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Saturday, February 17, 2018
Philly Shipyard: Will major U.S. commercial shipbuilding survive?
By Michael Hansen @ 10:21 AM :: 2316 Views :: Jones Act

Philly Shipyard: Will major U.S. commercial shipbuilding survive?

by Michael Hansen, Hawaii Shippers Council, February 16, 2018

Philly Shipyard ASA issued on February 15, 2018, a press release, “Q4 2017 and Full Year 2017 Results,” announcing their financial results for calendar year 2017 and outlook for 2018.

Philly Shipyard is a Norwegian company listed on the Oslo, Norway, stock exchange (OSE: PHLY), and their release describes the financial and operating results of its wholly-owned U.S. subsidiary, Philly Shipyard Inc. (PSI), a domestic shipbuilding company, and its related Norwegian company, Philly Tankers AS and its wholly-owned U.S. subsidiary Philly Tankers LLC, a Jones Act shipowner. Philly tankers acts primarily as a financing vehicle for ships constructed at PSI through a form of lease known as a bareboat charter.

The Philadelphia, Pennsylvania, shipbuilder, PSI is one of seven (7) active major U.S. shipbuilding yards constructing large self-propelled seagoing ships over 1,000 gross tons, and one of a subset of only three (3) such yards building commercial or merchant ships (the other four yards build ships only for the federal government’s Department of Defense).

While Philly Shipyard posted record revenues and net income for 2017, their outlook for 2018 and beyond includes the risk that it will “be challenging for Philly Shipyard to continue operations after . . . Q1 2019,” due to a lack of orders for new ships.

Philly Ship[yard reported, “Operating revenues and other income in 2017 ended at USD 615.8 million compared to operating revenues and other income of USD 233.6 million in 2016,” and “Net income for full year 2017 was USD 68.0 million compared to net income of USD 38.7 million for full year 2016.”

They explained the 2017 over 2016 increases, “The main driver for the significant increase in operating revenues and other income in 2017 versus 2016 is that Philly Shipyard recognized 100% of the revenue and other income on three product tankers (i.e., Hulls 026, 027 and 028) in 2017, compared to only one product tanker (i.e., Hull 025) in 2016.”

The 2017 operating results for vessel construction included delivery of “the final product tanker in the four-ship order . . . to Kinder Morgan, . . . building two containerships under contract with Matson (Hulls 029-030),” and the “design, planning and procurement activities related to the construction of up to four . . . vessels for the Hawai’i containership trade.”

Confirming previous advice, they stated the later “project was placed on hold ]during Q1 2018[ and the Letter of Intent (LOI) between Philly Shipyard and TOTE for the construction and sale of these vessels expired.” As a result, they noted, the effects of the LOI expiration have “thus far has caused it, and will continue to cause it, to experience a slowdown of various departments,” and, “it is necessary to temporarily cease certain operations and place some employees in a layoff status.”

Additionally, Philly Shipyard stated, “Due to the current main focus on securing new orders beyond Hull 030, the PHLY Board has decided not to pay any further ordinary or extraordinary dividends at this time.”

They are also planning to compete for government work to fill their order book, advising, “Philly Shipyard has teamed with Fincantieri Marine Group and Vard Marine to compete for the detail design and construction of the U.S. Coast Guard’s next generation heavy polar icebreaker.” This project is anticipated to be a series of ships (up to 6, but more probably 2 to 3) that will require ten years to design and construct the first vessel in the series and cost approximately U.S. 1 billion for each ship.

Describing the problems going forward, they conclude their release:

Philly Shipyard faces additional risks if it is unable to secure new orders and/or financing for vessels after Hull 030 ]i.e., the second containership for Matson[. There can be no assurance that Philly Shipyard will obtain new orders or financing for these vessels. If the shipyard fails to obtain new orders or financing for these vessels before the Matson project is substantially complete, then it is expected that the Company would incur significant expenses (including cancellation costs for long-lead items) and it would be challenging for Philly Shipyard to continue operations after delivery of Hull 030, which is scheduled in Q1 2019.

During 2018, Philly Shipyard will continue to transition from building a series of tankers to building prototype container vessels. Management views the container vessels as a higher risk since Philly Shipyard’s main activity during the last ten years has been building tankers and the last container vessel built by Philly Shipyard was delivered in 2006. Accordingly, there is a higher technical design risk and a higher project execution risk compared to the recent construction of multiple product tankers, which increases the current construction cost estimation uncertainty. In addition, due to the break-even projected margin on Hulls 029 and 030, there is a risk of a loss-making project.

A main underlying problem is that the domestic Jones Act major commercial ship construction market has experienced a “building boom” over the past decade – especially for medium range product tankers and feeder-max containerships that largely makeup the major Jones Act fleet – and is now largely built out with ships having an intended useful life of at least 30 years (Matson is planning 40 years).

This situation demonstrates the practical problem of attempting to restrict the employment of ships in domestic trade of any country to those constructed domestically, as the Jones Act prominently does in the U.S. And, this is true for the U.S., despite having the largest Gross Domestic Product (GDP) in the world.

The business of building large self-propelled seagoing ships necessarily depends on a worldwide market to ensure a sufficient level of work to keep a major shipbuilding yard in operation over time. Particularly as series production of a particular design is essential to reducing shipyard operating risks and costs.

The poor economic outlook for the major U.S. shipbuilding yards exists despite the fact that the cost of building large self-propelled seagoing commercial ships in the U.S. is now well understood to be five times that of constructing comparable ships in the three Asian countries (Japan, South Korea and China), which build over 95% of such ships constructed each year worldwide.

A good analog to the construction of large self-propelled seagoing ships is the manufacturing of wide-bodied commercial jet aircraft, where there are really only two major manufacturers in the world: The Boeing Company in the U.S., and Airbus SE an European multinational Corporation. Interestingly, U.S. aviation cabotage (as opposed to maritime cabotage) doesn’t include a domestic manufacturing requirement.

This development with Philly Shipyard leaves little doubt that reforming the domestic ship build requirement of the Jones Act is long overdue.

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