Some very good insights into the OPC contract contained in the...

Some very good insights into the OPC contract contained in the Congressional Research Report prepared just over a week ago for US Congress members:
https://s3.documentcloud.org/documents/22274191/coast-guard-cutter-procurement-background-and-issues-for-congress-aug-30-2022.pdf

Of note:

Report p9: Coast Guard made it clear in Oct 2019 the OPC procurement program would be restructured to include a competition for a new contract to build subsequent OPCs 5 through (then) 15. So Eastern Shipping Group (ESG) clearly knew way back then they were not automatically a dead cert for future OPCs, and would face stiff competition for the build of hulls past the first four they had been awarded.

Report p12: interesting comment from an observer is included:

This, to my mind, is where Austal ultimately had the edge and probably won over all of the other competing bids for hulls 5 to 25.

Report p21-22: quotes the Coast Guard commandant in May 2022 highlighting the ongoing need for price adjustments in the foreseeable future. He notes:

“...Rising inflation and supply chain issues continue to increase costs throughout the life cycle for our assets. For example, in the past year the price for steel to build our ships has increased 48%, fuel costs have increased 20% with an additional adjustment on the horizon...”

So if the current inflationary pressures continue we can probably expect the total contracted value per vessel paid to Austal by Coast Guard will rise as adjustments to the original fixed price contracts are made. That’s good for us as it protects our profit margins.

Report p22: the GAO (Govt Accountability Office, to whom ESG is now protesting the win by Austal of OPCs 5 to 25) was asked to review the procurement program for hulls 1 to 4 (awarded to ESG) way back in 2019/20. Their report in Nov 2020 was critical of parts of the decision and process used by Coast Guard for OPCs 1 to 4 and ESG doesn’t look good here at all imo.



I think from reading between the lines (and in Appendix E with the House Committee letter mentioned further below) we can see why Coast Guard opted not to award hulls 5 to 25 to ESG and chose Austal instead.

Report p23: then in August 2021 the House Committee made a request to GAO to review the management of the entire OPC program..

“...including, but not limited to: The status of the Phase 1 (the first four hulls) and Phase 2 (hulls 5 through 25) OPC acquisition programs, including what steps are being taken to manage the program within the revised cost and schedule commitments...”

So from this we can see GAO has clearly been intimately involved in the review of the whole process post-ESG and had provided guidance and learnings by way of report prior to the award to Austal of hulls 5 to 25. This bodes very well for us imo when it comes to the protest by ESG which argues the decision to award Austal was faulty/unfair.

Report p24-25: there seems to be a good chance the annual OPC procurement rate will be accelerated. Congress is being asked here to consider...


...as well as multi-year/block-buy contracting instead of annual options contracts.

This could imo be a very good thing for Austal in terms of revenue and certainty. Larry Ryder has been making a lot of statements lately about the scalability of the new Mobile steel cutting line, and the ability to run much greater capacity, meaning option one (above) could very much be in play (i.e. Mobile churning out 3 or 4 OPCs per year under an accelerated plan). If Congress approves that then we are really going to see big accelerated revenue impact here. Alternatively, Coast Guard might throw a bone at ESG by using them as a second yard while potentially ramping up the throughput at Austal. Either way it’s very good imo.

Report p47, Appendix E: the Nov 2019 letter from the House Committee chair to the Acting Secretary of Homeland Security which to my mind doesn’t help ESG’s argument much at all when it comes to protesting Austal’s win of the new hulls to GAO. The committee was clearly unimpressed with ESG lobbying for contract price relief barely 6 mths after the award of hulls 1 to 4, and the fact they’d never built a vessel before for the US Fed Govt. Austal has - many in fact - albeit aluminium hulls to date. The letter is quite critical of Coast Guard but the tone clearly shows the displeasure of the House Committee for how ESG went about things including their original bid. I think therefore we can have quite a high level of confidence that Coast Guard (taking GAO’s prior review and input, and the Secretary’s eyes on it too) ensured the procurement process for hulls 5 to 25 was much more watertight and the decision taken to award this to Austal was cognisant of the earlier criticisms over the hulls awarded to ESG.

Finally, October 24 is fast approaching!