Wind turbine installation vessel business – Reprieve or a debt trap for Scorpio Bulkers?

On 3 August 2020, Scorpio Bulkers (SALT) announced the signing of a Letter of Intent (LOI) to construct a wind turbine installation vessel (WTIV), due for delivery in 2023 with the option for up to three additional vessels. The total cost of the project is expected to be in the range of USD 265-290 mn, subject to final design specifications. Based on the preliminary information, the 148-meter long vessel would run on hybrid-battery power and will be fuel cell ready.

Given the embryonic stage of the sector, there is a shortage of WTIV vessels capable of installing large turbines in deep waters. SALT has claimed that at least 10 more vessels will be needed by 2024 to meet the global demand. At present, the contract rates for such vessels is as high as USD 220,000pd, thereby providing their operators with ample cash flows and liquidity.

At present, there are 7,233 offshore turbines installed around the globe. Based on IEA forecasts, this number, however, is expected to skyrocket to 26,900 by 2030. On the other hand, the other factor, the turbine sizes are also expected to increase. Based on a report by Global Wind Energy Council (GWEC), in 2010, the largest commercially available wind turbine was 90 meters with capacity of 3MW. In 2021, there are expectations of a turbine as big as 220 meters, with generation capacity of 12MW. Technological advancements coupled with cheap cost of wind turbines are the key drivers of this sector.

Offshore wind energy outlook: As green as renewables can get
Data from November 2019 implies that offshore wind energy provides less than 0.3% of global power generation, but in the coming years, this sector is expected to grow beyond USD 1tr. Turbines are growing, both in size and capacity, which in turn is delivering cost improvements and efficiency for offshore wind farms.

The global offshore market grew by 30% CAGR between 2010 and 2018, with about 150 ongoing projects as at end 2019. However, none of this comes close to what offshore wind energy has to offer. Studies show that offshore wind has the potential to generate over 420,000 TWh per year, which is more than 18 times today’s world energy demand.

China has been busy in this sector as well and is among the market leaders. In 2018, China added 1.6 GW of capacity – the most by any country in a year. The energy market is expected to transform over the next two decades, with the offshore wind sector expected to lead the trend, growing at a high CAGR of 13%. Bolstered by a strong focus towards renewable energy and falling technological costs, IEA forecasts global offshore wind to grow by more than 15x to a USD 1tr industry by 2040 – assuming matching capital spending on gas- and coal-fired capacity over the same period.

Can green energy mean green numbers for SALT?
Many shipping companies across various sectors have diversified into other sectors and industries, from investments in logistics to tech to ports and terminals. However, SALT is one of the first shippers to move into the WTIV space.

As technology advances and more players step in, both the cost of vessels and the payback period will reduce. Therefore, the current USD 220,000pd rates may be under pressure by mid 2020s as more operators acquire larger vessels at more competitive costs.

SALT has been sailing in troubled waters for a couple of years now, owing to its cash flow problems. Offshore wind business promises a strong and steady stream of cash, which would work wonders for the company. But that is the outcome. The first step would of course be the acquisition of the vessel which would drill a USD 290mn hole is SALT’s pockets. Also, SALT is already plagued with high debt (USD 661mn as of 30 June 2020) and low cash balance (USD 41.6mn as of 30 June 2020), and hence the acquisition of the WTIV will raise the company’s debt further in the next two years.

Drewry’s view: The WTIV, though risky (because of SALT’s finances), can prove to be a boon in the second half of the next decade. SALT needs a stable stream of cash flow, and the WTIV has the potential to do that. The company should focus on financing the acquisition with as much cash and as little debt as possible. SALT already has significant debt maturities coming up before 2023 (more on that in the next section), and given the current cash balance projections amid current policies, it is highly likely that SALT will be forced to raise capital through debt/vessel sale and leaseback. Therefore, in order to improve liquidity the company can make some considerations in the current dividend policy, as the pay-out will play a major role in its liquidity in the coming years.

Current debt update
SALT recently amended its debt agreements to reduce its liquidity covenant from USD 34.3mn to USD 25mn in exchange of debt prepayments of USD 7.7mn due initially in 2021. Based on the latest updates, it would appear that SALT is currently in discussion with a specific lessor to defer USD 4.6mn of future principal repayments until its maturity date. In exchange the company will pay off USD 3.4mn in advance, due later in 2020. As an effect of this restructuring, the debt maturity structure has modified as follows:

Stock price development
The announcement of the new business venture has failed to lift the share price which is currently hovering at a 5-year low (in the range of USD 12-13). As a result, the company on 2 September announced that its common shares have been purchased by related party ‘Scorpio Services Holding (SSH)’. SSH purchased 50K common shares of the company at an average price of USD 12.97 per share in the open market.

Currently, the company reports 11.9 mn outstanding common shares; SSH own 21.24%.

A quick look at the stock price performance over the last 12 months gives a huge insight in the sentiment of SALT’s investors. While the rally in SPX is credited mainly to the tech stocks, the BDI responded to better freight rates. If we look closely, the correlation between the BDI and SALT’s stock price between September 2019 and June 2020 was more than 0.65. However, over the full 52-week period, that correlation has dropped drastically to just 0.36. This is mainly due to the lacklustre outlook of the financial results. That said if the company is able to secure better charter rates, and improve its bottom line, there is definite room for better performance of the stock price.
Source: Drewry