The acquisition of GulfMark by Tidewater must be the tip of the iceberg if charter rates are to become sustainable
The North Sea OSV market in January 2019 was very much a charterer’s market, as rates fell to the £5,000/day mark (US$6,600) and owners tried to influence the market by warm-stacking vessels. By mid-February this was beginning to have an effect and brokers reported that on some days not enough vessels were available, leading to a doubling in rates. The average charter rate for February for >22,000 bhp AHTS was close to £15,000/day (c. US$20,000) nearly double that averaged in February 2018. This has been taken as an encouraging sign and the expectation is that rates will continue to rise in March.
Reported charters include that of two PSVs: the 2014-built ST-216 North Cruys and the 2012-built STX PSV 06 LNG Olympic Energy; the charter is for 380 days from August 2019 to DEA Energy. Olympic Energy also has a 60-day charter before the DEA Energy business.
The 2011-built STX (Vard) PSV 09 CD Troms Capella has won a two firm wells/three wells option in the North Sea to support Ocean GreatWhite, the world’s largest semi-submersible drilling rig.
Also in the North Sea, the PSV Grampian Sovereign has been chartered for one year to support the FPSO Aoku Mizu. The PSV Brage Trader and ERRV Esvagt Celina have also been fixed for three well contracts with Hurricane Energy.
Solstad reports a range of charters for its vessels. The PSV Sea Spear has 45 days work in the barmy Mediterranean for Saipem before heading off to the rather less barmy Kara Sea with Sea Supra for three months work for Gazprom.
DOF has won a 21-month or more contract with Chevron for the 2003-built PSV Skandi Star. DOF PSVs Skandi Buchan, Skandi Foula and Skandi Neptune have been booked by Saipem for work in the Liza field in Guyana.
These charters can be seen as indications of a recovery in the offshore market, but there are other fundamental factors at play. The AHTS market is under threat from an increase in the use of position mooring systems on rigs, which actively reduce tension in individual lines or assist the position mooring system’s winches in moving the rig from one location to another. The use of these systems acts as a swing supplier into the AHTS market, absorbing demand that has in the past been the remit of these vessels.
“The AHTS market is under threat from an increased use of position mooring systems on rigs”
Westshore Shipbrokers offshore analyst Inge Moy spelt out the impact on the AHTS fleet at the European Dynamic Positioning Conference on 5 February 2019. Mr Moy said the use of DP on drill rigs has had a significant impact on the AHTS vessel market worldwide. As of 2004, 29% of the drill rig fleet operating worldwide were fitted with DP systems; as of 2013, this had increased to 59%. As of 2019, 74% of drill rigs have DP systems and, as Mr Moy explained, some regions have 100% or close to it.
When AHTS are required it is a charterer’s market, and particular specifications notwithstanding, this is generally predicated on age. This was aptly demonstrated by Tidewater’s fleet clear of older units after its all-equity acquisition of GulfMark last year, scrapping or selling 41 older vessels in 2018 and targeting another 40 vessels this year. Tidewater is now the largest OSV owner, with a fleet of 253 vessels, a market capitalisation close to US$1Bn, and an OSV fleet with an average age of 10 years old.
Extraordinary consolidation required
The Tidewater consolidation model could become a template for the market. According to AlixPartners analysis, 34 of 38 OSV companies that it analysed had Altman-Z* scores of less than 1.8, indicating a high likelihood of bankruptcy in the next 12 months. Market capitalisation is one of the key indicators here, both in the Altman-Z ratio and as an indicator of investor sentiment in a company.
Unsurprisingly, this is now one of the main issues impacting the OSV market. Through the GulfMark merger, Tidewater is now a US$1bn market cap company, but this is a quarter of the size of Saipem, one of the charterers mentioned above. Other OSV operators simply do not have the scale to engage on a level playing field with their customers.
The value of a fleet is of course not the same as the market cap, but in an asset-heavy industry like offshore, there should be a close correlation between value and market cap.
On this basis, an OSV company with something like the market cap of Saipem would have the scale of Edison Chouset, Tidewater, Solstad, Sovcomflot, and Bourbon combined – an unlikely scenario given the different ownership structures and cultures involved, but an indication of the task facing the industry.
Which brings into play the next stage of consolidation – the role of the outside investor. The OSV sector exhibits dislocation, be that VesselsValue’s online OSV and MODUS valuations dislocating the traditional service of the S&P broker; digitalisation of vessel management and technical functions; or customers taking away the service providers through position mooring systems.
Stitching together the best elements of this change into a multi-billion dollar market cap entity would not only offer the scale to attract investors to an IPO, it could also alter the structure of the OSV market in the operators’ favour.
* Altman-Z score: the Altman-Z score is an academic predicter of bankruptcy based on five financial ratios that can calculate from data found on a company's annual 10-K report. It uses profitability, leverage, liquidity, solvency and activity to predict whether a company has a high probability of failing. A score of 1.8 or below indicates a high risk of bankruptcy and a score of 3 or high indicates a high level of solvency.