Image courtesy Knightsbridge Tankers

Bermuda-based Knightsbridge Tankers Ltd (NASDAQ:VLCCF) reported yesterday a net income of USD 9.5 million (EUR 7.1m) for the fourth quarter of 2011, up from USD 6 million a year earlier.  Net income increased primarily due to an improvement in the results of the VLCC Kensington, which is operating in the spot market.  Last year at this time, VLCC Kensington was in drydock which resulted in a subsequent revenue loss of $3.6M.

The average daily time charter equivalents (“TCEs”) earned by the Company’s VLCCs and Capesize vessels were $26,900 and $36,500, respectively, compared with $25,300 and $36,800 in the preceding quarter.

Operating revenue grew to USD 25.9 million from USD 21.6 million. Earnings per share (EPS) improved to USD 0.39 from USD 0.25. The board of directors proposed a dividend of USD 0.50 per share for the fourth quarter of 2011.

Net income for the full 2011 declined to USD $34.4 million from USD $38.6 million in 2010. EPS fell to USD $1.14 from USD $2.02. Revenue rose to USD $96.2 million from USD $95.9 million.

BREAK-EVEN FIGURES

As of February 2012, Knightsbridge reports an average cash breakeven rate for the remainder of 2012 for its VLCCs and Capesize vessels, (excluding bareboat charters), of $14,100 and $7,600, respectively, per vessel per day.

The VLCCs which are on bareboat charters have a cash break even rate of $5,300 per vessel per day.

THE TANKER MARKET

The market rate for a VLCC trading on a standard ‘TD3’ voyage between the Arabian Gulf and Japan in the fourth quarter of 2011 was WS 54, representing an increase of approximately WS 7.5 points from the third quarter of 2011 and a decrease of approximately WS 4 points from the fourth quarter of 2010. Present market indications are approximately $20,000/day in the first quarter of 2012.

Bunkers at Fujairah averaged $672/mt in the fourth quarter of 2011 compared to $664/mt in the third quarter of 2011; an increase of approximately $9/mt. Bunker prices varied between a low of $629/mt at the beginning of October and a high of $711/mt on November 14, 2011.

The International Energy Agency’s (“IEA”) January 2012 report stated an average OPEC oil production, including Iraq, of 30.53 million barrels per day (mb/d) during the fourth quarter of the year. This was an increase of 0.6 million barrels per day compared to the third quarter of 2011 and an increase of 1.1 million barrels per day compared to the fourth quarter of 2010.

IEA further estimates that world oil demand averaged 89.53 mb/d in the fourth quarter of 2011, which is the same level as the previous quarter, and a decrease of approximately 0.25 mb/d from the fourth quarter of 2010. Additionally, the IEA estimates that world oil demand will average approximately 90 mb/d in 2012, representing an increase of 1.2 percent or approximately 1.07 mb/d from 2011.

The global VLCC fleet totalled 594 vessels at the end of the fourth quarter of 2011, up from 584 vessels at the end of the previous quarter. 11 VLCCs were delivered during the quarter whilst one was deleted. The orderbook counted 123 vessels at the end of the fourth quarter, down from 131 orders from the previous quarter. Three new orders were placed during the quarter, and the current orderbook represents about 21 percent of the VLCC fleet. According to Fearnleys the single hull fleet stands at 30 vessels.

The hull structure of a semisubmersible, minus the topsides structure, image courtesy Drydocks World

DUBAI (Dow Jones)–Drydocks World, Dubai’s shipyard arm, is considering the sale of its entire Southeast Asian ship-building and repair operations in an effort to advance the restructuring of $2.2 billion of the company’s debt, three bankers familiar with the situation said.

The bankers said that auditors have conducted an analysis of the Asian assets and are currently reviewing a wide range of candidates interested in purchasing some or all of the operations. They said that Drydocks is preparing to draw up a shortlist of potential bidders, which include ship repair and ship building specialists.

“The company is pursuing a sale of the Southeast Asian business, there are plenty of candidates that have expressed an interest,” said one of the bankers familiar with the talks. Drydock’s Asian operations consist of four shipyards in Singapore and Indonesia, specializing in rig building, shipbuilding, repair and conversion.

In a statement, Drydocks didn’t comment specifically on whether it plans to sell its Southeast Asian business but said it “will continue to explore opportunities and seek to develop the best path forward to its operation.”

“The company has said and from inception that it will re align and rationalize its operation,” the Drydocks statement added.

Drydocks purchased the Southeast Asian assets in 2007 for about $2.2 billion, backed by financing from a wide syndicate of local and international banks. Drydocks, like a number of government controlled companies in Dubai, borrowed heavily to purchase assets just before the onset of the global financial crisis in 2008. Though its shipyard in Dubai has been thriving, the performance of the Asian businesses has been disappointing, bankers said.

Talks on restructuring the company’s debt have been underway since mid-2010, but progress has been slow. Last year, the Dubai government turned down a request that it provide a guarantee for the debt.

HSBC, Standard Chartered, Lloyds TSB, ING, DBS and Mashreq are the members of a coordinating committee leading the restructuring talks, one of the bankers said, while McKinsey is acting as an advisor to Drydocks.

Bankers said that the sale of the Southeast Asian assets would provide cash to help pay back the Drydocks debt, but it could also raise difficulties in that the company is likely to only get only a small fraction of what it originally paid for the assets in any sale.

The company and its bankers would need to discuss how to bridge the gap between what it can fetch for the Asian business and the original purchase price, the bankers said.

Moreover, valuing the Southeast Asian assets is complicated because potential bidders have signaled interest in different parts of the business. It is also hard to assess the value of the vessels that are currently under construction in the company’s Southeast Asian shipyards, they said.

But a sale of the Asian business, while far from certain, would mean the company’s focus will shift again to the Dubai-based shipyard, which is considered much more commercially viable and therefore could gain easier access to funding for now and once the debt restructuring talks are completed.

Drydocks is a ship-building and repair company based in Dubai and owned by Dubai World, which in turn is controlled by the government of Dubai. Dubai World finalized a $25 billion debt restructuring in 2011 that didn’t include Drydocks.

Drydocks chairman Khamis Juma Buamim was quoted in December as saying that the company hopes to complete a deal on its debt restructuring by the end of March, and is considering joint ventures in Asia to improve the business.

But bankers said that a complete sale of the assets is now the company’s priority. “Establishing joint ventures is still the way forward in the scenario a sale doesn’t materialize,” said one of the bankers familiar with the talks.

-By Nicolas Parasie, The Wall Street Journal

Geoje Shipyard, image courtesy Samsung Heavy Industries

SEOUL -(Dow Jones)- The world’s two biggest shipbuilders, Hyundai Heavy Industries Co. (009540.SE) and Samsung Heavy Industries Co. (010140.SE), reported worse-than-expected earnings for 2011 as sales of high-end ships fell and the cost of raw materials rose, and analysts expect the industry to continue to struggle in the first half of this year as the global economy stalls.

Hyundai Heavy said Thursday its fourth-quarter net profit slumped 91% to KRW71.3 billion ($64 million) from KRW826.7 billion a year earlier. Its full-year net profit fell 31% to KRW1.946 trillion.

Gains in the won led to foreign-exchange losses of KRW36 billion in the quarter, while the donation of KRW153 billion to a charity foundation also weighed, the firm said in a statement.

Operating profit declined 62% to KRW404.6 billion in the December quarter from KRW1.077 trillion, while sales were up 5.1% at KRW6.751 trillion from KRW6.423 trillion.

“In the past, the shipbuilding and non-shipbuilding industries would be buffers against each other as they had different business cycles,” said Yeom Dong-eun, an analyst at HMC Investment Securities. But this won’t be the case in the first half because of the continuing European debt crisis and a slowing Chinese economy, he said.

The company’s new orders rose 47% to $25.32 billion in 2011 from $17.2 billion, while sales were up 12% at KRW25.02 trillion from KRW22.408 trillion. For 2012, it is targeting a 21% increase in new orders to $30.55 billion and a 10% rise in sales to KRW27.573 trillion.

Hyundai’s full-year operating profit fell 27% to KRW2.613 trillion.

The Ulsan-based shipyard expects shipbuilding orders of $9.11 billion in 2012, a decline of 16% amid the euro zone’s debt worries, but it has targeted a 16% increase in orders for offshore facilities to $5.2 billion.

Hyundai also expects increased sales in its electrical systems and engine and machinery businesses this year as it is in talks over projects in major markets including the U.S. and Europe.

The firm has an accumulated order backlog of 161 ships valued at $22.5 billion to be delivered over the next two years. It said it would distribute KRW245.15 billion in year-end dividends in April.

Samsung Heavy’s 2011 net profit fell 12% as it has been building fewer high-end vessels because of conditions in the industry.

Net profit for the 12 months ended Dec. 31 fell to KRW863.9 billion from KRW976.5 billion. Full-year operating profit declined 20% to KRW1.102 trillion from KRW1.378 trillion, while sales were up 2.2% at KRW13.359 trillion from KRW13.071 trillion.

The company didn’t provide fourth-quarter results.

The Geojedo-based shipbuilder said it is aiming for a 12% increase in 2012 sales to KRW14.9 trillion as high-end offshore contracts secured over the past two years will be reflected in its results.

Earlier this year, Samsung Heavy said it had targeted shipbuilding and offshore-facility orders of $12.5 billion for 2012, less than last year’s $15 billion.

It said it would distribute KRW108.4 billion in year-end dividends.

Consolidated figures for the two firms are scheduled to be issued next month.

-By Kyong-Ae Choi, Dow Jones Newswires

The fourth quarter marks a reversal for the company, after it posted two preceding quarters with rising revenue and profits. The company had warned that scheduled maintenance would reduce the number of earning days for several rigs in the second half.

Deep-water drilling was suspended for about 10 months in response to 2010′s Deepwater Horizon rig explosion, which killed 11 workers and touched off the worst offshore oil spill in U.S. history. It wasn’t until last February when U.S. regulators began approving deep-water drilling projects, which face heightened scrutiny.

Houston-based Diamond Offshore, which is majority owned by Loews Corp. (L), reported a profit of $188.5 million, or $1.36 a share, down from $241.7 million, or $1.74 a share, a year earlier. Revenue fell 11% to $748.4 million.

Analysts polled by Thomson Reuters had most recently forecast earnings of 99 cents a share on revenue of $739 million.

Operating margin sank to 29.2% from 39.9%.

The average day rate for ultra-deepwater floaters rose 4.4% from a year earlier, while the utilization rate stayed at 70% from a year earlier. For mid-water floaters, day rates dropped 4.9% and the utilization rate slipped to 60% from 80%.

Shares closed Wednesday at $63.07 and were inactive premarket. The stock is down 2% over the past three months.

-By Ben Fox Rubin, Dow Jones Newswires

This is good news for Transocean investors who have recently seen the value of Transocean (NYSE:RIG) stock plummet to levels not seen since the immediate wake of the Deepwater Horizon disaster.

Transocean’s stock is currently up over 6% in pre-market trading.

This ruling does not, however, indemnify Transocean from paying civil penalties or punitive damages.   A trial on the spill is set for next month.

Frontline's stock price has plummeted drastically since a peak of 362 in 2008, to 26.3 at the end of 2011.

The world’s largest tanker owner, Frontline Ltd., has just announced the completion of major corporate restructuring following a sustained weak global tanker market that crushed their stock price since its peak of NOK 362.50 in 2008.  The following is their press release:

Frontline Ltd. (“Frontline” or the “Company”) is pleased to announce that the restructuring of Frontline has been successfully completed. The major part of the restructuring consists of the following elements:

Frontline has completed the sale of five VLCC newbuilding contracts, six modern VLCCs including one time charter agreement and four modern Suezmax tankers to Frontline 2012 Ltd. at fair market value of $1,121 million. In addition, Frontline 2012 has assumed $666 million in bank debt attached to the vessels and newbuilding contracts and $325.5 million in remaining newbuilding commitments. Further, Frontline will receive payment for working capital related to the assets sold. The estimated book value of the assets sold, including the remaining newbuilding commitments, at December 31, 2011 is $1,428 million. The assets have been sold at fair market values assessed by three independent appraisals. The right to subscribe to shares in Frontline 2012 has thereby no instant economical value, and no subscription rights have thereby been given to Frontlines shareholders.

On December 16, 2011, Frontline 2012 completed a private placement of 100,000,000 new ordinary shares of $2.00 par value at a subscription price of $2.85, raising $285 million in gross proceeds, subject to certain closing conditions. These conditions have now been fulfilled and Frontline 2012 was registered on the NOTC list in Oslo December 30, 2011. Frontline Ltd. was allocated 8,771,000 shares at a subscription price of $2.85, representing approximately 8.8 percent of the share capital of Frontline 2012. Frontline 2012 has used the proceeds from the private placement to acquire the assets from Frontline, prepay bank debt with installments for 2012 and capitalize Frontline 2012.

Frontline has obtained the required consents from lenders whose loans are transferred to Frontline 2012 and has further obtained agreements with its major counterparts whereby the gross charter payment commitment under existing chartering arrangements is reduced by approximately $320 million in the period 2012-2015. Frontline will compensate the counterparties with 100 percent of any difference between the renegotiated rates and the actual market rate up to the original contract rates. Some of the counterparties will receive some additional compensation for earnings achieved above original contract rates.

As a consequence of the restructuring, Frontline’s sailing fleet, excluding the non recourse subsidiary ITCL, is reduced from 50 units to 40 units. The newbuilding commitments are reduced from $437.9 million to $112.4 million, which relates to two Suezmax tanker newbuiding contracts, and bank debt is reduced from $679 million to zero, following a prepayment of $13 million associated with a vessel which is not part of the transaction with Frontline 2012. The cash proceeds for Frontline following the completion of the transaction is approximately $70 million.

The Board of Frontline wants to thank all the parties involved, including counter parties and financiers who greatly have contributed to the solution. Without the flexibility on terms and timing shown by them, a successful restructuring would have been impossible.

Following the restructuring, Frontline should have significant strength to honor its obligations and meet the challenges created by a very weak tanker market. Through the sale of a limited number of the Company’s assets, Frontline has avoided a heavy dilutive new equity offering and will thereby keep significant upside for the existing Frontline equity holders if the market recovers in the years to come.

Executives of publicly traded shipping and offshore drilling companies have a legal duty to act in the interest of the shareholders of their respective organizations.

To fulfill this duty, executives and their financial managers must identify and undertake honest and ethical investment opportunities that offer a greater investment return than shareholders would otherwise be able to make in the open financial markets for the same level of risk.

To put it bluntly, if company management doesn’t produce enough growth for investors, the investors may decide to entrust their money elsewhere and the company’s stock price will fall.

When it comes to creating growth within shipping and offshore drilling companies, financial managers typically have two options. They can either build a new vessel or acquire an existing vessel from another company.

This article looks at the financial analysis used by drilling companies when determining whether or not it makes sense “financially” to build a brand new drilling rig.

For our case study, we’ll need to consider estimated construction costs, operating expenses and revenues of a state-of-the-art $800 million 6th generation drillship.  We’ll also assume the ship will have a service life of 20 years.

The Opportunity Cost of Capital:

The first step in our decision of whether or not to build a new ship is to consider the “opportunity cost of capital“.

We’re all familiar with the expression “a dollar today is worth more than a dollar tomorrow”. If you had the choice of $10,000 today or $10,000 a year from now, which option would you rather have?

If you’re like most people you’d probably opt for $10,000 today. If for no other reason, you could put the money in a bank account and earn interest on it for the year.

The opportunity cost of capital is a business term that places a value on exactly how much more a dollar is worth today vs. a dollar a year from now (expressed as a percentage). In the example above, we chose to collect the $10,000 today vs. waiting a year to collect it.

Had we instead waited a year to collect the same $10,000 we would have lost out on the interest of investing that money in bank savings account. If the bank was paying 2% interest, that 2% represents our opportunity cost of capital.

In other words, it cost us 2% of our capital (the $10,000 that was owed to us)  deciding to wait a whole year to get paid.

The concept of the “opportunity cost of capital” helps financial managers analyze investment options and cashflows on an “apples to apples” basis vs. comparing money received in one time period to money received in another time period.  As you’ll see in a bit, we’ll use this principle when determining the economic viability of our hypothetical drillship project.

In this particular case, we’ll assume that the opportunity cost of capital for building a new drillship is 10%. In other words, the shipping company is expecting to earn at least a 10% return on their investment in a new drillship or else they may as well invest the money in stocks and bonds of similar risk to save the hassle of managing a shipyard project.

Understanding “Net Present Value”

With our opportunity cost of capital determined, we can then “discount” all projected future cashflows (revenue minus expenses) to find the value in today’s dollars of what our drillship investment will “earn” us in the future. The value of the project in “today’s” dollars is also called the “Net Present Value” or “NPV” of the investment.

For example, lets say the opportunity cost of capital for the $10,000 we talked about above was 10% and we wouldn’t receive the $10,000 until the end of 5 years. How much is $10,000 at 10% interest 5 years down the road worth today? To calculated this we simply divide the “principle”, which in this case is the $10,000, by (1.10)^5.

In this simple example, $10,000 at 10% opportunity cost of capital paid 5 years from now is “only” worth $6,209.

Getting back to our drillship example, to calculate the “Net Present Value” of our project, we need to estimate the annual (sometimes called “incremental”) cashflows for each of the 20 years the ship is in operation and then “convert” these cashflows to today’s dollars using the NPV formula we used in the example above.

Remember, we had to cough up $800 million to build our drillship, so the goal here is for the “net present value” of all future cashflow from operating the ship to be greater than $800 million. If the “net present” value of our ship building project is negative (including the cost of the ship) then we are better off foregoing the project and investing the $800 million in something else.

Hopefully I haven’t confused you too badly up to this point, but don’t worry if I have!  To bring the whole picture together, I’ve created some simple spreadsheets in Excel (below) to help illustrate the entire process.

Projected Expenses:

Now that the drilling company has agreed on an appropriate “opportunity cost of capital”, the company must consider the projected expenses of operating the drillship over its 20 year service life. To keep things relatively simple, I have broken these costs down into 3 categories:

Construction Costs: Let’s assume that the drilling company is paying cash for the construction of the new drillship with $400 million being paid at the start of the project and the remaining $400 million paid at the beginning of the next year (we’ll assume a two-year construction period).

Operating Costs: As you can probably imagine, the yearly operating costs for a 6th generation drillship can add up quickly. Between crew salaries, general maintenance, repairs, - “support” staff, consumables and other daily operating expenses, drilling companies spend tens of millions a year operating each one of their drilling units.

In this example, I have estimated operating costs to be $47 million the first year the vessel is in operation. I have also decided to increased these operating costs 3% each year to take into account inflation.

Drydock Costs: Whether or not the shipping company will be able to get their new drillship into a dry dock or not is another question, but regardless, money will need to be budgeted for major service upgrades every 5 years. In this particular example, I decided to include a $5 million upgrade at the 5 year mark, $35 million upgrade during the 10th year dry dock service, and $10 million upgrade at the 15 year mark to keep the vessel among the most capable in the industry.

The following Excel sheet captures these costs:

Projected Revenue:

The market for 5th and 6th generation rigs is still very strong and new-build 6th generation drillships are still commanding $500,000 day rates. Hypothetically, lets assume that our fictitious drilling company scored a 10 year contract at $500,000 per day.

Let’s also assume that the drilling company could operate the vessel with a revenue efficiency of 93% (less than 7% downtime). This would result in projected annual revenues of $169,725,000 for the first 10 years.

Let’s also consider that the vessel will score a 10 year contract extension (at the end of the current contract) only this time at $657,500 per day. At the same revenue efficiency of 93% this will amount to a projected annual revenue stream of $223,200,000 per year (for the final ten years of the vessel’s “life”).

The projected revenue over the “life” of our fictitious drillship is included in the table below. I have also included the “cashflow” from each year which is simply the revenues from that particular year minus the yearly operating expenses from the Excel sheet above:

Using the NPV formula I mentioned above, I programmed the Excel sheet to calculate the NPV of the estimated cashflows for each year of the ship’s projected life. This NPV is the “converted” value of the cashflows in “today’s dollars”. As you’ll see in the total at the bottom of the spreadsheet, the value of the opportunity to invest in the new drillship is over $200 million dollars!

In other words, the investment in building the new drillship (based on our very basic assumptions) is worth $200 million more to shareholders over and above the “opportunity cost of capital”.  That is the growth and value shareholders are looking for.

Although our example drillship, contract, and expense and revenue projections are all fictitious, the principles remain the same. The promise of “riches” is why we’ve seen virtually every drilling company in the world expand the size of their ultra-deepwater drilling fleets with aggressive new-build programs.

We’ve even seen companies with virtually no connection to the oil and gas industry commission new-build drillships on “spec”.

Demand is still strong for these vessels but as more and more are built on “speculation” and enter the market, day rates will inevitably come down and the promise of “huge” investment returns (like those we just calculated) will likely disappear.

MV Cap San Raphael

Diana Containerships Inc. acquires two Panamax container vessels, signs US$100 Million Credit Facility With The Royal Bank of Scotland

ATHENS, Greece, Dec. 19, 2011 (GLOBE NEWSWIRE) — Diana Containerships Inc. (Nasdaq:DCIX), a global shipping company specializing in owning and operating containerships, today announced that it has signed today two Memoranda of Agreement with Reederei Santa Containerschiffe GmbH & Co. KG for the purchase of two Panamax container vessels, M/V “Cap San Marco” and M/V “Cap San Raphael”.

The M/V “Cap San Marco” is a 2001-built vessel of approximately 3,750 TEU capacity and the M/V “Cap San Raphael” is a 2002-built vessel of approximately 3,750 TEU capacity. The purchase price for each vessel is US$33 million. The expected dates of delivery from their previous owners to the Company for both vessels are between January 5, 2012 and February 29, 2012.

Each of the two vessels is chartered back to the sellers of the vessels for a period of thirty-six (36) months plus or minus forty-five (45) days. The net daily charter hire rate for each vessel will be US$22,750 during the first twelve (12) months, US$22,850 during the second twelve (12) months and US$23,250 during the third twelve (12) months of the charter. Each charter will commence on or about the day of that vessel’s delivery to the Company.

The employment of the two vessels is anticipated to generate approximately US$47.5 million of revenues for the minimum agreed period of the charters.

Separately, the Company also announced today that it has entered into an agreement for a revolving credit facility of up to US$100 million with The Royal Bank of Scotland plc, which may be increased to US$150 million subject to further syndication. The credit facility has a term of five years and will bear interest at the rate of 2.75% over LIBOR. The Company will also pay a commitment fee of 0.99% per annum on the undrawn amount of the facility.

About the Company

Diana Containerships Inc. is a Marshall Islands corporation founded in 2010 to own and operate containerships and pursue containership acquisition opportunities. Diana Containerships Inc. intends to continue to capitalize on investment opportunities by purchasing additional containerships in the secondhand market, from other companies, shipyards and lending institutions, and may also enter into newbuilding contracts with shipyards for new containerships.

M/V Industrial Dream, image courtesy Intermarine USA

Part 2 of an exclusive gCaptain interview with Intermarine’s CEO, Andre Grikitis, and CFO, Michael Dumas.

By Jack Mylott, Partner, Flagship Management

JM: With the growth of the heavy lift and project cargo industry over the past decade, we’ve also encountered the global debt crisis, the Eurozone crisis, and China contracting, constricting, or otherwise limiting their trade.  From an infrastructure development standpoint, what has been the impact of these issues on the projects you have been involved with?  What has been the impact to Intermarine?

AG:  When there is a crisis, project movement lags, whereas the bulk industry reacts almost immediately.  Projects can’t stop immediately and they don’t start immediately.  Essentially, there is a lag-effect in our industry and it can vary depending on the region, so it could be 8 months or longer, and that’s both in the up and down cycles.

I think that’s one feature of our industry if you relate it to the bulk industry.  The demand for projects, or our type of cargo, is very difficult to forecast, because there aren’t many people following it and many people don’t report what’s on their books.  Our view of the market has to be developed from what our clients tell us what’s coming.  However, I think the complication for our market is that, like other parts of shipping, during the last decade or more our industry was really over-built, so the oversupply of tonnage is outstripping the forecasted demand, and has done so consistently since 2009 through 2013, from what we can see of newbuildings.

This overbuilding has had a few driving factors.  The major factor is the KG system in Europe which has made Germany the largest ship-financing region.  Many ships were built on speculation, and by people who didn’t operate them themselves, they did it because the money was available, and what you have now is equivalent to a sub-prime condition.  Equity was available from private investors who got tax deductions, these funds were created and promoted by the financial community, and this really led to a boom in building of multi-purpose, heavy lift, and container vessels as well.  It was completely overbuilt without any real notion of what the demand cycle was, and it far outstripped what many of the traditional carriers in this segment themselves had forecasted.  The market became distorted, and that distortion is a bubble that will continue here until supply and demand comes into sync.

One of the difficulties in our industry, and I’m guessing some others, is that having the equipment, and having the ships is one thing, but having the personnel that are competent and capable of operating them, is in fact, in short supply.  So, many of these ships are out on the market providing “space”, but they are effectively bringing down the industry.  I would say the problem has been pushed down the road by the German banks with moratoriums etc etc and they anticipate of the market recovering, but that hasn’t happened.  So, I think we’re expecting some redistribution of control, but that redistribution of control won’t necessarily improve the market if the ships don’t get into the proper hands in terms of how they can be used and managed.

JM: Regarding personnel competency and capability and some of the extended services you offer beyond A-to-B ocean-going service, where do you extend your logistics management expertise?  How far into the supply chain to you go?

AG:  Essentially, we go as far as our clients have wanted us to go.

One of our difficulties is that the freight-forwarding community is often involved in this as well, and in many cases, they arrange the ocean transportation. So, they are in fact our customers.  We cannot, and do not, compete with them on a direct basis, however on certain projects, we have quotes on cargos that have included services including road building, believe it or not, we’ve participated in barging, we have a barge in Venezuela that has brought the equipment alongside the Jose Refinery, and was the only barge available that had the capability to do that.  We’ve certainly done trucking, collaborated with heavy haul folks, all the way up to quoting on some erection.  We offer packing at the terminal for people who want to consolidate their cargos in a single location from multiple suppliers.  Clearly we do whatever is required on the documentation front, and I think that all these services, we can either do them in-house, or we collaborate with others in the industry, so it can all be done with the shipper going to a sole-source.

We’ve made arrangements, for example, for folks to be able to transport cargos from ship-side to their final destination by using berths where rail is available.  So, essentially, we are flexible in our approach to how we handle transportation solutions, and even if we are not the party who does the direct contracting, we try to involve ourselves as early as possible into the lifecycle of a project, so that the proper pre-planning can be done.  I suppose it’s no different in most businesses, but if you’re involved early enough in project cargos, quite often, you can achieve a much more effective and efficient operation in the end, and it puts people on the same page.  We try to avoid surprises.

M/V Industrial Freedom, Image courtesy Intermarine USA

JM: I’ve seen on your website that you have a couple of images of ships carrying wind turbine blades which falls outside of heavy lift, and moreso into the project cargo domain.  Do you see a difference with your services as they relate to the wind turbine industry?

AG: Let me make our position on heavy lift and project cargo clear.    Our formula is that our business needs to run on a combination of cargos.  Essentially, almost anything up to and including containers in some cases, in our view, qualifies as project cargo because a combination of cargos is necessary to make a successful voyage.  Irrespective of how much cargo there is, if you don’t have it in the right combination on a vessel, then you cannot produce a successful and profitable voyage.  So, with the number of ships in the world today, and the way cargo flows go, we certainly do not build our business around heavy lift cargoes.  Heavy lift cargoes are not that large of a percentage of our overall cargo mix.  Cargo mix is really what’s key in being successful in this industry in an ongoing basis.  I think that essentially is how we’ve always treated voyages.  We’re always combining various commodities in the best possible combination for a good outcome.

Wind blade equipment today, probably constitutes roughly 20% of ocean-borne multi-purpose heavy lift cargo today.  It has become extremely important for a number of reason.  For one, it moves almost from everywhere to everywhere these days, and producers are both importing and exporting from the same locations sometimes, which is not so easy to understand in some cases, but it’s become a commoditized business in many ways.  It has produced a large volume of cargo.  These cargos require specialized vessels due to their dimension, not because they are heavy.  They need to stow on vessels in a way that makes them more economically viable to transport because they are not that highly valued.  So, as part of the project multi-purpose heavy lift cocktail, they are a vital ingredient today.  Some of the turbines, and the other structures such as the towers, can of course get quite heavy, and they move as well.  The blades are a very important part of the global cargo movement.

Thinking about project and heavy-lift cargo, I would not make the distinction that only heavy pieces are project cargo.  There exists the Heavy-Lift Club, which was modeled after the Container Box Club where many of the world’s heavy lift carriers get together twice a year on the CEO-level.  The qualification to “join” the club is to have vessels of 150-ton lifting capacity continuously employed in service.  If you look at a cross section of the members, it’s quite clear that  the majority of them are engaged in things other than just heavy lift cargo.  There are many ships today that have heavy lift cranes, but it doesn’t mean they are in that trade on a continuous basis or even necessarily on a high frequency of service in the heavy lift sector.  There are many ships that have 150-ton lifting capacity in the modern fleet, and where as years ago we traditionally called things over 150-ton as heavy lift cargo, that story is different today.   Many “multi-purpose” vessels which are capable of carrying containers and homogenous cargos and so forth are also equipped with good gear of over 100 tons.

Check back in with us soon for Part 3 of this interview… read Part 1 here:  Intermarine CEO Discusses Operations, Ex-Im Bank Financing, Part 1

Alf C Thorkildsen, Chief Executive Officer, Seadrill Management AS

“At a point in time when there is turbulence in the financial markets we are very pleased to deliver one of our best quarterly operating profit ever reflecting solid performance and operation of our rig fleet. The market uncertainty has resulted in a significant drop in interest rate levels. This has adversely impacted our earnings in the quarter as we have booked an unrealized loss on interest rate swaps that we entered into in order to cap our interest expenses at attractive long-term levels. We have since our last reporting secured US$2.5 billion in new contracts bringing our order backlog to a record US$13.5 billion. This provides for a solid operating profit performance going forward. The outlook for our business continues to be strong and we have resolved to increase our cash dividend to US$0.76 per share for the quarter.”

Rig Utilization At or Above 2nd Quarter Figures

Seadrill had 44 offshore drilling units in operation during the third quarter (including five tender rigs owned by Varia Perdana) in North Europe, US Gulf of Mexico, Mexico, South Americas, West Africa, Middle East and Southeast Asia.
For our floaters (drillships and semi-submersible rigs) the economical utilization rate in the third quarter averaged 97 percent inline with the second quarter.

For our jack-up rigs, the economical utilization in the third quarter was 91 percent compared to 89 percent in the second quarter as Offshore Resolute was in transit to its next drilling assignment and West Cressida had a yard-stay to repair one of its legs.

For our tender rigs, the average economic utilization for the third quarter increased to 94 percent compared to 88 percent in the second quarter as West Menang commenced operations in August after completing a mandatory survey and upgrade partly paid for by the customer.

4th Quarter Looks Strong…

Our fourth quarter earnings is expected to be favorably impacted by a full quarter in operations for the new ultra-deepwater semi-submersible rig West Pegasus, the new semi-tender West Jaya commencing operations for BP in late November and the harsh environment jack-up rig West Elara commencing operations in Norway during December, subject to weather conditions. However, the quarter will be adversely affected by an aggregated 60 days of off hire for our ultra-deepwater units due to repair and maintenance of the BOP equipment. In addition, we will have a further 30 days at yard for the jack-up
rig West Cressida to complete the repair work on one of its legs. Furthermore, the quarter is expected to include a US$47 million gain on sale on completion of the disposal of the jack-up-rig West Janus.

Newbuilding program – 14 Rigs Under Construction

We currently have 14 units under construction following the completion of construction of the semi-tender West Jaya and the harsh environment jack-up rig West Elara in Singapore in the third quarter. The remaining newbuild program includes five ultra-deepwater units, one harsh environment jack-up rig, four premium benign environment jack-up rigs, three
tender rigs and one semi-tender rig.
In late December this year, we are scheduled to take delivery of the ultra-deepwater semisubmersible rig West Capricorn. The delivery of the ultra-deepwater semi-submersible rig West Leo is slightly delayed and the unit is now expected to be completed in January 2012. Further 12 units are under construction and scheduled for delivery between the fourth quarter 2012, and third quarter 2013. The total remaining payable yard installments are approximately US$3.1 billion.

3rd Quarter Highlights

• Seadrill generates third quarter 2011 EBITDA of US$612 million
• Seadrill reports third quarter 2011 net income of US$58 million and earnings per share of US$0.07
• Seadrill resolves quarterly cash dividend per share of US$0.76
• Seadrill completes the divestment of the jack-up rig West Juno and records a US$23 million gain on sale
• Seadrill secures two three-year contracts for two jack-ups with a revenue potential of US$348 million
• Seadrill secures a four-year contract with a revenue potential of US$787 million for the ultra-deepwater semi-submersible rig West Hercules
• Seadrill acquires a 33.75 percent ownership stake in Asia Offshore Drilling Ltd through a private placement
• Seadrill participates in two private placements in Archer Limited and increases its ownership to 39.9 percent

Subsequent events

• Seadrill secures contracts with a total revenue potential of US$1.6 billion for the ultradeepwater rigs West Capricorn, West Leo and West Aquarius
• Seadrill secures contracts with a total revenue potential of US$115 million for the jackup rigs West Ariel, West Callisto and West Prospero
• Seadrill raises US$950 million in debt through two new secured credit facilities

Condensed consolidated income statements

Third quarter results
Consolidated revenues for the third quarter of 2011 amounted to US$1,029 million as compared to US$995 million in the second quarter. Operating profit for the quarter was US$480 million, up from US$430 million in the preceding quarter. The improvement is related to an increase in the number of units in operation and sale of the jack-up rig West Juno.

Net financial items for the quarter showed a loss of US$372 million compared to a gain of US$264 million in the previous quarter. The adverse contribution is mainly related to a loss of US$330 million on derivative financial instruments for the quarter whereas the second quarter had a gain of US$416 million on realization of holdings in the former offshore
drilling company Pride International Inc offset by a loss on derivative financial instruments of US$90 million.
Income taxes for the third quarter were US$50 million in line with previous quarter. Net income for the quarter was US$58 million and basic earnings per share of US$0.07.

Balance sheet
As of September 30, 2001, total assets amounted to US$18,321 million, an increase of US$198 million compared to June 30, 2011. Total current assets decreased from US$1,965 million to US$1,883 million over the course of the quarter primarily related to a reduction in accounts receivables.

Total non-current assets increased from US$16,158 million to US$16,438 million mainly due to installments paid on newbuilds as well as further investments in associated companies.
Total current liabilities increased from US$2,066 million to US$2,459 million.  Long-term interest bearing debt increased from US$8,264 million to US$8,378 million over the course of the quarter and net interest bearing debt increased from $8,711 million to US$8,879 million.
Total equity decreased from US$7,077 million to US$6,772 million as of September 30, 2011. The decrease is mainly related to dividends paid during the quarter.

Cash flow
As of September 30, 2011, cash and cash equivalents amounted to US$464 million, which corresponds to a decrease of US$24 million as compared to the previous quarter. Net cash from operating activities for the period was US$627 million whereas net cash used in investing activities for the same period amounted to US$505 million, primarily related to
payment of yard installments on new rigs and investments in associated companies. Net cash used in financing activities was US$146 million mainly due to payment of cash dividend of US$351 million, partly offset by proceeds from debt.

Outstanding shares
As of September 30, 2011, the issued common shares in Seadrill Limited totaled 467,099,774 adjusted for our holding of 2,151,159 treasury shares. In addition, there were 4.3 million options outstanding under various share incentive programs for management, out of which approximately 1.7 million are vested and exercisable. The Board has approved new share incentive programs reserving 1.7 million shares for allocation to senior management. As such, the number of shares outstanding under various share incentive programs may increase to 6 million shares. The new program is for five years with ¼ vesting after 18, 36, 48 and 60 months. The strike price for the new incentive scheme will be the average volume weighted share price for the next three trading days on the Oslo Stock Exchange. The primary insiders, Alf C Thorkildsen, Per Wullf and Esa Ikäheimonen, will be grated 100,000, 60,000 and 60,000 share options respectively under the new incentive program.