VesselsValue lead offshore analyst Charlie Hockless sees little reason for cheer next year, and warns that problems in the OSV sector require urgent action
In a year characterised by mergers among the offshore sector, the tie up between Tidewater and Gulfmark was still big enough to raise eyebrows. While the initial announcement came as a surprise to many, as the year progressed it started to make a lot more sense.
Both companies underwent chapter 11 proceedings and both emerged as leaner and far more efficient organisations. So unlike other mergers, which often involve a large profitable company and a smaller, struggling entity, this deal saw two companies both with clean balance sheets come together.
Combine this with the forward-looking strategy which Tidewater has displayed in its attitude towards scrapping vessels, and benefits of the merger become more obvious. Now to get the rest of the industry thinking the same way.
Solstad Offshore also underwent restructuring and consolidation this year; however, without a clean balance sheet, problems are more likely to emerge later on. Bourbon too, is a major player that has struggled to service its debt and is now actively looking for financiers. Evidently, kicking the can down the road is not a viable option in this market. That said, it is important to note that consolidation in today’s market only works if lenders are willing to take haircuts and provide an opportunity for these companies to start afresh, with a clean balance sheet.
"Despite the recent strengthening in oil prices, the offshore market has changed little over recent months and remains characterised by a weak appetite for risk, and low asset values and charter rates"
Rates, values, utilisations in 2018
Despite the recent strengthening in oil prices, the offshore market has changed little over recent months and remains characterised by a weak appetite for risk, and low asset values and charter rates. A five-year old PSV was valued at circa US$15M at the beginning of 2016 and we are ending this year at the same level. When people ask how bad the situation is in terms of asset values, the answer is as follows: out-of-class ships aged 15 years or more will almost certainly be worth less than the cost it would take to survey and reclass them. In terms of asset sales this year, we have seen mostly distressed deals and fire sales and little to indicate a market recovery is just around the corner.
So despite much talk of 2019 being an exciting year for the offshore market, the problem remains that there are simply too many vessels. Extreme scrapping levels are required, but can we really expect owners to go through with pledges to scrap vessels on a wide scale once activity/healthy earnings return?
Number of OSVs recycled 2014-2018 (credit: VesselsValue)
Predictions for 2019
Unfortunately, for the vast majority of those involved in the offshore sector, I suspect 2019 will be little changed from this year. Stagnating rates, low asset values and company restructurings will continue to drag on the sector and dampen any significant signs of a recovery.
We must hope that the trend for vessel scrapping continues into 2019. VesselsValue has recorded 95 OSVs sold for recycling in the last 12 months, up from 76 in 2017 and 64 in 2016.
The largest seller of vessels for demolition is Tidewater, which has scrapped 23 vessels over the last five years; hopefully, this will encourage other owners to follow suit. If so, then we can expect the benefits to be felt throughout the industry, helping bring balance sheets back into the black.
A hard line is required, and it will be a bitter pill to swallow. Many of these vessels will be sold at levels far below the purchase price achieved prior to 2014 and owners will have to accept the painful reality of taking a serious haircut if they hope to kick-start a genuine recovery.
The annual Offshore Support Journal Conference, Awards & Exhibition in London 6-7 February 2019 will explore growth opportunities in an unpredictable market.