Riding the Wave
Harvey Gulf International Marine leads the charge to recapitalize offshore support assets. Where will it lead next?
In the midst of a red hot offshore boom, one that arguably has its epicenter squarely in the middle of the Gulf of Mexico, everyone seems to be busy: shipbuilders, operators, OEM vendors – everyone. Scores of new offshore assets are on the way. As it unfolds, three U.S.-based offshore support providers are pouring hundreds of millions of dollars into fleet and infrastructure renewals. One of those firms, Harvey Gulf International Marine LLC, and its CEO Shane Guidry, have combined its growth plans with the introduction of innovative technologies, a new financing vehicle, high end equipment and an aggressive acquisition strategy.
The Harvey Gulf plan is dependent on a number of assumptions, both fraught with risk, and at the same time, the promise of great reward. Gambling that “the flight to quality” will finally come to fruition, Guidry and Harvey Gulf are set to deliver into the market a modern fleet of support vessels the likes of which have never before been seen under U.S. flag. Bigger, more capable, cleaner LNG-powered vessels will arrive, also equipped with accommodation standards and redundant safety features that, until now, were commonly found only in the Norwegian markets.
As the new tonnage comes out, the upgrade of a newly acquired, older fleet of outside acquisitions is also underway. And then, there are the new LNG bunkering facilities, a recently inked Moody’s $1 billion credit facility and the new additions of engineering and operations staff to run it all. It’s a long list of “firsts” for Harvey Gulf and industry, too. To sort it all out, MarPro spent a morning with Guidry on the Gulf Coast in July. As with all things in the Harvey Gulf business model, it isn’t for the faint of heart.
The first public rating from Moody’s for a new $1 billion credit facility, announced by Harvey Gulf in June, is the cornerstone upon which the Louisiana-based firm will build its future expansion plans. Shane Guidry, Harvey Gulf CEO explained, “The Moody’s rating gives you better access to capital; as good as if you were a publicly traded company. The loan was done through Bank of America (BCXQL.PK) – so that’s the only entity I’m dealing with.” Competing against other firms, some of which are publicly traded and can access capital in other ways and perhaps with more ease, the Moody’s rating was a key step for the company.
The LNG Play: risk, payback and the future
The June announcement that Guidry had exercised its option for a sixth clean burning LNG OSV hull with Mississippi-based TY Offshore leaves no doubt that Harvey Gulf is committed to the concept. The only question left to answer is why no one else is following. Guidry has his own take on that. “It’s a combination of several things. Others claim that this is a niche market only. It’s not a niche market; it’s a new market. So, it’s going to be a situation where everyone is looking to see how successful we are and perhaps Shell, too. We have interest from foreign oil concerns who want to talk about taking the LNG boats to Australia. Here’s what happening: the only LNG boats in the world are being built in Norway, most likely financed by the Norwegian government, so they have to be used in Norway. So, now there are boats available to be operated anywhere in the world. We’ve been contacted by a company in the Middle East. It just has to make economic sense. So, we chartered the first three boats to Shell – which was the right thing to do – and the entire oil and gas world can see that somebody is interested in this and can make it work.”
Responding to doubters who point to the operational drawbacks of a dual fuel arrangement, Guidry shrugged and said, “The LNG tank weighs 100 tons – we lose 100 tons of cargo there, but we got back 50 tons by reconfiguring the vessels. Now, the engines weigh more because they are bigger so you lost some there. But, at the end of the day, instead of being 5,500 deadweight tons, we end up being 5250.” He adds, for emphasis, “When we finish the build out of the current 49 vessel plan, 6 of the 49 will be dual fuel vessels. But, we have options for 4 more – they’re called options but we are going to exercise them. That’s because I’d sign for them today if the yard didn’t require a deposit. But, I’m not going to give them money until they can start the boat.”
According to Guidry, the Wärtsilä dual fuel engines will not require after treatment, because when burning LNG, they exceed the requirements for tier 4, and on the diesel side, there are no rules for tier 4 in this class. That said; the lure of LNG and dual fuel for Harvey Gulf had more to do with the promised reduction in maintenance issues and longer span between service intervals. Detractors point out that the real merits of the concept are as yet unknown and may not be all they are cracked up to be. Again, Guidry shakes his head and says, “People do not understand these engines and until they do, they shouldn’t make statements like that.”
He continued, “Here’s what we do know: Wärtsilä recently had a dual fuel engine that ran for 20,000 hours on a Norwegian offshore vessel and when they opened that engine up and took a white glove to the inside of it, there was no carbon. If you can make 20,000 hours – why can’t you make 60 or 80,000 hours, as long as you do not operate those engines using diesel. And that’s why I am hell bent on not allowing anyone to use diesel fuel in my boats. When we bring these boats in, I’m not going back offshore until we fill those LNG tanks. The CAPEX is a lot higher – yes. But, the maintenance CAPEX is a lot less to support the decent rate that I’ve been giving out. But, in order to do that, I have to run LNG.”
Finally, Guidry addressed the issue of cost. “They talk about the building costs. It does cost $12 million more per boat. So, with the 6 boats I am building, I could’ve gotten 1.5 more. Right now, the returns are no more than what a $42 million supply boat is getting. But, Harvey Gulf is not the company looking for returns for today; we’re looking for long term returns. That coincides with our philosophy on long term charters.”
Bunkers, LNG and Operational Realities
It used to be the 600 pound gorilla in the room, but Guidry dismisses the fears about bunkering logisitics. “People wonder where they will get the LNG. Well, they’ll get it in Fourchon. And yes, we will sell bunkers to others if they want it. Right now, we’re the only dual fuel operator in the gulf. The dual fuel boats will have 67,000 gallons of usable LNG – you can go 2,000 nautical miles before you have to switch to diesel. We think the boat will be able to DP 14-to-17 days on LNG, depending on the forces it encounters. There’s no difference in operational mode when you use LNG versus diesel.” What about safety? Guidry insists, “For there to be a real problem with LNG, there would have be a double breach, which is pretty much impossible.”
A construction delay, because one of the shore-based LNG tanks was damaged in transit, means that a February 2014 completion date will not be met. With the first dual fuel hull scheduled to be delivered in mid-March, the hope is that the terminal will be ready then. Guidry admits, “The casualty set us back a bit, but we’ll be up and running in April of 2014 for sure.” Explaining further, he adds, “It takes only two hours to bunker one of our boats at 500 gallons per minute – a lot quicker, perhaps than typical conventional bunkering operation. But, we elected to have no other hazardous materials or other bunkers on the property because LNG is so new to people. It’ll be a standalone facility for the purposes of safety and perception.” Separately, and as MarPro went to press, Guidry was also considering a deal to build and operate LNG barges in concert with Shell, and others.
At Sea in Style
For a guy who loves to talk about quality, the two-tier market and his newbuild program, Shane Guidry is also acquiring a lot of used “cars,” too. Dolphin Towing, BeeMar and Gulf Offshore Logistics vessels now fly the Harvey Gulf flag and Guidry is acutely aware that what might have been good enough for others won’t cut it when it comes to putting out to sea for Harvey Gulf. He also puts his money where his mouth is. “We’re spending millions of dollars to bring up to Harvey Gulf standards the quality of the interiors on the boats that we’ve acquired.”
The improvements extend beyond interior accommodations and creature comforts. The plans to stretch five of its recently acquired OSV’s, increasing their deck space to 10,000 square feet and cargo capacities to 10,000 Barrels of Liquid Mud plus 10,000 cubic feet of Dry Bulk is already underway. And, he adds, “For example, some of the boats have just two generators – they conform to the rules but we don’t like it. So, we’re adding a third. It’s about providing the best possible service. We’re going to change out the flooring in all of these vessels. The crew boats will be upgraded to more comfortable living quarters. First quality mattresses – everything. I appreciate the hard work and the safe job that they do, so you just can’t expect keep it that way with a couple of pay raises. You also have to make people want to come to work.”
At Harvey Gulf, they do want to come to work and Guidry is intent on ensuring that they go home in the same condition that they arrived on board. Since 2008, the firm has had one recordable incident. Guidry says, “I’m not sure if anyone else can say that. And knock on wood, in 58 years of being in business; we’ve never had a fatality. 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.”
Guidry points to today’s Gulf of Mexico oil companies operating in a post-Macondo world: “They want safety. We are the only group with cameras on board monitoring safety with 180 tilt – up and down/side to side, with 1000x zoom. From Alaska to French Guiana, we have someone watching the boats. We could use it for operations, but for us, it’s all about safety.
The Flight to Quality: Pie-in-the-sky?
Shane Guidry talks about the so-called “two-tier” market. Todd Hornbeck calls it the “flight to quality.” To date, however, it hasn’t come to pass and Guidry himself freely admits that his shiny, high tech, environmentally correct tonnage still isn’t yielding an appreciably higher rate of return than boats costing tens of millions less. He also isn’t worried about it, either. According to the Harvey Gulf CEO, to understand where the market is going, you have to understand where it is today.
“Today, we have 36 boats out working, with nine under construction and two additional firm commitments. Tidewater (TDW) is probably the largest operator, but in a fragmented market, that equates to less than 10 percent of the worldwide fleet. As we climb the ladder, the difference between us and a Tidewater, for example, is that we’re climbing the ladder with new assets. Tidewater has a lot of older assets, but they work them in places like the Middle East and Asia where perhaps the standard of the boat doesn’t yet matter as much as it might here in the Gulf of Mexico.”
Continuing, Guidry insists, “Tidewater is not the right company to compare this sort of thing to. Why? Because they operate older tonnage in a lot of areas where top quality and modern assets aren’t going to matter for a long time. Many places in the world are still okay with 25-30 year old boats that they’ll pay $9,000 to $12,000 per day for. Tidewater only has 3 percent of their boats here, and the ones they do have are new. If they want to compete in this market, they have to build or buy. That’s a management decision, of course – do you play here or do you play somewhere else? You can’t be everywhere so you play where you think you have the highest chance for best returns.”
Pointing to the local markets, Guidry sums it up by saying, “In terms of our U.S. Gulf fleet, I think that Chouest is the largest, and then Todd and I are close – if you take out all his DP-1 stuff. He does have a lot of boats under construction, so I’m not sure where we’ll end up. I think you could eventually see us end up with 70-to-75 DP-2 boats.”
Moody’s Caveat: a non-Starter
The Moody’s rating reflects the expectation that Harvey Gulf “management will successfully handle any operational complexities arising from the material increase in its fleet size.” That caution is understandable for a company whose fleet has expanded from 15 to 49 vessels in a very short time span. In February, Harvey Gulf addressed those concerns when it tapped Mike Carroll to head up its New Construction and Special Projects. The new Senior Vice President will be Houston, Texas and brings with him 15 years of experience in the field of Naval Architecture and ship construction. But, bringing in Carroll from STX wasn’t Guidry’s only move in that regard.
“We also hired another from STX. They’re part of that ‘ramp up’. We have drydocks being built in one shipyard in Louisana; boats being stretched at Bollinger, in Gulfport and Florida. We have five shipyards building for us right now. We also have to run our vessels and maintain our fleet and drydocking schedules. By April of 2016, we’ll have 49 boats. It hasn’t been too long since we only had 15. Back then, we had 35 in-house people and today, we have 120. On the boats, we’ve gone from 200 to over 700.”
The Harvey Charter Plan
Shane Guidry’s strategy when it comes to deploying his fleet is a simple one. Guidry says flatly, “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.”
Reinforcing his earlier remarks on charter strategy, Guidry drilled a little deeper into his playbook. “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. Let’s face it, these boats last 30 years; I don’t want to try and make all my money in one week. It’s like a restaurant – you’ll keep going back if the food and service are consistent. With us – it’s our service and our safety record. It allows us to be very consistent with our returns and growth.”
Jones Act Compliant – and Smart Business, too.
The Harvey Gulf business plan goes beyond evironmentally correct vessels. “We’re looking at everything – rig decommissioning, anything that requires high quality, fully capable construction assets,” says Guidry. He adds, “For some reason, the industry has not committed the funds for Jones Act compliant construction vessels. We saw that some time ago as a big void and that’s where we ordered the Harvey Deep Sea, Harvey Blue Sea and one other. Those huge, 340-foot LOA vessels will be the biggest, American flag Jones Act compliant vessels in the U.S. Gulf. These sleep 120 people in 1 and 2 man rooms.”
Guidry also knows that the oil companies don’t necessarily have to charter his boats, depending on how far out and where they do work. But, it’s not all about day rates, either. Leaving the boat out in the Gulf of Mexico and having supply boats bringing out of all the cargo comes at a cost. Guidry predictably hits all the hot button issues of U.S. jobs and tax revenues, and finally gets to the heart of the matter.
“A lot of people don’t want to make dual transfers – it is a big liability. The oil majors would rather deal with high quality US flag assets here in the Gulf. This is for two reasons: It allows them to come inside and take a full load of whatever they want and take it out there and lay it. Let’s say you have two big foreign flag construction boats working here, you might have to have four supply boats tending them. With Harvey Gulf, you just incur the main vessel costs with less potential liability. We’re building bigger because we see more operations past 10,000 feet of water and 80-to-100 ton pieces of equipment. In order to deliver that cargo out there it is going to take a larger vessel with a bigger crane. We also see where bed space is a premium and our larger vessels will be a huge plus in that regard.”
Guidry’s take on the U.S. Gulf of Mexico is fairly simple. “It’s busy times, but consolidation is still the key. We’ve bought Dolphin Towing, BeeMar, and Gulf Offshore Logistics. There are other companies out there to buy. I wish more people would go out there and do it. Let’s consolidate and not overbuild. At some point, we will be overbuilt, only the strong will survive and we’ll be one of them. We might have to redeploy to other parts of the world.”
Enumerating just a few of the many variables in play, Guidry points out that a lot of rigs are being built – 65 to be delivered by 2022. He asks, “Will they be cancelled? Will they happen? Will LNG become the golden fuel offshore? Will oil come down to $65 per barrel and hurt us all?” Conceding that he has no crystal ball, he continues, “These are the kind of things we prepare for by having long term charters. And if LNG partially displaces oil? It’ll be great for the economy, great for jobs and the country and it’ll make the oil last that much longer.” No doubt it’ll be good for Shane Guidry and Harvey Gulf, too.
(As published in the 3Q edition of Maritime Professional - www.maritimeprofessional.com)