Petters: Avondale could yet build Jones Act tankers

Avondale SOSAUGUST 8, 2013 — The current healthy market for Jones Act tankers might, just possibly, mean that Huntington Ingalls Industries' Avondale unit could once again operate as a builder of commercial vessels. This emerged in a conference call for financial analysts held yesterday, following yesterday's publication of HII's second quarter financial results.

HII President and CEO Mike Petters told analysts that as well as hiring an oil and gas industry expert to look for opportunities for Avondale in that sector, "we are also evaluating opportunities for commercial vessel construction, which are being driven by demand to support Jones Act requirements."

According to the transcript of the conference (available here from Seeking Alpha), Mr Petters continued, that "similar to the initial inquiries we received from the energy infrastructure market, we are being pulled to evaluate opportunities by vessel owners and operators that need additional U.S.-flag vessels to support the energy market.

"Now I am very sensitive about this type of work given the scars on our backs from past commercial shipbuilding endeavors. However, if the right pricing structure and risk profile can be combined with the four requirements I have discussed all along regarding Avondale opportunities: support from the Navy, support from the state, a viable market and a credible partner, we will consider getting back into this market. As we have communicated previously, if we are unsuccessful in these efforts, we will have to close the facility."

Of course, analysts weren't letting it go at that. When it came to Q&A time, Carter Copeland of Barclays Capital, Research Division wanted to know more about Mr. Petters' comment about the right pricing and risk structure to reenter commercial shipbuilding.

"We've been pretty clear about our reluctance to enter the market here on the commercial shipbuilding side," said Mr. Petters. "And we're adamant that we're not going to do this on our own. We're going to do it with a partner that understands that business. But having said that, a lot of our experience in the commercial shipbuilding was driven by our attempt to do international commercial shipbuilding. Especially, the team at Newport News back 15 years ago was trying to do that. Jones Act shipbuilding looks to be a little bit different in terms of both need and pricing. And so after saying we're not going to go in that by ourselves, we're at the point now where the demand for the ships means that we need to go take a look at this.

"We have committed to the workforce at Avondale that we're going to turn over every rock that we can to find a way to redeploy that asset. We are very disciplined about how do we price contracts and how do we establish risk registers before we go into it. And we're going to go turn this rock over and see if there is anything under it. We're not backing away from our requirement for a partner.

"We're not backing away from our requirement for a sustainable market. We have gone back and revisited all of the challenges that we had in all of our commercial shipbuilding exploits in the past 20 years. Given all of that, if we can navigate a way through this in something that makes sense, we'll come forward and tell everybody that we did that. Short of that, we won't be doing commercial shipbuilding. So that's the -- we have an obligation, I think, to go look and see if we can create some value here. And we're going to do that in a very deliberate way in the way that we've done that across our whole business for the last 5.5 years."

Later in the session, Peter J. Skibitski of Drexel Hamilton, LLC, Research Division, noted that "NASSCO really seems to have found the right approach in commercial shipbuilding." And asked "Is there anything you guys feel like you could learn from those guys given the success that they've had if you do go forward with that initiative?"

"Fred Harris and his team at NASSCO are excellent shipbuilders, and I have high regard for Fred as a leader. And he's been working this problem and project for quite a while at NASSCO. And they've done very well, but they've kind of done it the way that we're talking about,"  responded Mr. Petters.

"They've had -- they started with a partner, and they found a set of reliable customers in a sustainable market. And they've been able to be very successful in that. We understand that it's beyond that. It's about how -- what is it that you need to do? Where did you trip up before? And we -- I lived through the experience of a nuclear shipyard trying to do commercial shipbuilding. I've got a long list of things not to do out of that experience.

"Avondale has a history of having been successful in that business in the past. And the question here is, can you really put something together that makes sense? We're obligated to go look at it. And I've told you what the requirements will be. If we come back with something, it will mean that we've met all the requirements and that we're optimistic about the success. So that's -- we're in the business here with no surprises, and so we are doing that."

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