A formula for success – in good times and bad: Harvey Gulf International Marine hasn’t deviated from its long term plans and goals, even as the price of oil negatively impacts all sectors. Apparently, this isn’t rocket science.
According to Dr. Loren C. Scott, an industry analyst, retired professor and economist from Louisiana State University, U.S. oil production is up 85 percent since 2008 – the highest growth of any country in the world, over that period. Shale oil is largely responsible for that trend, with production increasing from 10,000 barrels per day (BPD) in 2003 to 1.2 million BPD in 2015. The impact of the resulting low price of oil on the offshore support sector of the maritime industry has been nothing short of devastating.
Largely as a function of the collapse in prices, U.S. oil production peaked at 9.6 mbpd in 2015, but will drop to 8.1 mbpd by year’s end. Total rigs are down since 2014. Nevertheless, output from the Gulf of Mexico (GoM) by 2017 will be at a record high. Despite those numbers, rigs in the GoM are now down to 16 from a high of 56 reached in 2016.
Despite the bad news, at least one offshore support firm finds itself on firm footing, with the majority of its assets on the water and earning money. There is, says Harvey Gulf International Marine President and CEO Shane Guidry, a formula for that reality – in good times and bad. Very few offshore service providers would talk on the record during this difficult time. Harvey Gulf is one that did.
Bad News and … More Bad News
There is plenty of bad news to go around. According to Dr. Scott, the situation isn’t likely to turn around soon. The staggering low GoM rig count was recently further accentuated as ConocoPhillips announced that it was departing deepwater at the same time that two others paid hefty cancellation fees to escape drillship contracts. Western Gulf lease sales have plummeted from 2014 numbers (14 firms; 93 bids) all the way down to today’s 3 firms who made just 24 bids.
Bakken on shore well costs are falling while the GoM continues to get more expensive. And, 14 new production platforms require just 25 percent of the number of service boats that drillships and drilling platforms would need. As the offshore energy industry negotiates with BSEE to lessen the cost of the new well control rules, GoM CapEx – and the rig count – is set to drop even further. There is good news to be found, if one looks hard enough at the raw numbers.
The 2014 ‘breakeven’ costs for offshore drilling, through better technology and belt tightening, has dropped to about $55-60 per barrel. Dr. Scott, in an address to the American Association of Port Authorities in October, projected a 2017 average price per barrel of crude oil of approximately $53, possibly rising to $60 in 2018, with recovery finally coming in 2019. Scott told his audience, “Things are tough, but they could be tougher.”
Shane Guidry, for the most part, agrees. “Next year will be the most challenging year. 2018 will likely be worse and I think in 2019, we’ll see the light again. It’s about the price of oil forcing everyone to scrap projects and push them to the right. Less capital is being put out to work in this space,” he told Maritime Logistics Professional in an exclusive interview, adding, “You’ve got debt holders out there; you’ve got investment bankers out there looking to come in and steal people’s companies. So, let’s face it: 2017 is going to be a mess.” At the same time, Guidry says that those companies with a healthy backlog and that “are well run” will survive. At this point, though, there aren’t too many that can boast both metrics. Harvey Gulf might just one of them.
Guidry also isn’t shy about saying what will happen next. “I think the debt holders are going to look at which companies have the best management teams to stay invested in and make sure those companies have enough capital to survive. I think you’ll see ‘revolvers’ for some companies cut and I think you’ll see more bankruptcies. Consolidation is the key. People need to start focusing on that. Egos need to be put aside.”
An Offshore Business Model: For Good Times, and Bad
In the summer of 2013, Maritime Logistics Professional visited Shane Guidry for an exclusive interview. With the average price of crude oil hovering around $105 per barrel – and about to go even higher – Guidry said, “There are other groups with more folks and boats, but we don’t play in the DP1 arena. It’s not high quality enough for us. I run my company differently. Our goal is to get 5-year charters for our boats. Today, 80 percent of our fleet have those; the rest have one to three years. We prefer five years and we’ll give a discount to get it. I have a certain EBIDTA return that I want to make on each asset – somewhere between 57-67 percent, depending on the cost of the vessel, its size and ability to bring the higher amounts of cargo to get the higher rates. I’m comfortable not pushing the envelope; I’d rather have long term contracts that allow me to pay down debt and build assets.”
In a nutshell, Guidry committed to a long term policy that he claimed would sustain his firm in the best of times, and just as importantly, leave it on solid footing when the times got bad. More than three years later, we asked him how that had panned out. As it turns out, privately-held Harvey Gulf has seen its share of the pain now plaguing the entire sector. With its headcount now down to 700 from a high of 1,200, Harvey Gulf’s fleet of 59 vessels still has 34 working on the water. True to the Harvey Gulf formula, 26 of those 34 vessels are operating on time charters. And, according to Guidry, that’s way it will stay.
“We’re long-term thinkers and fortunately we don’t live for today and we don’t live to sell stock. Last quarter, our EBITDA was more than Seacor, Tidewater, GulfMark, and Hornbeck put together. Our returns were over 60 percent. That’s purely from being in the business all my life, understanding my clients’ needs, getting down in the weeds with my crew members and my staff, and working with them to understand what’s coming next, how we all survive together, in your personal lives and in the business,” insists Guidry.
Guidry also projects his firm’s EBITDA will be over $160 million this year. Facing a much different landscape than he could have possibly predicted in 2013, he also maintains that, aside from the necessary belt tightening, little has changed in terms of how he operates. Pressed to explain why, Guidry responded, “You have to decide: do you want to live for today or tomorrow? I’ve got a 10, 15, 20-year plan for this business. I’m not thinking 30, 60, or 90 days out. That model requires a lot more thought, more work, and a lot more relationship building. It requires you to be a better operator; it requires you to be a safe company. Because major oil companies tend to invest in long-term contracts with you – they have to really believe and see that your safety culture is true to what you’re selling, so that when they lock themselves into this long-term contract, they know they’re not going wake up three years from now dealing with a disaster.”
For Guidry, the way forward still involves a strict culture of safety, a fleet of modern redundant DP-2 tonnage, and a commitment to liquefied natural gas (LNG) power – both for the economy and the long term environmental benefits that it brings. We asked Guidry if the ‘two tier’ market that he envisioned is working out. He insists that it is. “Where you survive is lining yourself with big oil companies. Big oil companies are not going to sacrifice safety. If they can get with an operator that has operational excellence, like we do, at 99.9 percent utilization on contract, annually, they know they can run their business with fewer boats because they know we are reliable. They are still not going to sacrifice safety for rate. So, if they can get a DP-1 boat for $2,000 less per day, they simply won’t take that risk. We haven’t seen that.”
LNG: Pure & Simple
Guidry clings to his plans for LNG; both in terms of his Fourchon-based bunkering operation and LNG/dual fuel tonnage has yet to be delivered. Separately, in stark contrast, representatives from Island Offshore, Remoy Shipping and Bourbon Offshore Norway recently offered a different perspective. “It’s a bloody disaster,” says Island managing director, Haavard Ulstein. “The amount of environmental effect these (LNG) vessels offer and also the amount of pluses saved by the clients and that converted into day rates for the owners is a disaster, and personally I have asked (Rolls-Royce business) Bergen Engines (AS) for technical proposals to convert those LNG engines into diesel. LNG is a big, big … a huge disappointment,” Ulstein added.
Guidry couldn’t disagree more. “We still see that the majors here in America want LNG. Just this year we’ve signed two five-year charters for two of our LNG boats still under construction. In this market, the rates make a ton of sense. So, yes, I still think LNG is the future and I still believe that you’re going to pay more for it and you’re not going to get the incremental increase in rate that you’d like to get because of the investment. But I’d rather have ten LNG boats working, than 10 diesel boats at the dock with no work.”
The difference in price between LNG and diesel has shrunk, but LNG still remains the cheaper option. Guidry points to the operational advantages of operating a boat between Point A and Point B with only one generator. “Where my ‘Shark Class’ boat runs just diesel, I have to run two and three engines. On the LNG vessel, I’m running one big, low RPM-turning Wartsila engine on LNG, and I’m just crushing it for them. A huge difference.”
Turning to his now established bunkering operation, Guidry admits he has no other customers, but says, “It’s a long-term investment; a necessity for the space to grow.” With the Harvey Gulf 300-foot class vessel – LNG verses non-LNG – about 25 percentless fuel is burned. Guidry adds quickly, “That’s nothing to do with the dollar difference. Just fuel burned, period. And, that’s one more place that the client saves money. What’s more attractive about it is when you have emission monitoring that you have to do at certain, permanent sites offshore, that’s where these boats come in and emit low emissions and so it helps with the problem at the platform.” Looking ahead, Guidry believes that as that continues to tighten up in the future, it will make it more advantageous to have LNG boats, explaining, “The last thing you want to do is have a boat that you don’t need for four hours, so you tell it to go outside the zone and stand by. We still have to account for the emissions, whereas right now you have to tell them, ‘Go out to the 25-mile zone.’ Well, that takes a lot of time to go out to 25 and come back in. Then you have to go two and a half hours away at 10 knots.”
Today, Harvey Gulf has three working LNG vessels, one delivering in March, another in April, and the last will deliver next summer of ’18 if Guidry decides to do it. With two five-year charters with oil major Shell (signed in March 2016) for the first two vessels, there’s a good chance the third hull will become a reality. Separately, Harvey Gulf recently received full class approval for an LNG bunker ATB concept. Guidry claims to be negotiating with a potential client now for “a long term charter.” If so, construction could begin as early as the first quarter of 2017.
Dr. Loren Scott insists that the LNG price is down and it is going to stay there. U.S. Natural Gas is today cheaper than EU and Far East sources, and as the price of crude oil recovers, that price differential (and related financial & environmental advantage) will continue to grow, especially for those choosing to burn it as a source of propulsion. In the domestic offshore markets, only Harvey Gulf has made that commitment.
Back in the summer of 2013, Guidry boasted, “At our company, there is no budget in our safety department – they get whatever they want. They can make any changes they need to for the betterment of the boat; no matter what the cost or the time involved. Today, I’ve got 36 boats working and 18 safety people. It’s my most costly division and there’s no doubt it brings in the most in terms of return.” Today – in a decidedly more glum business atmosphere – he also insists that not much has changed.
“Because the new, big boats have so many personnel, and they’re so advanced, we’re able to manage the fleet with one safety representative for each three boats. So, it’s still the same. That hasn’t changed. In July, we made three years with zero total recordable injuries (TRI).” Where, perhaps, BSEE might fear that safety will take a back seat to the bottom line in tough times, that hasn’t been the case at Harvey Gulf.
What’s Next – and 20/20 Hindsight
The Harvey Gulf party line says that consolidation is something that needs to be looked at. Guidry adds, “If we were all smart guys then we’d figure out a way to consolidate companies. Not only would it help everybody survive a downturn, it would be profitable during this downturn for investors. I think we’d be much more successful when it does turn.” That said; Guidry also doesn’t think all the boats will go back into the water in the Gulf of Mexico.
That’s not to say there isn’t a place for many. According to Guidry, there is. “I think a lot of this tonnage is good tonnage, so it’ll have an opportunity at some discounted price to replace boats in other markets around the world – 25 or 30-year-old ‘junkers,’ if you will. That’s like bringing in new tonnage, for some people.” Circling back to the current cast of players in the U.S. Gulf, Guidry doesn’t think acquisitions are as likely as a possible merger. “People need to be focused on coming together, then seeing how we can survive together.”
As sure of his game plan as anyone, Guidry also admits there might have been a few things that he might’ve done differently. His five, 300-foot diesel direct boats – for example – he wishes were all LNG-powered. “My two big construction boats – I probably should have made those LNG, as well.” Looking ahead, he remains bullish on LNG. “The next big thing for us is LNG ATB bunker barges. You know, we’re not an ATB business now, but it could be a platform for us not only in the LNG marine market ATBs, but it could be a platform for us to get in the ATB market, overall.”
We pointed out that Harvey Gulf had once been in the transport markets, but had gotten out. Guidry acknowledges that reality but replies, “We got out and we would certainly entertain the opportunities to bid long-term transport contracts for new builds, of course. We’re not opposed to owning tankers if the opportunity presented itself. We’ve been doing this since 1945, my family, and I’m lucky enough to learn from them to get all that knowledge and know how to operate vessels and, we think, operate them better than most. And there’s nothing we don’t think that we couldn’t build and operate, which is another stepping stone for us to get to a different business.”
Asked if anyone else was managing to make money in this offshore environment, Guidry shrugged and said, “It doesn’t seem like it from the quarterly earnings reports you see. It’ll catch up to us, too, if it stays bad. We just have to have a better mousetrap to keep our boats working, which we think we do. We think a lot of our LNG fleet and our 300 short class vessels, and we just brought two of the 220’s out of stack and put them out to work.”
In the end, says Guidry, it can come down to not so much wanting to be the biggest all the time. Just the best. “That’s what you have to do. You have to stay focused and be safe. The record clearly shows that we are. I’m still young and I need to run my business myself every day and not let others run it for me. And, it’ll continue to be successful.” That’s a business plan that hasn’t changed much at all – from mid-summer 2013, to present day. He might just be on to something.