USNS SUPPLY (T-AOE-6). The navy's T-AEO fleet is heading for retirement, and a new generation of oilers is emerging. Image source: U.S. NAVY.
The contract is done -- and General Dynamics (GD 0.62%) is well on its way to earning $10 billion (plus) to build the Navy's next fleet of oil tankers.
The news
News on this contract broke nearly two years ago, when the Navy (technically, the Military Sealift Command, or MSC) began floating plans to replace its fleet of aging T-AOE, T-AO, and T-AKE resupply ships with shiny new TAO(X) tankers at $684 million a pop. At the time, it wasn't certain who would get to build the new fleet -- General Dynamics was still vying for the honor again rival shipbuilders Huntington Ingalls (HII +0.35%) and VT Halter Marine.
But now the winner is clear.
As General Dynamics recently announced, the Navy has awarded its NASSCO shipbuilding subsidiary a contract to prepare detailed designs and begin construction of the first ship in the new class of oilers, to be dubbed the USNS John Lewis (TAO-205). Capable of hauling 156,000 barrels of oil in its tanks, along with "significant dry cargo capacity," and even some "aviation capability" (aerial refueling, perhaps? Or even drones?), General D estimates the new ship will be capable of reaching speeds of 20 knots. That would be at least as fast as the existing fleet of T-AO oilers and T-AKE dry goods-and-ammunition supply ships, if not quite as speedy as the T-AKEs that General Dynamics previously built.
What does it mean to General Dynamics investors?
How much is this contract worth to General Dynamics? Well, the Navy asked for $674.2 million to build John Lewis in its fiscal 2016 budget request. And General Dynamics confirms that its contract award stretches beyond construction of just the lead ship in the class, to authorize it to build a total of six vessels.
That works out to a $4 billion contract right off the bat. And eventually, the Navy intends to build out the TAO-205 fleet to as many as 17 ships. While it's not certain that all of those contracts will go to General Dynamics, a good performance on the first batch of ships should give it a leg up in any recompete of the contract against its two earlier rivals -- and give General Dynamics a chance at winning an eventual prize of $11.5 billion in oiler contracts.
And what does it mean for Huntington Ingalls?
Don't feel too sorry for rival Huntington Ingalls, either, though. While it may have lost out on the TAO-205 contract -- and may well lose out on each of the 16 follow-on contracts to come, the Navy did at least hire it to build its new amphibious assault ship, currently known only as "LHA 8." At an estimated $3.1 billion in value, that's hardly a small consolation prize.
Going forward, I expect that's how the rest of these contract awards will play out. General Dynamics will specialize in fleet support ships, and win the remaining TAO-205 contracts going up for bid. Huntington will continue its focus on small (and large) aircraft carriers, and continue raking in LHA awards at $3 billion or so apiece.
There's plenty of work to go around for these two big military shipbuilders -- and plenty of profits for their shareholders.
