AlixPartners discusses how best to tackle the ongoing concern of oversupply among the OSV fleet
The OSV industry has emerged from its 2017 trough, thanks in large part to a slight shrinkage of the active fleet, a string of debt restructurings, improved cost management, and an uptick in drilling activity in a few regions. The industry is far from healthy, though, and the climb back to financial well-being will likely be long and unsteady. Not every operator will survive. And even though we’ve seen some improvement from 2017 levels, leverage ratios remain sky-high, the supply of vessels far outstrips demand, and—most crucially—the price of oil remains volatile. In the face of that acute price uncertainty, oil majors remain reluctant to commit to new long-term offshore projects, which has stifled demand for charters in all but a few regions.
Our view of the industry’s condition has altered in one respect since last year: facing the prospect of a prolonged and muted recovery – and the near certainty that the industry’s most-prosperous days are behind it – a handful of companies have launched aggressive, far-reaching measures to remain financially viable. The measures the most-forward- looking operators have undertaken include reducing debt, reining in general and administrative (G&A) expenses, and retiring older, smaller vessels to align supply more closely with demand.
The ongoing oversupply of vessels will continue to hinder the sector’s recovery until it is addressed adequately. From a peak of 3,583 OSVs in September 2017, the sector has seen only minimal reductions in overall OSV fleet capacity. Taking new build deliveries and scrapped vessels into account, total fleet capacity decreased to 3,515 OSVs in July 2019 – a reduction of only 68 OSVs, or 1.9%, in the two-year period. Assuming that all 210 vessels in the current order book are delivered and scrapping rates are maintained at current annual levels of about 70 vessels, the OSV fleet would grow to 3,558 vessels by December 2021. Assuming a 4.5x OSV-to-rig ratio and a sustained fleet of 550 working rigs, the fleet’s projected overcapacity would be equal to nearly 1,100 vessels, or 30%.
The outlook for the OSV sector cannot improve until the bulk of the sector’s excess capacity is permanently eliminated through scrapping. Demolitions increased to 71 vessels in 2018 from a low of 15 vessels in 2011, but if the current trend continues, it would take more than 15 years to remove the estimated supply overhang of 1,100 vessels. Those numbers are illustrative only, but they clearly suggest a chronic imbalance in OSV supply, which to date, operators have done little to address. Scrapping activity, however, might accelerate in coming years. Before 2016, demolition and removal activity ran at 60 to 70 vessels per year, or 1.7% of OSV feet. Since 2016, the industry has posted a sharp increase in demolitions, whereby increases of more than 40% in scrap prices from 2016 through 2018 gave operators a strong incentive to permanently retire parts of their fleets – in particular, older, smaller, less- efficient vessels.
Larger reductions in the oversupply of vessels are unlikely as long as the OSV sector remains highly fragmented. The 10 largest operators in the sector control only about 30% of the total OSV fleet; the remaining 70% is in the hands of some 400 smaller operators, whose average fleet size is 6.1 vessels. There is no reason to expect the smaller operators to take collective action for the benefit of the sector as a whole.
AlixPartners will be speaking at the Annual Offshore Support Journal Conference, Awards and Exhibition, held in London on 5-6 February. For more information, please visit: www.osjconference.com/index.htm