In 2015, the U.S. Pentagon faced a dilemma. Global warming was melting the Arctic ice, opening up new sea routes and access to oil fields near the North Pole. Russia was making a beeline for these oil fields (oil costs $88 a barrel today, up 57% from last year), and deploying a fleet of more than 40 icebreakers to break channels through the thinning ice.
If America wanted to contest Russia's claims (or even just keep an eye on what the Russians were up to up north), it would need access to the Arctic itself. But the U.S. had only two icebreakers in its entire fleet.
The Coast Guard icebreaker Healy. Image source: U.S. Coast Guard.
Calling all cutters
Recognizing that the U.S. faced an "icebreaker gap," Congress allocated $8 million in 2015 to begin the process of building new ships to join our existing icebreakers, the aging U.S. Coast Guard Ship Polar Star, and the younger, larger Healy.
This was only a down payment on what needed to be spent. Early estimates guessed that it would cost about $2 billion to build two more icebreakers and double the size of the fleet. But in 2019, the halting effort to rebuild the icebreaker fleet bore fruit when U.S. shipbuilder VT Halter Marine won a $745.9 million contract to build our first new icebreaker in more than 20 years.
This new Polar Security Cutter (PSC) will be at least 10% larger than the Healy: 460 feet long and 88 feet across at its widest point, and displacing roughly 23,000 tons. It will carry a crew of 186 and include a large flight deck capable of launching and landing large helicopters such as Lockheed Martin's Sikorsky Seahawk.
Most important to investors, the PSC will be the first of a series of not just two, but more likely three new icebreakers, because the contract VT Halter won included options to build two more ships between 2024 and 2027, for a total purchase price of $1.9 billion.
Making it up on volume
Yes, you read that right. Somehow, some way, the famously profligate U.S. Defense Department managed to negotiate a contract to get 50% more than the expected number of ships, and pay 5% less than the expected $2 billion purchase price.
Confirming that this is indeed the deal the Coast Guard will be getting, late last month the Pentagon announced that it is exercising its first option on the 2021 contract, and ordering VT Halter to build it a second icebreaker for $552.6 million.
Assuming a third ship can also be had for that cost, the total price of this contract should fall below $1.9 billion.
What it means for investors
As TheDrive.com reported last year, these new PSCs will be among "the heaviest ships that [VT Halter's shipyard] in Pascagoula, Mississippi, has ever built," and it's possible that building such large vessels is straining the company's current capabilities. TheDrive notes that delivery of the first new icebreaker has been pushed back from 2024 to 2025, and the second from 2025 to 2026, suggesting that the need to build "new infrastructure capable of handling [the PSC's] weight" might be the reason.
While these delays are disappointing, though, they may bear fruit for VT Halter as it competes against such military shipbuilding heavyweights as Lockheed Martin, General Dynamics, and Huntington Ingalls Industries. Of these three major defense contractors, at least two are believed to have bid against VT Halter for the PSC contract. And with a potential need to add as many as seven more icebreakers to the fleet, VT Halter's victory on the first three contracts could give rise to billions of dollars more revenue for the rising shipbuilder.
VT Halter intends to bid on even more big-budget defense work, in particular the Marine Corps' Light Amphibious Warship contract. That one could see the Marine Corps spend approximately $3.9 billion to acquire 30 new lightly armed transports. VT Halter has already won a place among five companies short-listed to develop concept designs; the Navy will choose a final winner later this year.
And after that, who knows? The U.S. government has already expressed concern about the increasing concentration of the defense industry among fewer and fewer companies. As VT Halter racks up contract wins and grows its revenue stream, it should benefit from the Navy's desire to have more contractors to choose from -- potentially becoming so valuable that current owner ST Engineering might decide to spin off VT Halter in an initial public offering, and cash in on its 2002 investment in VT Halter.
Put another way, the more contracts VT Halter wins, the greater the chance that we will eventually get a chance to invest in the company and share in its success.
