2023-04-27 22:11:56 ET
Summary
- Shares of junior wind turbine installation vessel ("WTIV") operator sold off following a seasonally weak first quarter and expectations for full-year revenues to decrease substantially from 2022 levels.
- That said, Eneti's story isn't really tied to its legacy fleet as the company is scheduled to take delivery of two newbuild, large-scale WTIVs in late 2024 and early 2025.
- Newbuild WTIV "Nessie" has recently been awarded its maiden contract at respectable terms. Free cash flow generation from this contract is estimated to be up to $25 million in 2025.
- Discussing proposed conversion of cold-stacked drillships into state-of-the-art crane vessels in a new joint venture with leading offshore driller Transocean.
- After Thursday's setback, the discount to estimated net asset value of $16 per share has increased to almost 50% which is simply too cheap to ignore, particularly when considering persistent long-term market tailwinds. Investors should consider using the weakness to initiate or add to existing positions.
Note:
I have covered Eneti Inc. ( NETI ) previously, so investors should view this as an update to my earlier articles on the company.
Shares of junior Wind Turbine Installation Vessel ("WTIV") operator Eneti took a hit on Thursday after the company reported seasonally weak Q1/2023 results which came in largely in line with muted expectations.
That said, Q2 and particularly Q3 should be substantially better with both of the company's largest vessels Scylla and Zaratan working again:
Company Presentation
Unfortunately, full-year revenues and earnings will be nowhere near last year's levels as Scylla has spent most of Q1 in transit from Asia to the North Sea while Zaratan's new contract offshore Taiwan won't commence before June:
Company Presentation
Even when assuming customers exercising all options and the company being successful in securing additional work for its smaller vessels Leviathan , Kraken and Hydra , revenues are likely to be down by approximately 35% year-over-year.
To be fair, this pattern has been well known for some time already and is mostly reflected in the current analyst consensus.
But Eneti's story isn't really tied to the legacy Seajacks fleet anyway as the company is scheduled to take delivery of two newbuild, large-scale WTIVs in late 2024 and early 2025, respectively, with the first vessel Nessie expected to commence its maiden contract in the first half of 2025:
Based on my assumptions for operating expenses and debt service requirements, I would expect the contract to generate between $20 million and $25 million in free cash flow for Eneti in 2025.
To be perfectly honest, I would have preferred a multi-year term for the first newbuild, similar to the contract recently secured by Danish competitor Cadeler for its new F-Class vessel currently under construction at COSCO Heavy Industries' Qidong shipyard in China, to assure market participants of its ability to generate stable cash flows going forward.
That said, on the conference call , management pointed to strong customer interest in both newbuild vessels with negotiations now centering around multi-year contracts:
So there is very high interest in both vessels. We're talking to people about contracts throughout the end of the decade. We're talking about multi-year, potentially multi-year maintenance contracts going forward. Everything is geared towards growth and kind of exciting years ahead. So we have a lot of – we have a lot of interest both on Nessie and Siren. And as we said before, we're really focused on finding the right contracts for those vessels. (...)
So we haven't changed our philosophy. We're not waiting to be the last taxi cab on the rank. We're just really focused on finding the right contracts.
At the end of Q1, Eneti had approximately $117.8 million in unrestricted cash and remaining newbuild payments of $120.3 million after accounting for the proposed $436 million vessel financing expected to be provided by Credit Agricole and Societe Generale.
The company also has access to a currently undrawn $75 million revolving credit facility which in combination with cash generated from operating activities should be more than sufficient to cover remaining newbuild capex.
Additional funds might be generated from the potential sale of its smaller vessels which are considered non-core assets:
We are now starting to actively market for sale the NG2500s whilst we are benefiting from higher day rates on these assets. Until now, we had openly said that we thought these were non-core assets to our fleet. More or less a year into this statement, the market has favorably developed both on the rate and utilization side. And as I just mentioned, we have decided to actively market the vessels for sale going forward.
With the offshore wind turbine installation market expected to strengthen significantly in the second half of the decade, I wasn't exactly surprised by Eneti's latest endeavor announced last week (emphasis added by author):
Eneti Inc. (...) announced the execution of a non-binding memorandum of understanding indicating their intention to form a joint venture company with Transocean Ltd . that will engage in offshore wind foundation installation activities . (...)
The establishment and operation of the joint venture are subject to definitive agreements which would provide for (i) the conversion of at least two Transocean vessels into floating offshore wind foundation installation platforms , (ii) expertise and operational personnel to be provided by both Eneti and Transocean, and (iii) the right but not the obligation for each of Transocean and Eneti to invest in the joint venture with additional partners . The vessels, once converted, would be capable of carrying and installing up to six 3,500-ton, 12-meter diameter monopile foundations with state-of-the-art safety and efficiency.
In layman's terms:
Transocean would contribute at least two cold-stacked drillships for conversion to offshore wind foundation installation vessels
According to Transocean's ( RIG ) press release , the conversion would include the installation of a 5,200 ton crane, which would put these vessels well ahead of competitor Boskalis' Bokalift 2 , also a converted Transocean drillship formerly known as GSF Jack Ryan .
Boskalis
Unfortunately, both Transocean and Eneti are lacking the funds required to finance the equity portion of at least two multi-year crane vessel conversions. In aggregate, I would estimate conversion costs of up to $400 million for two 6th generation drillships.
As a result, the new joint venture would be required to secure a sizeable amount of third-party capital with Transocean and Eneti likely being left with minority stakes for contributing the drillships and managing the converted crane vessels, respectively.
During the questions-and answers session of the conference call, analysts lined up in droves for management to provide additional details on the proposed joint venture but were rebuffed for the most part.
It's not that we want it to be cagey is just that we have started this corporation, which we've been discussing for a number of months with Transocean. At this stage it's difficult for us to detail more than what we said because we are working on putting together a joint venture. And this is why we have started from the MOU. As I said, not wanting to take things away, but I wouldn't know what to say more than what we've said already.
Based on statements by the company's COO, Eneti will be requiring some sort of customer commitment to move on with the joint venture:
So just from my perspective, the joy of the agreement is that there aren't actually any milestones. So it's – we're currently speaking to all of the major clients. And based on their response or when we get an acceptable contract from any of these developers, then we'll move on from there.
Quite frankly, it's difficult to envision potential customers committing to a contract for a vessel that does not have financing in place but perhaps a letter of intent or memorandum of understanding might be sufficient for Transocean and Eneti to move on with their own MOU.
Anyway, even if Transocean and Eneti decide to formally establish the proposed joint venture, with vessel conversion taking up to 36 months, there won't be any financial benefits from this new endeavor anytime soon.
At this point, Eneti's future will be mostly determined by the company's ability to secure sufficient work for its newbuild wind turbine installation vessels at lucrative rates.
Considering current expectations for vessel demand to significantly outpace capable supply in the second half of the decade, Eneti should have no problems signing new contracts at decent terms.
Bottom Line:
NETI stock sold off following a seasonally weak first quarter and expectations for full-year revenues to decrease substantially from 2022 levels. In addition, management's performance on the conference call was nothing to write home about either.
While the company's results in both 2023 and 2024 are likely to remain mediocre at best, the addition of Nessie and Siren in combination with a projected increase in demand for offshore wind turbine installations should result in decent free cash flow generation from 2025 onwards.
After Thursday's setback, the discount to estimated net asset value of $16 per share has increased to almost 50% which is simply too cheap to ignore, particularly when considering persistent long-term market tailwinds.
Speculative investors with patience and the ability to stomach the company's volatile operating performance for another couple of quarters, should consider using the renewed weakness in Eneti's shares to initiate or add to existing positions.
For further details see:
Eneti: Latest Setback Provides Another Buying Opportunity