The challenges of OSV financing
Financial experts discussed the difficulties OSV owners face obtaining financing in the current market on day two of the 2019 Annual Offshore Support Journal Conference in London.
DNB Bank’s president of ocean industries and offshore Arnfinn Eilertsen, NIBC Bank’s associate director of offshore energy Wim van Wijngaarden and SpareBank 1SR-Bank’s director and head of energy and maritime industries Stig Horsberg Eriksen were joined by Norton Rose Fulbright partner Richard Howley on a panel to discuss issues such as refinancing, the likelihood of bankrupticies, market restructuring and consolidations.
Commenting on the outlook for owners seeking financing, Mr Howley reflected on the downturn in bulk and container shipping in the late 2000s and said “If you can take one thing from that it’s that there is life, eventually [but] there’s a lot of pain and rationalisation required to get to that point.”
“A good level of communication is needed between owners and banks about what is needed, how the next few years are going to play, what the pressure points are and how to address restructuring,” he said.
Mr Eriksen said “The downturn in 2014 exposed cyclicality and volatility of the offshore sector to an extent no one had foreseen. Some of us are in this business to stay [but] for other banks it’s a case of once bitten twice shy."
Tidewater will only add assets if it 'makes sense'
Following its acquisition of Gulfmark in 2018, Tidewater will use its strong balance sheet, global footprint and continued scrapping programme of older vessels to right-size its fleet for the recovery, Tidewater president, chief executive and director John Rynd told conference delegates.
“Six years into the down cycle, this business is far from being recovered,” said Mr Rynd, noting the oversupply in the market and the 'need' for drillers to return.
Tidewater’s US$340M all-equity transaction to acquire Gulfmark after both companies emerged from bankruptcy left the company with a well-positioned balance sheet to take advantage of a rising market, according to Mr Rynd.
The largest OSV owner, with a market cap of US$919M, Tidewater has a fleet of 264 vessels, 100 of which are stacked with an active fleet with an average age of 8.7 years.
Tidewater is going to be very judicious in its spending to "right size" its fleet, said Mr Rynd, and was not going to add assets “willy-nilly,” but only if it made sense -- both in terms of individual acquisitions and M&A opportunities.
In 2018, Tidewater continued to rationalise its fleet, scrapping or selling 41 vessels and targeting another 40 vessels for sale or scrap this year.
Mega-merger matchmaking: is Harvey Gulf ready to settle down?
Harvey Gulf has made no secret that it wants to merge or go into business with others, according to VesselsValue offshore analyst Robert Day.
In one of his potential match-making scenarios, if Harvey Gulf were to merge with Solstad Offshore, the new fleet would have the greatest fleet number-to-value ratio.
“However, if that was not the route that Harvey Gulf wanted to go down, they could actually look at merging with Bourbon [Offshore]. That would give them the overall highest number of vessels,” Mr Day said.
And what would happen if Harvey Gulf were to merge with the new Tidewater-Gulfmark entity?
“I don’t think the world is truly quite ready for that, yet,” Mr Day added.
'When you run out of cash, you run out of time'
Addressing the question “Why does the recovery in the OSV market remain elusive?” AlixPartners managing director Jeff Drake said the financial health of the OSV market is a function of a supply-demand gap.
AlixPartners estimates that OSV demand in 2019 will be at 2,291, whereas the supply is 3,647, equating to a 63% utilisation rate.
Historically, OSV operators have used stacking as a low-cost means of handling oversupply and keeping the option open for a market recovery. However, even with a potential recovery in offshore drilling, the significant oversupply of OSVs could continue to plague the sector, he said.
A highly fragmented market -- 400 owners in the market have fleets of six vessels or less -- is making removing oversupply very difficult, according to Mr Drake, and many owners have a high debt-to-cash ratio that limits their financial leverage
As more companies address their balance sheets, those with less debt will be able to price more aggressively, and those who retain debt will risk being driven out of business. “When you run out of cash, you run out of time,” warned Mr Drake.
OSV owners should pool assets for market upturn
Owners of small fleets of offshore support vessels (OSVs) should pool their assets and collaborate in gaining charters to compete with the major operators according to Anglo-Eastern Group managing director for offshore Douglas Lang.
“The best strategy for smaller owners is to collaborate so they can punch above their weight,” he said.
Mr Lang also explained some of the barriers that challenge vessel operators when they consider bringing their assets out of layup including rising reactivation costs and the inability to raise finance.
“Larger players can afford swing vessels, but smaller owners struggle with the costs,” he continued. “Owners need to be looking at term chartering. They need a business case as it is a big undertaking.”
Duncan Telfer calls for new balance in charter-party terms
Swire Pacific Offshore’s commercial director Duncan Telfer called for a re-evaluation of charter-party terms in his address to the 2019 Annual Offshore Support Journal Conference.
Owners need to pay greater attention to aspects of the charter party (CP) beyond the day rate, Mr Telfer said.
“Much of spotlight has been placed on the near-60% drop in rates but not enough attention has been paid to the gradual erosion of CP terms,” he said.
“The day rate will be dictated by supply but the terms and conditions will not.”
He highlighted several areas that negatively impact on owners while favouring charterers, such as consumables pricing being included in day rates, payment terms growing longer and longer, insufficient cure periods, terminations for convenience and cause not allowing for remedy, and draconian liquidated damage clauses.