The consensus is that a recovery is taking place in the OSV market and specialist, high-quality vessels are likely to bring most benefit
One of the key indicators of a recovery in the OSV market is a rise in utilisation. MSI’s associate director for offshore, Gregory Brown, speaking at Riviera’s Asian Offshore Support Journal Conference, held in Singapore 17-18 September, told delegates that utilisation for anchor handlers and platform supply vessels (PSVs) will rise to 60% in 2020, from below 50% in 2017-2018.
Another indicator of the pending recovery in the OSV market is that, according to MSI, more than US$10Bn of upstream offshore contracts have been awarded so far in 2019, more than matching the investments committed for the whole of 2018 and the US$7Bn awarded in 2017.
“We are encouraged by activity for LNG backfill work in Malaysia and Australia and the potential for greenfield projects in Myanmar and Brunei,” said Mr Brown. Still, the encouraging signs of a recovery and an increase in utilisation does not automatically translate into an increase in rates. Any forecast of improvements in utilisation and rates comes with caution: “The OSV market continues to strengthen, but we are not out of the woods yet,” said Mr Brown.
“The market could reach activity levels that allow owners to do more than survive, but the upside is capped,” he explained, noting that market rates will be limited by the oversupply of vessels, including those laid up during the industry downturn in the last five years.
“There is still too much idle capacity, and this could be reactivated,” cautioned Mr Brown.
Nonetheless, utilisation of floating drilling rigs (semi-submersibles and drill-ships) is expected to rise over 70% in 2020. Jack-up rig utilisation is now climbing to more than 65%, statistics showed.
In a panel on restructuring at the conference, participants differed on how much optimism was justified for the offshore market’s recovery. Some were more positive than others, saying there is more good news than is generally acknowledged in the industry.
Pareto Securities managing partner Erik Strømsø began on a bright note, citing participants at a recent investors conference in Oslo, who unanimously agreed the sector’s recovery had begun. While 2018-19 was a tough financial year from a capital markets perspective – oil majors did not do as well as expected, for example – demand is now moving in the right direction.
Mr Strømsø recalled last November’s oil price plummet that sent capital markets into turmoil, hammering drilling companies’ and oil services’ stock prices. “The market is just about bottoming out now. Things are looking better for the offshore support industry,” he said.
Mr Strømsø listed the negatives for the oil and gas industry overall and the offshore segment specifically: the focus on renewables is only increasing as a moral imperative; shale output continues to grow, but with fewer onshore rigs; and trade wars are having a negative impact. On the other hand, he pointed to the yearly surveys Pareto Securities does which showed offshore spending grew by 5% in 2018-19, compared to just 2% overall spending growth in 2017-18, largely driven by onshore. For 2020, an additional 5% increase in spending is forecast, he said. “For the first time since 2014, funding is available. There will be a recovery despite an overhang,” according to Mr Strømsø.
Regarding sources of finance, he said banks are still a closed option except for those with good credit, which narrows the field significantly. The bond market continues to be negative, but he believes it will turn. “Equity is the way to go. Offshore companies should improve their balance sheets and try and raise money for new projects,” he said.
Confidence to negotiate
Mr Strømsø also gave his take on restructuring options for companies. The Chapter 11-type option works in countries like the US where businesses are typically not family owned, he said. The chief executive is in charge, making Chapter 11 a relatively easy route.
“Take the equity holders, wipe them out, and make debt holders equity. In one stroke, the balance sheet is looking much better,” he said, adding this approach may not work in other countries where families do not like to relinquish control.
The other option is to fix the balance sheet and move on when the market picks up. “This can happen only if the company is not in deep trouble,” he said.
He added that there will be positive restructuring in the next 12 months and consolidation is bound to happen. “Companies will have the confidence to negotiate better deals once the restructuring is done,” he said.
In a panel discussion that followed, Nam Cheong chief executive Leong Seng Keat sought to maintain caution. He said the rates are up compared to last year but are nowhere near the peak when the industry expanded capacity. He felt the present rates will not sustain the industry.
MMA Offshore commercial general manager Tom Fairclough disagreed with the tone of many of the speakers. When it comes to pricing vessels or the sentiment in the bond market, things are much more upbeat, he said, adding he was seeing significant rate increases in select markets. “I think we are drinking too much negative kool-aid,” he said.
When it came to the best offshore vessels to invest in, VesselsValue’s head of representative office (Singapore) and former offshore broker and analyst Charlie Hockless was clear which sector held the most promise. His role is to monitor and provide support to companies in Singapore, and he presented a paper on his observations from a Singapore point of view. The local market has specific requirements but these are translatable to the world stage.
He noted that the offshore companies that have survived the recession are the small companies that have moved quickly to snap up high quality units that are in demand and found immediate employment.
He quoted Eastern Navigation as a company that had acquired high quality units that over the lifetime of the vessels are likely to produce a significant positive yield. In February 2019, Eastern Navigation purchased part of the Toisa fleet in a bank sale, including the 2011-built multi-purpose support vessel Ena Wizard (ex-Toisa Wave) for US$6M, estimated to be currently worth US$23M, according to VesselsValue.
Mr Hockless was of the opinion that the value lay in the specialised offshore units, in particular the offshore construction sector and the sub-set of diving support vessels. This is a relatively young fleet, but with a surprising long tail of vessels 20 years old or more.
An OSV recovery, the agility of small companies and the interest shown in specialist vessels all makes for an interesting story and could be the profile of an interesting investment vehicle. A large company could spin-off its subsea/diving sector vessels and aggregate together a young fleet to create a vehicle for an IPO as the recovery takes hold.