need it.
In Taiwan, Dong Fang Offshore (DFO) has led the industry by buying an operationally very successful SOV from beleaguered Swire Pacific Offshore, Pacific Constructor, now Orient Constructor, on which it has fitted an active heave compensated (AHC) walk to work gangway. The purchase was made in 2021 before the former owner's fire sale to Tidewater, with Dong Fang rumoured to have paid under US$30 million for the ship.
Dong Fang then snapped up the 130-metre-long, DP3 vessel Polar Onyx (now Onyx) from GC Rieber Shipping. Onyx is a flex layer, fitted with a 250-tonne AHC crane, which established its owner's pole position in the Taiwanese windfarm market. Earlier this year, Dong Fang announced it intended its plans to convert the vessel for cable lay operations.
With its track record and the surge in the value of its vessels since it bought them, Dong Fang's parent company, Hung Hua Construction, must surely be expecting a call from Lee Keng Lin at Cyan.
Others in Asia have decided to join the bandwagon by building their own SOVs speculatively. First onboard was Vallianz Holdings of Singapore, which announced in late March (here) that it would be building a "state of the art" SOV designed by Royal IHC at its own shipyard in Batam, Indonesia, United Sindo Perkasa. No delivery date has been announced yet, and no contract is yet in place.
Last week, Singapore-listed Marco Polo Marine announced that it is also building a commissioning SOV with length of 83 metres and beam of 21 metres based on design it has developed with Seatech Solutions. The press release (here) stresses that the ship will have the "latest walk-to-work motion compensated gangway," a 3D motion compensated crane, and the inevitable "state-of-the-art green technology, such as hybrid battery-based energy storage systems" as well as being "future-ready" for methanol, like Ocean Infinity's fleet (here).
Future-ready being a great buzzword for "not quite ready now".
Marco Polo's CSOV can "comfortably" accommodate up to 110 personnel on board, the company says. Now that Cyan is on the prowl for windfarm assets, one of the ironies is that in May, Marco Polo's Taiwanese joint venture bought Taiwanese PKR Offshore and its two vessels from POSH when Lee Keng Ling was running POSH.
Maybe it can sell the business back to him now for an inflated multiple…
At this stage in the market, as things hot up in Asia, all we need now is for Lionel Lee, the former CEO of now bankrupt Ezra Holdings, to turn up in his Lamborghini on Orchard Road, moon the DBS bank office, and formally declare that the Asian wind bull market bull market, in all its craziness, has formally begun.
Background Reading
See our previous coverage of the stampede to list wind-related offshore companies in Oslo, along with our previous analysis of Eneti, here.
Cyan Renewables' fleet list is on the company's website here.
