Market conditions are improving slowly, but the OSV market must overcome some significant hurdles before it is on the road to a full recovery, says John Snyder
OSV day rates are up, albeit slightly, and, as we reported, expectations are rising for brighter days ahead. But there are still impediments to a full recovery in the OSV market.
Big OSV owners and offshore drilling contractors revealed some of the things keeping the market upswing low and slow during the 32nd Marine Money Week in New York.
Tidewater president and chief executive John Rynd and Seacor Marine chief executive John Gellert lamented that investors have not yet bought in to the recovery in day rates. The pair said the money will not arrive until there is a sustained increase in the number of drilling rigs being hired. That fundamental market mover would correlate directly to increased demand for OSVs and give investors the assurance they need.
One offshore drilling region that both OSV executives thought was attractive was the North Sea. Moderator DNB Markets senior analyst Martin Huselby Karlsen agreed, pointing out that North Sea day rates were rising for the newest generation of drillships and jackup rig hires were climbing.
But all markets are not the same. Neither Mr Rynd nor Mr Gellert saw conditions in the US Gulf of Mexico and the Mexican offshore market as particularly appealing. Drill rig activity in the US Gulf has been stagnant, stuck like an old clock at between 19 to 20 active rigs for over a year. Other rigs have departed the US Gulf altogether, moving to explore in Guyana, as Noble Corp CFO and senior vice president Adam Peakes pointed out.
Investment in onshore shale gas activity also continues to divert funds away from the US Gulf, with oil majors allocating less capital to the offshore drilling sector there.
And, of course one of the principal drags on the entire OSV market remains oversupply. Some 1,750 vessels remain in lay-up. Vessel utilisation rates have crawled up, but overall global averages remain low, with platform supply vessels at 52% and anchor handling tug supply (AHTS) vessels at around 60%.
And while scrapping has reached record levels, it has not yet had a significant impact on oversupply.
Large OSV owners such as Tidewater and Bourbon have been actively scrapping older vessels or selling off non-core assets for years. Tidewater, for example, has sent 85 vessels to shipbreakers in a six-year timespan.
But many older OSVs – those 15 years old and older – are still in the market in hundreds of small shipowners’ fleets. The aggregated fleet of some 400 smaller OSV owners totals 2,400 vessels.
Thus, the highly fragmented OSV market legacy remains problematic.
Compounding the oversupply problem are hundreds of AHTSs and PSVs, ordered during the pre-2014 oil boom years, that remain undelivered and in various states of construction and preservation.
Banchero Costa reported that more than 330 AHTS vessels and PSVs were in the orderbook at the end of 2018. Many of these vessels were contracted on speculation when oil was in the neighbourhood of US$100 per barrel and remain tied up at shipyards because the contractor disappeared, went bust or the contractor is the yard itself and there are no buyers in the market.
While some of these vessels will not ever be completed, others will. Atlantic Towing, for instance, has just purchased a battery-hybrid platform supply vessel that was originally ordered by another owner in 2014. The PSV will be completed by the shipyard and join Atlantic Towing’s fleet in 2020.
Back at Marine Money Week, both Mr Rynd and Mr Gellert said their companies retain the competitive advantage of having strong financial balance sheets, putting them in a position to weather out the storm until the eventual market upturn.
That is almost undeniably true, but other OSV owners do not have that luxury. The prolonged slump left many strapped with vessel mortgages that are under water. Some owners have been successful at negotiating short-term deals with their creditors to suspend or defer payments of principal and interest under their vessel mortgages. However, for overall industry health, creditors and owners need to work together on pragmatic long-term solutions so that they both can participate in the market recovery.
All that said, the recovery does look real. Vessel day rates are crawling upwards and charterers are tendering for longer terms and the results are showing up in OSV owners’ revenue. Rystad Energy noted the positive trend in its analysis of the financials of 200 companies operating in the oilfield service sectors. The research showed aggregated quarterly revenue growth for eight consecutive quarters year-on-year, which has not happened since 2014.