America's Coast Guard is looking for a few good icebreakers -- and it's finally going to get 'em.
I've been writing about the U.S. Coast Guard's need for new icebreakers to help clear shipping lanes in a rapidly de-icing Arctic for nearly a decade now. Over that time, the situation has only gotten worse. Back in 2014, the USCG had just two icebreakers (down from eight in the 1980s): the medium icebreaker USCGC Healy, and the heavy icebreaker USCGC Polar Star.
Not a single new icebreaker has been built since. Meanwhile, both the Healy and the 48-year-old Polar Star have suffered multiple mechanical failures. An engine fire put the Healy out of commission for months, and the Healy Polar Star's captain says his ship is "just falling apart."
Image source: U.S. Coast Guard.
But don't lose heart; things might finally be getting better. In 2019, the U.S. Navy (which buys ships for the Coast Guard) awarded $1.9 billion to private shipbuilder VT Halter to build not one, not two, but three new icebreakers for the USCG, and work on the first ship has finally begun.
Naval mergers & acquisitions
This was surprising for a couple reasons: First, the Navy finally moved to close the "icebreaker gap" with Russia, which operates a fleet of 40 icebreakers. Second, the Navy got a really good price -- approximately $1.9 billion for three icebreakers. (The Navy had expected to pay about $1 billion for each ship.) The third surprise was the company the Navy chose to build these ships.
When the Navy first started casting about for a defense contractor to do the work, two obvious possibilities suggested themselves: Lockheed Martin (LMT +1.05%), which built Polar Star, and Huntington Ingalls (HII 2.02%), which had acquired the shipbuilder that originally built Healy. At the time, these seemed the "usual suspects" that would get "rounded up" and asked to build new icebreakers.
NYSE: HII
Key Data Points
Back then, I noted a remote chance that the Navy might give the contract to a smaller, privately owned shipyard such as Bollinger Shipyards. But honestly, that didn't seem likely. So imagine my surprise when the Navy picked private shipbuilder VT Halter to do the work -- and then Bollinger Shipyards stepped in and bought VT Halter, along with its $1.9 billion icebreaker contract, for a piddling $15 million!
Time to get to work
So now Bollinger has the contract that nobody expected it to win. But when will it deliver the ships?
Last week, Bollinger announced it has begun "cutting steel" to build its first icebreaker-Coast Guard Cutter, the future USCGC Polar Sentinel (PSC-1). Well and good. But the new heavy icebreaker will comprise 85 "modules" total, and initially Bollinger is only working on the first eight modules as a "proof of concept" -- budgeting four months each for completion.
So this is going to take some time. According to the Congressional Research Service, Polar Sentinel won't be ready for service before 2028, and the next two cutters will take even longer.
That's a bit of a disappointment, considering the Coast Guard had initially hoped to receive all three icebreakers by 2027. A Congressional Research Report earlier this year cited Covid-19 delays, as well as ongoing design work to modify an existing German icebreaker design to suit the Coast Guard, and "the shipbuilder's inexperience with large government acquisitions," for the delays.
So Bollinger itself is at least partly to blame for the delays, which isn't a great start to the project. That said, as Bollinger points out, no one in the United States has tried to build a heavy icebreaker from scratch "in 50 years." There's going to be a bit of a learning curve here, and there's no guarantee that Lockheed or Huntington would have done the job any faster.
NYSE: LMT
Key Data Points
What it means to investors
Still, Bollinger needs to get up to speed fast if it wants to capitalize on its success. The private shipbuilder has made a real name for itself serving as the Coast Guard's shipbuilder of first resort, delivering its 54th (!) fast response cutter to the Coast Guard just last month, and its 180th Coast Guard vessel of any size.
That said, cutter contracts are relatively small awards for Bollinger, weighing in at just $65 million apiece. Each single icebreaker that Bollinger gets to build is worth ten times that amount. According to data from S&P Global Market Intelligence, the total size of this contract is worth more than Bollinger's entire annual revenue stream of $1.2 billion. And even after these three cutters are built, Russia will still have 10 times as many icebreakers as the U.S. There's a lot of room here for Bollinger to keep growing -- perhaps even get big enough to contemplate an IPO -- if it proves itself up to the task.
And if it fails? If costs run over and delivery delays continue to mount?
I have no doubt that Lockheed Martin and Huntington Ingalls are waiting in the wings for just such an eventuality, and will be happy to forgive and forget the Coast Guard's giving away their contract in the first go-round. If Bollinger drops the ball, the "usual suspects" will be more than happy to step up and build as many billion-dollar icebreakers as the Coast Guard would like to buy.
