Debt restructuring, consolidation and the recovery in the offshore market were at the centre of a lively panel discussion during Riviera Maritime Media’s recent Asian Offshore Support Journal Conference in Singapore
In describing the slow recovery in the offshore oil and gas market, panellist Nam Cheong chief executive Leong Seng Keat says he tells his team: “We are like the surfer. We stay prepared and practice every day and hopefully when it comes, we can ride the wave.”
One of the leading OSV shipbuilders in Malaysia, Nam Cheong is a relative newcomer to vessel operations, entering the chartering business in 2007. It has 26 active vessels in its fleet and its Miri shipyard in Kuala Baram, Sarawak, Malaysia is capable of delivering up to 12 vessels annually.
In September 2018, Nam Cheong successfully completed its debt restructuring. Mr Keat says the debt restructuring enabled the company to significantly pare down its debt and improve its net tangible assets by over RM500M (US$120M). While the transaction was welcome news, he cautioned that it came with a price tag; Nam Cheong has seven years to pay back the money invested during the restructuring.
One of the dilemmas owners face, said Mr Keat, arrives when the vessel is due to go into a shipyard for its five-year statutory drydocking: “When the vessel is due for drydocking, you have to consider whether you have enough cash flow to have the vessel serviced and back up and working. Is the day rate good enough to justify servicing it and to keep it working for the next five years?”
He pointed out that day rates are about US$1-US$1.50 per bhp, which is “good for old assets but not for a new asset.”
High utilisation, low rates
Day rates are low in the Indonesia offshore market says Wintemar president director Sugiman Layanto, despite increasing utilisation rates for some vessel types of 90%.
Operating 60 vessels, Indonesia-based Wintermar reported that overall its high-tier vessels were the best performers in Q2 2019, with utilisation rates above 70%. This resulted in revenues for owned vessels jumping 21% quarter-on-quarter to US$10.2M in Q2 2019. Total fleet utilisation for Q2 2019 rose to 58% compared to 41% in Q1 2019. Gross losses from this division narrowed in Q2 2019 to US$0.5M, compared to a gross loss of US$1.6M in Q1 2019. Despite the quarterly improvement, revenue for H1 2019 of US$26.5M was still 19% below H1 2018, largely attributable to lower fleet utilisation and lower charter rates as compared with 2018.
Wintermar does see offshore oil and gas investments starting to rise, with stronger activity in Malaysia, Myanmar and Brunei. In Asia, it sees demand for ‘operationally ready’ support vessels starting to pick up.
Mr Layanto said Wintermar has vessels operating in 10 countries. To participate in other Asian markets where some degree of cabotage is in effect, the Indonesian owner is also striking agreements with in-country partners to establish a broader market presence in the region.
As activity picks up, Wintermar sees potential growth in fee-related services like chartering and ship management.
Oversupply keeps day rates depressed
Swire Pacific Offshore (SPO) general manager Florent Kirchhoff agreed that day rates are improving but not for all asset classes. Part of the Hong Kong-based Swire Pacific conglomerate that controls hotels, real estate, beverages and Cathay Pacific airline, SPO has 75 vessels, among which are 42 AHTS vessels, 22 PSVs and 11 construction and specialist vessels.
In H1 2019, SPO posted a loss of HK$583M (US$74M), compared to a loss of HK$650M (US$83M) in 2018, excluding impairment charges and related write-offs of HK$3.9Bn (US$497M) at SPO.
In reporting its H1 2019 results, SPO said there are some signs of recovery in the offshore industry, with E&P spending expected to increase in 2019 and 2020. The number of working rigs is slowly increasing, which has resulted in higher vessel utilisation rates, but day rates remain depressed, due to oversupply of vessels.
Many at the conference put the number of laid-up vessels in the neighbourhood of 1,200 vessels.
SPO’s fleet utilisation during H1 2019 was 74.7%, up 5.8% as compared with H1 2018. However, average charter rates have decreased by 16% to US$14,500 per day. Utilisation of SPO’s AHTS vessels and PSVs increased by 6.4% to 79.9%, but average charter rates slipped by 1% year-on-year (yoy) to US$10,800 per day. Utilisation of SPO’s construction and specialist vessels increased to 43.6%, but once again average charter rates fell 37% to US$54,800 per day, while utilisation of its subsea vessels fell to 59.6% and day rates dropped to US$36,400 per day.
Unlike his fellow panellists, MMA Offshore commercial general manager Tom Fairclough had a different opinion on the market. Mr Fairclough castigated the offshore industry for its gloomy outlook. “The sentiment around this room is incredibly negative,” Mr Fairclough told delegates at the conference. “Everyone has remarked that there are 1,200 vessels laid up. I don’t see that in the spot market. I don’t see it when we are pricing vessels. I don’t see it in the pricing expectations you are actually able to achieve.” Added Mr Fairclough: “It feels like we are still telling ourselves the bad news; drinking the kool aid, if you like. I don’t recognise this market that is being described.”
Mr Fairclough said MMA Offshore has seen significant rate increases in certain asset classes and different markets. “My message is cheer up!” he told delegates.
In a move aimed at strengthening its presence in the subsea services market, Freemantle-based MMA Offshore Limited acquired the operating units of ASX-listed Neptune Marine Services in a transaction valued at about A$18.5M (US$13M).
By packaging back-deck work such as ROV and diving services with its fleet of multi-purpose support vessels, MMA Offshore expects to realise an improved return on assets. MMA Offshore owns and operates a fleet of over 30 specialised OSVs, offering offtake, drilling, construction, seismic and survey support, and anchor-handling and towing, accommodation and walk-to-work services.
Time to demonstrate earnings
As a result of the prolonged downturn in the offshore market and the shipping sector in general, investors have sought refuge in other sectors with healthier returns. With the offshore oil and gas market recovering, is it time for investors to reconsider putting capital back?
“Offshore needs to demonstrate that earnings are coming,” said Pareto Securities managing partner and chief executive Eric Stromso. He pointed out that some companies have shown significant increases in EBITDA, as much as 30, 40 or 50% over previous levels. He pointed out that while those previous levels might be low, it still demonstrates a positive trend.
“Investors will come back when the OSV industry proves it is making money,” said Mr Stromso. He added: “Restructuring is going to be a positive development over the next 12 months. It will lead to increased consolidation. There is a need for a few larger and more responsible players. You are not going to have that in the OSV industry because it is highly fragmented, but you can get enough large players to take the responsible lead.”
He also warned that the offshore industry needs to “improve news flow”, highlighting that marginal investors are only reading negative reports on the offshore industry. In which case, he exclaimed: “Why would they pull money out of Amazon to invest in offshore?”