The offshore industry is currently so ugly that it is hard to know where to start….With the intriguing news that four bidders have apparently made bids for Bourbon, which the French bankruptcy court will review in December? With Swire Pacific Offshore's surprise decision to close its ailing Swire Seabed subsea division and lay off 150 staff? Or, with John Frederiksen's announcement that he was quitting as Chairman of Seadrill with immediate effect, on the same day that the rig company announced a net loss of $521 million for the third quarter?
Perhaps, we should ask the Magic Mirror in the Baird Offices: "Mirror, mirror on the wall, which is the ugliest offshore company of them all?" The mirror replies: "Those are all pretty grim, yes, it is true. But beyond the mountains in Houston, in Texas, lies a company a thousand times uglier than you can imagine; McDermott International, run by seven greedy little gold-diggers, all receiving huge bonuses whilst the company cannot pay its debts."
And the mirror is right. Last month we were shocked and outraged that McDermott's CEO and senior executives were raking in $7 million dollars in "retention bonuses" as the company sought to stave off bankruptcy with a new, very expensive refinancing package from a consortium of banks headed by Barclays.
We suggested that the incompetent leaders who had driven this once great company into the ground should be fired, including CFO Stuart Spence for his egregious failure to report hundreds of millions of dollars of additional, unforeseen cash burn on loss-making projects between July and October.
Imagine our surprise, then, when the company did actually announce that Mr Spence was leaving McDermott "to pursue other opportunities" on November 4, following another shocking set of bad results. The company reported horrific third quarter earnings on November 4, with a net loss of $1.9 billion and an operating loss of $1.7 billion. I was genuinely amazed that the CFO would actually take responsibility for the dire situation McDermott finds itself in and resign. Well done sir!
My amazement quickly turned to alarm and disgust when further facts emerged. After announcing Mr Spence's departure, the company filed another disclosure with the SEC, the stock market regulator in the US, a week later.
It turns out that as compensation for leaving, Mr Spence will receive a severance payment of $866,666.67. That was based as the balance of the $1.3 million retention bonus not already paid out to him. His restricted stock units will also vest, so he can sell them.
His shares are valued at less than $100,000, with the stock price at just 67 cents when the announcement was made. His deferred consideration will also be given to him (worth approximately $70,000).
So, Mr Spence gets over $1 million for driving McDermott into a ditch, and most of the pay-off money is a retention bonus, which he was supposed to receive only if he stayed with the company, and only if the remaining tranches of the loans and letters of credit were actually paid out by the banks. Which they have not been yet.
The Magic Mirror wasn't wrong. This is ugly, paying someone a huge retention bonus when they quit, and handing them all their supposedly restricted and deferred compensation as well.
And my assumption that Spence left because of the catastrophic $1.9 billion loss in just 90 days and the disastrous failure to forecast the cost overruns in the LNG project was also incorrect. How foolish of me. Never make assumptions regarding McDermott.
According to The Wall Street Journal the CFO left because McDermott had failed to disclose to Barclays and the consortium of banks that it was subject to an SEC investigation. Only when the ink was dry on the refinancing agreement and the first tranche of payment safely tucked away in the McDermott bank account did this unfortunate fact slip out. Hidden away in the quarterly loss report was a brief note:
"By letter dated July 26, 2019, together with accompanying subpoenas, the US Securities and Exchange Commission (the "SEC") notified us that it is conducting an investigation related to disclosures we made concerning the reporting of projected losses associated with the Cameron LNG project. We have been and intend to continue cooperating with the SEC in this investigation, including by producing documents requested by the SEC."
McDermott did not consider the SEC investigation material, so had not disclosed its existence to the lenders, even though the company had known about it three months before the loan was disbursed. The banks were, not unsurprisingly, furious, and this was, apparently, what led to Mr Spence's departure. The headline "Investors lent $1.7 billion without knowing of SEC probe" says it all.
If you thought the worst was over with such a large loss, the expensive resignation of the CFO, and the emergence of an SEC investigation, you would be sadly mistaken.
McDermott's woes have continued to pile up. The quarterly report reminded investors that the $4.5 billion lawsuit with its legacy Colombian client will go to international arbitration next year. The same report also disclosed that the company had been subject to a Saudi Arabian Customs Audit, with more grave threats to McDermott's already limited cash reserves:
"On October 20, 2019, McDermott Arabia Co. Ltd received a customs audit report from the General Directorate of Customs Audit department in Saudi Arabia, stating that additional custom duties are applicable on structures and platforms imported during the period from 2014 to 2019. The audit report claims that customs on imported structures and platforms of $47.6 million are owed to the Saudi Arabia Customs Authority."
McDermott said that it was "currently assessing the customs audit report and are required to post a bond for the assessed amount; however, we do not believe a risk of material loss is probable related to this matter and, accordingly, no amounts have been accrued as of September 30, 2019. We believe the audit report is incorrect, and we intend to challenge the assessment vigorously."
Good luck with challenging the Saudi Arabian government, "vigorously" or otherwise. Let us know how that works out for y'all!
Then, there was another asset impairment on a boat, this time the DSV Thebaud Sea, which had already been written down at the end of last year, although this detail was probably lost in the sea of red ink.
"During the quarter ended September 30, 2019, indicators of impairment were present for our Thebaud Sea vessel, which was previously impaired in the fourth quarter of 2018, and two of our offshore diving operations saturation support systems. Those indicators of impairment were primarily related to a lack of future utilisation plans.
"We determined the aggregate carrying value of these assets ($26 million) was in excess of their estimated fair value, which approximated the estimated market value ($8 million) and recorded an $18 million non-cash impairment in our Corporate segment. We are considering scrapping or selling these."
Good luck with getting $8 million in scrap for a small DSV and two dive systems, and even better luck selling them. Thebaud Sea is a 1999-built ship with a helideck and saturation dive system, 50-tonne offshore knuckle-boom crane, and 760m² of deck space. The market for a twenty-year old marine assets like this is very limited, as DOF Subsea, Solstad and the creditors of Toisa can attest.
On November 8, signs of more trouble emerged. McDermott's shares slumped 26 per cent lower when the Houston media reported that construction work on the company's brand-new Houston headquarters building had been halted, because the company had been unable to pay its builders.
The general contractor, DE Harvey Builders, recently filed a lien on the improvements to the building, saying that McDermott was $14.2 million behind on its payments as of October 30. McDermott released a statement saying that it was, "working with the contractor to finalize the remaining schedule for the construction and buildout of the space." How about never?
Unpaid builders, impaired assets, Saudi customs audits, undisclosed SEC investigations: all run of the mill for a company as troubled as McDermott, you might think, and all survivable. Unfortunately, as Thanksgiving approaches, the company faces an existential crisis on another front.
Amid the gloom of the results filing, one item flashed unmistakable warnings of imminent distress. McDermott failed to make a $69 million interest payment under its 10.625 per cent 2024 senior unsecured notes.
It has until December 1 to pay the interest on the notes, thirty days' grace. Since the company seems not to have that cash, either the new bank consortium will have to pay the $69 million in interest by the end of the month (something the bond price currently indicates that no one believes will happen, since the 2024 notes are changing hands below seven per cent of face value, the Seeking Alpha website has highlighted); or McDermott receives consent from 95 per cent of the bondholders for new payment-in-kind (PIK) notes very quickly to enable the next tranche of the loan drawdown, which seems most unlikely as well; or the company will default and the cross default provisions on its loans kick-in, leaving McDermott with very limited options.
In those circumstances, the "McDermott Way" may well lead to a court ordered restructuring under a Chapter Eleven filing. The 2024 bond prices currently indicate the market has an expectation of a recovery of only a pitiful $80 million on the notes, from the $1.235 billion of the original face value. Clearly, the company needs cash, and fast, or things get Evil Stepmother ugly on December 1.
Meanwhile, McDermott's senior leadership continues to act like everything is alright. Business as usual. Hundreds of McDermott employees gathered in Dubai last week for the company's largest Global Women's Network event to date, called the Inspire Summit, a day spent focused on "empowering" McDermott's female workforce as part of the company's global diversity and inclusion initiatives.
Whilst diversity and inclusion are important, one might have though the company would be conserving cash and attempting to show a semblance of cost-saving when it is battered on multiple fronts. After all, both its female staff and its male staff, and those of other genders, might be more empowered if McDermott was not a week away from defaulting on its bonds.
The internet, like any good Magic Mirror, never forgets. So, it was with exquisite irony that a quick Google search reveals that only a year ago, Stuart Spence of McDermott was interviewed in the Houston Business Journal for his nomination as 2018 CFO of the Year.
He was asked what was the worst piece of advice he'd received? I might venture that the idea that McDermott should acquire CB&I should rank high on the list of the worst ideas of the last decade in the offshore industry, but, without a hint of self-awareness, the McDermott CFO answered, "Take on debt leverage to increase equity returns, as too much debt restricts the overall business to manage expansion and normal business events and it restricts the balance sheet flexibility and capacity to handle downside events."
Mr Spence has had plenty of experience with "downside events" these last 12 months, and of excessive debt. Better yet, the man who received a severance bonus and a retention bonus of $1.3 million, even as the company failed to pay its 2024 noteholders, was also asked by the journalist, "when was a time you had to lead your company in solving a major problem?"
He replied that the time he had led his colleague in solving a major problem was "implementing a new cost-conscious culture at McDermott."
I think I need to chew on a poisoned apple after reading that. Many McDermott shareholders probably feel they already have.
Stuart Spence's severance bonus is covered here:
The Wall Street Journal disclosed the unfortunate omission of the SEC probe into the company from the disclosures it made to the banks refinancing it in October here:
The company's third quarter SEC report, disclosing the SEC investigation, the vessel impairment and the Saudi Arabian Customs audit is here:
We covered the McDermott refinancing and the senior management retention bonuses here:
Mr Spence's interview as a candidate for CFO of the Year 2018 is here:
