Solstad Offshore FY2015 earnings review

Solstad Offshore the Norwegian offshore vessel contractor, amidst a major debt restructuring, as it repaid its NOK 700m senior unsecured FRN’s due on 25 February 2016. Furthermore, as per the company’s 4Q15 earnings presentations, Solstad had successfully refinanced 65% and 75% of its mortgage debt maturing 2016 and 2017.  In addition to this, Solstsad was undergoing refinancing discussions for the reminder 35% and 25% of its mortgage debt, while debt under joint-ventures was progressing as scheduled. Furthermore, the company’s earnings presentation also stated that, the financing of its CSV ship Normand Maximus was progressing as planned. As earlier in end-FY14 Solstad’s management had stated that the ship was due for commissioning in June 2016 with USD 340m payment due.



As of 31 December 2015, Solstad’s net debt increased to NOK 10.8bn as compared to NOK 10.3bn, which may have been due to appreciation of USD against the Norwegian Krone. As company’s debt exposure comprised of 50% USD, 41% NOK and 9% GBP. This coupled with 9.4% YoY decline in EBITDA led net leverage to increase to 6.93x at end-FY15 versus 5.99x at end-FY14.

Solstad reported a 4.6% YoY decline in revenue to NOK 3.7bn, largely due to decline in contributions from its anchor-handling (AHTS) and platform-supply (PSV) segments. Moreover, lower contractual demands for AHTS and PSV vessels led Soldstad to put nine vessels in lay-ups (5 AHT’s & 4 PSV’s), which lowered segmental revenue by 30.7% YoY and 19.9% YoY respectively.  On the other hand, construction service vessels (CSV) continued to be a bright spot and a main driver for growth, as in FY15 CSV revenues increased 16.6% YoY to NOK 2.4bn largely driven by existing back-log’s.


Aforementioned decline in revenue, coupled with an impairment charge of NOK 1.3bn recorded during the period and 2.9% YoY increase in personnel expense led EBITDA to decline 9.4% YoY to NOK 1.6bn. This led operating cash flow to decline 42.5% YoY to NOK 870m. FCF stood at NOK 742m as compared to a cash burn of NOK 900m, on account of lower capex in FY15. Capex was higher in FY14 due delivery of two large CSV’s in June and July 2014.

Fleet review: As of 22 February 2016, Solstad’s fleet consisted of 44 vessels: 19 CVS (1 new built), 15 AHTS and 9 PSV. During FY15, the company had 13 vessels in lay-ups. Furthermore, these vessels had a firm contract coverage of NOK 2.8bn representing 41% available days for 2016. Contract coverage including options stood at NOK 3.2bn representing 48% available days in 2016. As of 31 December 2015, Solstad’s fleet value based on broker valuation stood at NOK 19bn as compared to NOK 20bn at end-FY14.




Source: Solstad Offshore, Rsquaredanalytics


Ocean Rig to end relationship with Dryships by buying back the remainder 40% stake, although operational woes continue.

Ocean Rig UDW Inc. (NASDAQ:ORIG), the Norwegian offshore drilling contractor has agreed to buy all of Dryships’ shares in Ocean Rig for total cash consideration of approximately USD 49.9m via its newly created unrestricted subsidiary, Ocean Rig Investments. Post this transaction, Dryships will not hold any economic or equity interest in Ocean Rig. This move suggests that Mr. George Economou, the CEO of Ocean Rig and Dryships is acting in favor of the former. The company had announced in its 4Q15 investor call that it has created a new subsidiary and earmarked USD 180m for distressed buys. As such, the share acquisition will remove USD 50m from the USD 180m available in the subsidiary. While, USD 130m balance amount could be used for debt repurchases.

Huge Debt load: During 2015, Ocean Rig capitalised on low bond prices to buy back bonds at a discount. Although the company had decided to close its buyback program after 4Q15, it announced on its recent investor call that it would continue bond buybacks considering the low prices and company’s huge debt load of USD 4.3bn, with 608m outstanding under its USD 800m senior secured notes due October 2017. Net debt as at end-FY15 stood at USD 3.59bn vs USD 3.84bn in FY14 with corresponding leverage improving to 3.34x in FY15 (FY14: 4.00x). While Ocean Rig does not have any short-term maturities in 2016, the company depends solely on cash balance of USD 735m to meet its liquidity requirements given its senior credit facility is fully drawn. Earlier in July 2015, management suspended its quarterly dividend distributions to save cash until market conditions improve. In Feb 2016, S&P downgraded Ocean Rig to CCC+ from B- due to unsustainable capital structure considering recent contract cancellations. While, in December 2015, Moody’s also downgraded Ocean Rig’s corporate family rating (CFR) to Caa2 from Caa1 on account of high leverage in light of current business conditions and increased liquidity pressures that the company may face over the next two years.



Contract Cancellations: Since the start of 2016, Ocean rig has received early termination notices from ENI Angola SpA, Premier Oil and Total E&P for Ocean rig Olympia, Erik Raude and Ocean rig Apollo, respectively. The company has commenced arbitration proceedings for early termination and will get termination fees for its cancellations. However, it will not get any lump sum amount this year but would receive the payments in installments. On the other hand, the company signed a drilling contract on 7th March 2016 for Leiv Eiriksson with Lundin Norway AS. The drilling contract is for a minimum of three wells, for drilling offshore Norway, with an estimated backlog of around USD 23.6m and is scheduled to commence drilling from 3Q16.


Fleet Status: As at 30 March 2016, the company had a contract backlog of USD 2.6bn running through 18 months. The company currently has seven rigs having firm contract while three rigs are without any contracts and are marketed. Additionally, it also has three newbuilds which are scheduled to deliver in 2Q17, 1Q18 and 1Q19 and haven’t secured any contracts yet. As such, with 6 rigs currently looking for employment and rest contracted just until end- 2017, the company has to accelerate efforts to secure work for its rigs or face restructuring.

Earnings to deteriorate: FY15 revenue slide 3.8% YoY to USD 1.74bn due to decreased utilization of the rigs. However, thanks to cost saving initiatives by the company, drilling operational expenses went down 20% YoY to USD 582m resulting in 11.8% rise in adj. EBITDA to USD 1.07bn, while adj. EBITDA margin grew 857 basis points to 61.5% in FY15. The company has been on an expansionary spree since 2011, adding eight rigs to its fleet through 2015 vs a fleet of just two in 2010. However, in light of the difficult macro environment with three existing rigs losing contract this year and just 55% contract coverage in 2017, Ocean Rig is pressing hard to defer delivery of its new-builds. This indicates revenue to drop significantly in the coming years.

Heavy capital spending: Despite strong adj. EBITDA and operational cash flows (OCF) growth over the past few years, Ocean Rig has been free cash flow (FCF) negative due to heavy capital spending on its new-builds. During FY15, FCF improved to negative USD 51m compared to negative USD 228m in FY14 due to 26% rise in OCF and 15 % reduction capex to USD 634m. According to management, the company is in talks with shipyards to defer the deliveries of its new build even further as it would require the company to shell out approximately USD 1.8bn by 2019.

In conclusion:  Despite having a young fleet, the company will have to accept lower day rate contracts in future to service its debt. Going forward, the company plans to remain focused on reducing operating costs and make conservative use of cash in hand. Looking into 2017, with just 55% contract coverage and circa USD 600m of debt repayment, the company will be hard pressed to defer its newbuilds and gain contracts for its fleet. If the company fails to gain any contract this year and enters 2017 with just four rigs, the long term view for the company looks gloomy and would lead to restructuring.


(Source: Ocean Rig UDW Inc)