Touching Bottom

upgrades & downgrades - touching bottom

By Jack O'Connell 2017-01-05 14:08:02

Recovery is in sight for the beleaguered offshore industry, but it may be too late for some companies.

By Jack O’Connell

The company that invented the offshore business is in trouble, big trouble. Its stock is in freefall at less than $2 a share, down from $7 at the beginning of the year and over $60 three years ago. Its market cap is less than $100 million, compared to debt of $2 billion. Earlier this year it borrowed the full amount of its revolving credit agreement – $600 million – in an effort to weather the storm. But it may not be enough.

The company, of course, is Tidewater, which has been in ongoing talks with its lenders for months now, seeking (and getting) temporary waivers to various covenants in its lending agreements. The latest waiver extension expires on November 11, at which point it may well have to enter Chapter 11 to shield itself from creditors.

For those readers with a sense of history, such a development is mind-boggling and exemplifies – like nothing else could – the depths of the depression in the offshore market. It wasn’t so long ago, after all, that Tidewater had no debt at all. Its balance sheet was clean. Then it went on a building spree and had to borrow money for the first time to finance it and then the market caved along with the price of oil and, well, it’s a familiar story.

            But it’s not supposed to happen to a company like Tidewater. For a long time it was the big kahuna, the biggest and bestest. It began the business in 1956 with the first purpose-built boat for the Gulf of Mexico. Other companies soon followed. Then, when oil was discovered in the North Sea, the “Cajun Mariners” – as they were famously called in Woody Falgoux’s excellent book of the same name – taught the Scandinavians and Brits how to drive the boats to service the offshore rigs. Through it all Tidewater was the gold standard with the biggest fleet, the best safety record, long-standing customer relationships, and a top-notch management team.

It had been through downturns before, of course – lots of them – and survived them all, usually emerging stronger and farther ahead of the competition. But this one is different. This one is “lower for longer,” and Tidewater is in a race against the clock: Will the market recover before one of its lenders decides to blow the whistle?

Market Bottom?

Tidewater’s not alone, of course. U.S.-based Gulfmark and Hornbeck are struggling as well, and Paris-based Bourbon, which now bills itself as the world’s largest oilfield services company, is not far behind. Already there have been some casualties – mainly among North Sea operators – and two Norwegian companies, Solstad Offshore and REM Offshore, recently agreed to merge in a desperate effort to stave off insolvency.

The carnage seems to be worst in the North Sea and in what was once known as the “golden triangle” – the Gulf of Mexico, West Africa and offshore Brazil. This has affected all of the big global players with farflung operations – the Tidewaters of the world. Faring better are small regional players in places like the Middle East, where companies like Zamil Offshore and Topaz, which has extensive operations in the Caspian Sea, are holding their own.

Topaz, for example, recently secured a $350 million contract with Chevron to build and operate 15 offshore service vessels (OSVs) in Kazakhstan. The vessels will be built in Norway by VARD and operated by Topaz for a minimum of three years. The company had earlier scored a similar 14-vessel contract with BP.

Non-public companies like Harvey Gulf and Edison Chouest are also keeping their heads well above water. Why? Because their owners have deep pockets and, as private companies, they’re not subject to quarterly earnings expectations and all the other complications (and costs) that come with public ownership. Both are dominant in the deepwater Gulf of Mexico, where projects tend to be more long-lived, and Chouest in particular has extensive government contracts that keep it going in good times and bad.

So all is not doom and gloom in the oil patch, as I wrote in these pages a year ago, and there are pockets of hope.

In fact, there is growing consensus that a bottom was reached in the third quarter, bolstered by firming oil ($50/barrel) and gas ($3/mcf) prices. The farsighted CEO of Bourbon Offshore, Jacques de Chateauvieux, predicted back in August that the market had bottomed, which seemed optimistic at the time. But with more than 500 vessels and operations in 45 countries (twice as big as its nearest competitor, Tidewater), Bourbon is likely to know what’s going on well before the rest of us.

The company has four main segments: subsea, crewboats, deep water and shallow water. According to Chateauvieux, the subsea segment reached bottom in the first quarter of 2016, followed by the crewboat segment in the second quarter. The deep and shallow water segments, “due to the late cyclical nature” of these businesses, would follow suit in the third quarter. He cited the diversified nature of the company’s operations (if you can call four aspects of the same market “diversified”) as the reason for its being impacted “less and later” than its competitors.

“Less and later” is a nice counterpoint to “lower for longer,” the depressing mantra of Big Oil. But Chateauvieux and his PR folks are just warming up. How about “Stronger for longer,” the name given to Bourbon’s strategic plan? That’s even better. “Stronger for longer,” according to Chateauvieux, encompasses “operational excellence, cost optimization, cash preservation and an appropriate debt structure.” Now I’m not sure what all of that means, but in Bourbon’s case it does seem to be working.

Pure Play vs. Diversified

It’s a well-known fact that Wall Street loves so-called “pure plays” – companies that have only one line of business and stick to it. Diversification is frowned upon, despite its obvious merits, and the stocks of diversified companies tend to be penalized as a result. Shareholder activists constantly badger management to spin off “non-core” operations and thereby “unlock” the value in individual businesses by allowing them to stand alone, all on the theory that the individual parts are worth more than the whole.

            It wasn’t always that way. There was a time when conglomerates ruled, and the accepted wisdom held that the whole was greater than the sum of the parts. Being diversified made you bigger, gave you enhanced access to the stock and bond markets, and protected you from declines in individual markets. The more businesses you owned, the better. Cyclical declines in one area were likely to be offset by increases in others, and the chances of all your businesses rising or falling at the same time were miniscule. And that was the whole idea: Insulate your company from the ups and downs of the business cycle by being in a whole lot of different areas.

            Contrast that with the “pure play” approach, where you essentially have all your eggs in one basket. When times are good, they’re really good. And when times are bad, they’re really bad. And that’s what’s happening in the workboat sector today. Times are really bad.

            One company that has weathered the storm better than most is SEACOR Holdings. Its stock is down for the year, like everybody else’s, though not as much, and it’s not in danger of violating any loan covenants. One reason for this is its diversity. Though primarily an offshore services company, SEACOR also operates tankers, tugboats, inland towboats and barges, terminals and offloading facilities, and ethanol plants. The tanker business is thriving, as are the logistics and ethanol businesses, helping to offset the steep losses in offshore. And while the company is still losing money, it has substantial cash reserves and a solid balance sheet as a result of wise and diversified investments.

Bottom Line

The strategy of “cold-stacking” vessels (withdrawing them from the market), along with cash conservation and strict cost controls, is having an impact. Quintin Kneen, President & CEO of Gulfmark, says he is seeing signs that “the industry is withdrawing capacity to such a degree that certain geographic markets are beginning to show signs of balance.” He adds that this is especially true in the North Sea, where Gulfmark is a major player.

And in an ironic twist, the company has actually benefitted from the decline in the price of its debt securities by buying them back at less than fifty cents on the dollar and thereby significantly strengthening its balance sheet.

With the International Workboat Show in New Orleans coming up in December, it will be interesting to see just how many attendees there are and what the mood is among operators and suppliers. Certainly the worst is over, and the long slow process of recovery and rebuilding can begin. And this seems to be the case not just in the offshore market but in container and bulk shipping as well – with the Hanjin bankruptcy, as pointed out by global maritime consultancy Drewry, marking the low point in the container cycle.

But while the worst may be over, it will not be business as usual. A s Bourbon’s Chateauvieux says, "The model of tomorrow will not return to that of pre-crisis and we are already preparing new responses to changes seen in the clients’ expectations." What the “model of tomorrow” will look like and the “new responses” will be remains to be seen. – MarEx                                                                                                          

Tale of the Tape

                                                12/31/14      12/31/15      Recent   YTD                        

SEACOR (CKH)                     $73.81          $56.37           $49      -13%

Bourbon (GBB)                     €18.81           €14.80          €12      -19%

Hornbeck (HOS)                   $24.97           $  9.94          $5.20   -48%

Gulfmark (GLF)                     $24.42           $  4.67          $1.45   -69%

Tidewater (TDW)                   $32.41           $  6.96          $1.65   -76%

 

Source: WSJ