Using data-driven valuations to avoid the mistakes of the past

Over the last five years the OSV industry has experienced one of the longest and most challenging downturns in its history. Since the oil price drop of 2014, the OSV market has been plagued by bankruptcies, consolidations, takeovers and mergers, forced fleet sales and most importantly, a significant decrease in asset values.

VesselsValue has always been conservative in terms of offshore asset values. In January 2019, Norwegian financial authority Finanstilsynet requested Solstad Offshore to revalue its fleet. At that time VesselsValue estimated the value of a five-year-old large platform supply vessel (PSV) at US$13.7M, down almost 22% year-to-date from US$17.5M. By comparison, other valuation providers were quoting valuations 20% higher.

In the months that followed, others believed the value of a five-year-old large PSV increased from about US$16M to about US$19M. By comparison, VesselsValue figures increased from US$13.5M to US$14.1M.

During this period, there were very few transactions within the market to support such an aggressive increase. However, the market was seeing some positivity, both a stable and relatively high oil price, vessel rates increasing, layup figures decreasing, and a handful of ships sold for demolition.

The VesselsValue algorithms use a combination of long- and short-term rolling averages of the Brent crude oil price to model sentiment in the absence of transactions. This is effective because the VesselsValue sentiment does not overreact to any short-term, knee-jerk effects witnessed in the market unless there are enough supporting sale and purchase transactions to justify this.

While 2019 was not a bad year for the offshore industry, VesselsValue has always argued, based on its data and valuations, that the market was not experiencing the upturn others believed.

This year has seen the Covid 19 global pandemic and a significant decline in oil price. On 21 April, Brent crude dropped below US$16/barrel, a 21-year all-time low. To put this into perspective, the lowest recorded oil price in the last crisis was US$23/barrel.

The oil price plunge has reverberated throughout the OSV market. On 31 March 2020, Solstad Offshore announced that it had entered financial restructuring, citing the Covid-19 pandemic and continued poor offshore market conditions. Such a large Norwegian offshore owner entering restructuring is an important milestone for the sector. As of 23 April, VesselsValue put the value of the Solstad fleet at US$1,483.9M.

A condition of Solstad’s restructuring deal is that 37 vessels must be removed from its fleet. Although the exact vessels to be sold are not yet known, it will most likely be the laid up, older and smaller units.

Utilising VesselsValue fleet search and the AIS function, we determined which PSVs, AHTs and OCVs within the Solstad fleet had not signalled in one or more weeks, ie what we classify as inactive or laid up. These 34 vessels, which could represent a large portion of the possible 37 candidates for sale, are valued at US$121.13M. Their removal would reduce the overall valuation of the Solstad fleet to US$1,362.8M.

It is unknown how long this current economic situation will last, but what is known is that the offshore industry is in retraction and the outlook will pose an extreme test for everyone from oil majors to small service providers and all those in between. All signs point to another period of restructuring, forced vessel sales, mergers and consolidations and therefore declining asset values. As always with periods of austerity, data-driven valuations are critical to keep the market moving forward and prevent it from making the mistakes of the past.