Even with a strong oil price the recovery in the offshore vessel market will be slow, so operators must consider how they will protect themselves, writes MSI director of consultancy James Frew
The offshore vessel market is emerging at a glacial pace from a downturn that has ravaged earnings and values across asset classes in the main demand centres. All market segments have suffered to varying degrees and the overall contraction in demand remains staggering. This is illustrated in the chart below, which plots demand for anchor-handling tug/supply (AHTS) and platform supply vessels (PSVs).
It is immediately clear that the volume of underlying work – looking at working rigs, offshore construction and active platforms – is back to pre-boom levels, with the huge demand growth from 2005 to 2014 largely negated by the most recent downturn.
Further, underlying demand has evolved at varying pace across different asset classes within the wider OSV market. The volume of demand for AHTS from drilling has collapsed (by 41%) on 2013 levels, whereas the volume of supply runs and other platform support activities has only dropped by 26% (although by the same token, we believe that rig demand will rebound quicker, whereas well shut-ins in South East Asia have taken a more lasting toll on overall platform supply demand).
There are also significant regional differences across the OSV markets (see chart below). The Middle East remains comfortably at the top of the major markets, since asset utilisation remains high and cash flows are positive (although assets mobilising to the region from South East Asia have ensured rates move in line with the wider market).
Utilisation for standard OSVs (AHTS and PSVs) is a little higher than in other regions (somewhere between 50% and 60%) on an overall basis, considering the total fleet including lay-ups. However, bigger and better-known owners show significantly better utilisation rates. The landscape remains extremely fragmented in the Middle East, with a throng of owners with one or two vessels, mainly in the UAE.
The Far East remains crippled by both reduced demand from well shut-ins and lower drilling levels, coupled with having the greatest exposure to the oversupply of assets in Asian yards.
The most promising region in terms of growth is likely to be Mexico, which retains a focus on smaller assets, while the recovery in activity off West Africa is promising. However, the relatively stable nature of Middle Eastern demand, coupled with the fact that much of the decline in South East Asia has already taken place, means the sensitivity of oil price demand among smaller OSVs is blunted.
By contrast, larger AHTS remain extremely sensitive to fluctuations in the oil price. Maritime Strategies International’s (MSI) modelling suggests those regions with the greatest sensitivity to oil prices are the Golden Triangle of Latin America, West Africa and the Gulf of Mexico. Of these, demand in Brazil is, in MSI’s view, most sensitive to crude pricing fluctuations.
As well as experiencing reduced demand, the nature of new construction projects executed by OSVs in the western hemisphere is evolving. This structural shift is towards high capex/low opex projects that international oil companies (IOC) now favour as their best strategy to counter the tight oil revolution – projects such as Mad Dog 2, Kaikias and Liza in the Gulf of Mexico/North Coast South America and Johan Sverdrup and Johan Castberg in the North and Barents Seas.
Such complex and expensive projects are only available to the IOCs and these will increasingly be their focus. That shift in capex to big projects, or towards sub-sea tie-backs, also means a reduction in demand for smaller offshore assets.
As well as shifting demand, the landscape in which boats can win contracts is changing, with tightening local content restrictions becoming increasingly important in determining vessel utilisation. In our view this is one of the key ingredients for survival among smaller OSV owners. Without some protection from local content, OSV owners will be left in an increasingly commoditised industry, with a significant oversupply of modern, commoditised assets available in Asian shipyards at increasingly aggressive price levels.
To the extent possible, OSV owners that can present a value proposition beyond simply providing the asset, adding some sort of logistical solution, will be better placed to earn a margin. Examples include Seacor’s introduction of fast crew/supply vessels to Saudi Arabia, or Topaz’s construction of specialised module carriers to move infrastructure into the Caspian region.
The commoditisation of smaller asset classes is also reflected in the relative pricing of classes of OSVs (see chart below). Using relative depreciation to newbuilding prices to compare values across different asset sizes gives a clear view of where the pain is concentrated. The more sophisticated, larger and often European-built AHTSs have retained more of their value, while the Asian non-specialised and smaller AHTSs have fared worst. For example, MSI evaluates a five-year old 24,000 bhp AHTS at 70% of its replacement value, whereas the equivalent percentage for a 5,200 bhp AHTS is below 25%.
In our view this is the crux of the market. Assets which were significantly overbuilt by Asian yards have seen their values collapse; it is not really a failure of the demand side that is crippling the market, but rather colossal oversupply. This means that any market recovery will be slow to come. MSI has modelled a High Case oil price scenario, with oil continuing its recent upwards movements and stabilising at close to US$100/bbl (in part as a consequence of Saudi determination to maintain a high oil price ahead of the Aramco IPO).
Even in this scenario, the market recovery takes until 2020, and is as much to do with the gradual removal of inactive assets from the fleet – either through outright scrapping or lapsed class certificates and escalating reactivation costs - as it is from resurgent demand.
The fact that the oil price is currently around US$75/bbl – a level higher than most in the industry would have dared hope for two years ago – but there has been no obvious market uptick shows the problem is not the oil price, nor the volume of offshore work per se, but the extremely deep supply-side hole the industry has dug itself into.
This hole is only made deeper by the orderbook, particularly given that we believe most of the assets on order will be delivered. We believe around 60% of the current PSV orderbook, for example, has been launched and is awaiting fitting out, whilst the equivalent figure for AHTS is just under 50%. All said, we feel there are over 200 AHTS and PSVs ordered in the last cycle where construction is sufficiently advanced that it is likely the asset will eventually join the fleet.
It should be clear then that there are no silver bullets for asset operators – if there were, they would have used them by now. The efforts of the likes of Bourbon in reshaping their businesses to adjust for the new reality, scrapping vessels and trying to incorporate digitalisation into their fleet, is a step forward, but the oversupply of assets continues to drag any recovery off course.
In this context a quote from Dwight Eisenhower is particularly apt: “Plans are worthless, but planning is everything.” MSI is no better-placed to predict the oil price than any other forecaster. However, what our research shows is that even in a strong oil-price environment the recovery will be slow, and any operators that remain exposed to commoditised assets, without the protection of local content restrictions, will continue to struggle, even as the market shifts into recovery phase.