A group of industry executives unanimously agreed the offshore industry’s downturn has bottomed out and there are signs of revival – how much of a revival was the sticking point
In a panel on restructuring at Riviera’s Asian Offshore Support Journal conference in Singapore, 17 September, the panellists 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 Stromso 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 moving in the right direction, they said.
Mr Stromso 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 Stromso 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 Stromso.
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.
Mr Stromso 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. A few do not do anything but wait out the downturn and get all stakeholders to help out. “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.