Hurt by the prolonged slump in the OSV market, Norwegian owners expect revenue to rise for the first time in five years
Marked by a pronounced oversupply of vessels, low day rates, short-term contracts and the volatile oil price, the prolonged slump in the offshore oil and gas market appears to be slowly receding. Prospects for increased OSV activity appear to be brightening.
The tough market conditions over the past five years have taken a toll on Norwegian OSV owners. Often considered a bellwether for the OSV market, Norwegians operate globally and control one of the world’s largest fleets of OSVs, with some 550 vessels.
In the heady days of 2014, the last year of US$100-per-barrel oil, Norwegian OSV owners reported revenues of Nrk100Bn (US$11.5Bn). By the end of 2017, total revenues had dropped by almost half to Nrk52Bn (US$6Bn), according to a survey by the Norwegian Shipowners Association (NSA). In the wake of the downturn, the balance sheets and fleet evaluations of Norwegian OSV owners suffered.
In January 2019, the Financial Supervisory Board of Norway, Finanstilsynet, required Norwegian OSV giant Solstad to revalue its entire fleet. The total value was reduced by Nrk 850M (US$99M), according to UK ship-valuation research firm VesselsValue.
VesselsValue head of offshore Robert Day says Solstad has long maintained its fleet valuation figures, so this reduction shows not only Solstad’s acceptance of the continued poor market conditions, but also the resultant asset prices, which is a major step forward.
Brisk secondhand sales of PSVs
In May, Farstad Shipping Pte Ltd, a wholly owned subsidiary of Solstad Offshore ASA, sold the platform supply vessel (PSV) Lady Melinda to an undisclosed owner. Built in 2003 at Aker Brevik in Norway, Lady Melinda has an overall length of 71 m, beam of 16 m, and maximum draught of 5.8 m.
This year, 32 of the 61 vessels sold on the secondhand market have been PSVs, according to VesselsValue.
In 2018, secondhand OSV sales climbed to 180 vessels, almost 82% of which were anchor-handling tug supply (AHTS) and PSVs.
“I think the positive (in the secondhand market) is that values seem to have bottomed out”, says Mr Day. “PSVs have suffered the most during the downturn, but when traded on the spot market can experience very healthy returns. Once these earnings stabilise, they will result in higher term rates, which will in turn cause asset values to rise.”
Distressed sales during the downturn also created buying opportunities. “The Toisa bankruptcy sale produced a number of opportunist and savvy buyers”, says Mr Day. “If the price is right and a buyer has a plan for a vessel, then any OSV can be considered desirable. Unsurprisingly though, we have seen a large majority of the secondhand transactions within the PSV sector.”
Fewer OSVs laid up
A result of an uptick in secondhand vessel sales and improving conditions on the Norwegian Continental Shelf is that there are fewer OSVs laid up. As of February 2019, 112 OSVs and 20 drill rigs were in layup, compared with 137 ships and 25 rigs in February 2018, according to the NSA. By year’s end the figure will fall to 78 ships and 15 rigs.
“The market is in a recovery”, says Mr Day. “It will be a long process but the worst, I believe, is behind us. However, how and at what pace inactive vessels are reactivated over the coming year will dictate how quickly the market recovers.”
The market recovery does present Norwegian OSV owners with some financial hurdles. “Moving forward, one of the biggest challenges Norwegian owners face is aligning themselves strategically for a potential market upturn”, says Mr Day. “Unlike their US counterparts, Norwegian owners do not have the luxury of the Chapter 11 bankruptcy process.”
Prior to their merger, US-based Tidewater and Gulfmark both used the Chapter 11 reorganisation process to reduce their debt and strengthen their balance sheets. Tidewater and New Orleans-based Harvey Gulf International Marine, which also reorganised under Chapter 11, have some of the strongest balance sheets in the business.
“We are currently seeing the very early signs of an improving market, especially within the North Sea”, points out Mr Day. “However, many Norwegian owners are still burdened by heavy debts produced by a long and painful offshore downturn. So even when experiencing short-term increases, it’s just not enough to outweigh the pre-existing debt”, he adds.
Mr Day points out that the reorganisations and merger between Tidewater and Gulfmark has evolved the North Sea competitive landscape, and not in favour of the Norwegians.
Armed with a fresh cash injection and clean balance sheet, Tidewater has a significant advantage over its non-restructured competitors in the North Sea. “Tidewater can be aggressive and highly competitive with its rates, and it will certainly make for some interesting North Sea market dynamics very shortly”, says Mr Day.
More consolidation ahead
Those companies that have been through consolidations have emerged with strong balance sheets and are primed and ready to profit from a market upturn. Mr Day observes that the North Sea is still a very fragmented marketplace and “in a market as poor as the last few years, this fragmentation does nothing to speed up a recovery.”
While he is not sure how consolidation will play out among Norwegian owners, Mr Day does note US owner Harvey Gulf’s continued strong interest in the North Sea. Harvey Gulf has not been quiet about its intention to be a global player.
Offering several potential merger partners for Harvey Gulf, Mr Day adds, “Who they are intending to take over or merge with and when is not yet clear, but it will be very interesting to watch its development over the coming months.”
With activity increasing, Norwegian OSV owners do have an improved outlook for 2019. Revenues are expected to rise by 6% to Nrk60Bn (US$7Bn). The question is, will the increased drilling activity translate into rising OSV charter rates?
During the prolonged downturn, the NSA points out, there were several years of oil companies undertaking major cost reductions and efficiency improvements, combined with extensive consolidation in the supplier industry. As a result, oil companies showed strong profitability on the Norwegian shelf. The combination of large cost reductions and a more stable, higher oil price has led to very good margins for the oil companies.
“When activity levels pick up and the markets tighten on the capacity side, oil companies must also expect a significant increase in the rates for ship operations,” says NSA chief executive Harald Solberg. Time will tell.