Picking Up the Pieces

A year ago in this column I wrote of the impending bankruptcy of Tidewater, the company that started it all in the offshore workboat business, the company that was the biggest and bestest and for generations seemed invincible. Bankruptcy came six months after I wrote that column, in May of year, in the form of a “pre-pack,” Wall Street lingo for a prepackaged bankruptcy in which all the parties agree to the terms of the restructuring and it’s “just” a matter of getting the courts to okay it, which they usually do.

It may have been the quickest pre-pack in history – 75 days, to be exact. The company filed for bankruptcy protection on May 17 and the “new” Tidewater emerged on July 31. Debts were cancelled or exchanged for equity in the new company and presto!, all was good again. Even the ticker symbol remained the same (TDW). Today the stock is trading in the high 20s and the company has a new interim CEO, industry veteran Larry Rigdon, which is a story in itself.

Rigdon spent ten years with Tidewater before leaving in 2002 (having been passed over for the top job) to found his own company, Rigdon Marine, which he subsequently sold to GulfMark at a hefty profit. In July he joined the board of the restructured Tidewater and – in a fitting twist of irony – was named CEO in mid-October. What’s the old saying – “What goes around comes around?”

Rigdon is a savvy exec and a good thing too because he has his work cut out for him. Despite a cleaned-up balance sheet and a “right-sized” fleet of modern workboats, the landscape hasn’t changed all that much from what caused the company to enter Chapter 11 in the first place.

As Tidewater Chairman Tom Bates put it in announcing the appointment, “The board and management are excited about Tidewater’s future, but there are still challenges that confront Tidewater and all offshore supply vessel companies that must be addressed while we wait for the overall recovery in the offshore energy industry. Balancing revenues with operating costs to reach cash flow breakeven is one of the most important of these challenges. I am pleased that Larry will be able to bring his vast operating history to Tidewater to lead us in the continuing evolution of the company.”

BOOM OR BUST

Same old, same old. Twenty years ago I was working for a company called Hvide Marine, an established tugboat operator that was moving fast into the exciting world of offshore supply vessels, where the margins were fat and the prospects seemed limitless. The only thing lacking was capital. So we went public under the symbol HMAR and embarked on a spending spree and the stock tripled in three years and then the bottom fell out when the price of oil collapsed and we found ourselves in bankruptcy. Sound familiar? We went through a pre-pack just like Tidewater only it took us a little longer and the company that emerged from Chapter 11 three months later was renamed Seabulk International (SBLK).

We lured the renowned Gerhard Kurz, who had run Mobil Tankers, out of retirement to be our new CEO and he proceeded to build a thriving and well-run company on the remains of the old. Five years later SEACOR Holdings (CKH) came along and scooped us up and we all rode off into the sunset.

SEACOR, of course, is another story in itself, and a very successful one at that. Despite being a major offshore player, its diversified holdings had largely shielded it from the carnage of the last three years. But earlier this year Founder and Executive Chairman Charles Fabrikant apparently decided he had had enough of the up-and-down offshore market and spun off the workboat business as a tax-free dividend to shareholders. The new company, Seacor Marine (SMHI), started trading at 20 in early June but is now down to about 14 as the offshore market remains lifeless.

Spinoffs, by the way, can solve a lot of problems. First, they get rid of an unwanted business. Second, they can clean up the balance sheet. And third, they can benefit shareholders on the theory that two companies are worth more than one. In SEACOR’s case that last item seems to have worked: Since the two companies started trading as separate entities in early June, the decline in SEACOR Marine’s stock has been more than offset by the increase in SEACOR Holdings’ stock, but it’s close.

LESSONS LEARNED

One of the first things you learn in the offshore business is that workboats occupy the bottom rung of the food chain. They’re the “bottom-feeders.” At the top are the big oil companies, then come the drillers, then the boat companies. Bottom-feeders are the first to feel the effects of a downturn and the last to benefit from a recovery. Which, in a nutshell, is the situation today.

Tidewater did the smart thing by filing for bankruptcy and got off easy. Except for the shareholders, of course. They’re always the ones left holding the bag. When Hvide Marine went under in 1999 I had outraged shareholders calling and threatening to come over and break my legs with a baseball bat. It didn’t come to that, fortunately, but such are the perils of working in investor relations.

Other companies haven’t fared as well. Some went out of business, some joined forces, and some – mainly those privately held – soldiered on. One-time North Sea competitors Farstad and Solstad combined earlier this year to form Solstad Farstad, boasting the fourth biggest offshore fleet in the world behind Bourbon, Edison Chouest and Tidewater, according to my unofficial count. Among U.S. companies, Houston-based GulfMark is currently in Chapter 11 while Louisiana-based Hornbeck Offshore has renegotiated debt agreements and thus far managed to avoid the worst.

But nearly two-thirds of Hornbeck’s vessels are currently stacked, meaning deliberately taken out of service, and may never return to the market, and the same is true for competitors. It’s become the accepted way of surviving the prolonged downturn – cut costs by shrinking the fleet and hopefully, in the process, stimulate demand for the remaining vessels. But there are still too many boats chasing too few rigs. Rates are still below cash-breakeven, and further consolidation seems inevitable.

BRIGHT SPOTS

Only the privately held companies like Chouest and Harvey Gulf seem to be thriving, but are they really? Hard to tell, and nobody’s talking. But it looks that way on the surface, and why not? They have longer time frames, deeper pockets, lower costs because they’re not public, and longstanding customer relationships. Which begs the question of why any of these companies are public in the first place. Their market caps are miniscule. Their revenues are puny. They have no profits. Most have yet to achieve the holy grail of “cash-breakeven.” They should be private. Whatever happened to good old LBOs?

On the bright side, signs of life are appearing in places like the Middle East and North Sea. Even Brazil had a recent successful lease sale and is showing signs of renewed activity. Southeast Asia is now a hotbed of drilling activity, particularly for natural gas, and Mexico is getting back in the action with its new open-door policy toward private sector participation.

And let’s not forget the U.S., where the Trump Administration has taken steps to open up new areas for drilling off the Atlantic, Pacific and Gulf coasts and is planning one of the biggest lease sales ever for next spring. Add to that the aptly termed “ASTRO Act” (Accessing Strategic Resources Offshore), proposed legislation that would open up previously off-limits areas of the U.S. Outer Continental Shelf to oil and gas exploration, and you have a potential bonanza for drillers. Incidentally, the ASTRO Act has been described by opponents as the “kitchen sink of the oil industry’s wish list.” How’s that for mixing metaphors!

Bottom line, there seems to be a consensus among analysts that the bottom has been reached, at least in the drilling sector, and many are bullish on companies like Transocean (RIG), the biggest offshore driller, Ensco (ESV) – which just completed the acquisition of competitor Atwood Oceanics – and Rowan (RDC). A Reuters article recently proclaimed an end to the “worst downturn in history” and said that rig demand was picking up, particularly in harsh-environment areas like the North Sea.

If winter comes, can spring be far behind? Or, with due apologies to Percy Bysshe Shelley, if rigs rebound, can boats be far behind?

NEW HORIZONS

While the worst may be over, the one thing everyone agrees on is that the good old days are gone forever and the market will not return to business as usual. There will be fewer but stronger players and a more level playing field. The wildcatter out for a quick buck with two or three boats will all but disappear from the scene. There will be fewer ups and downs, and the swings will be less severe.

Meanwhile, rather than wait for a full recovery in the Oil Patch, workboat operators are finding new markets and new uses for their fleets. Offshore wind is one. It’s already huge in the North Sea and growing fast in the Baltic. Windfarms need vessels to build and service them, and windfarm vessels are the next big thing. Once the U.S. joins the party – which it’s already doing – they will really take off, and boat operators will benefit.

Decommissioning work is another big market. There are hundreds of abandoned and plugged platforms in the Gulf of Mexico and North Sea that will eventually be dismantled and towed away, providing lucrative opportunities for workboat companies and satisfying the environmentalists. And the recent hurricanes in the Gulf of Mexico are a stark reminder that cleanup efforts from storms and other natural disasters are an unfortunate consequence and require large numbers of these versatile offshore workhorses to get the job done.  MarEx