Offshore supply vessel companies running out of options, according to AlixPartners study
New York - As oil continues to hover at $50 per barrel, 2017 could be one of the toughest years in decades for Offshore Supply Vessel (OSV) companies, according to a study of 44 companies in the industry by AlixPartners. The firm’s analysis highlights these companies’ rising debt burdens, making it increasingly unlikely that most of them can maintain solvency. The industry faces grave financial pressure, which is clear from recent bankruptcy filings and distressed mergers.
Exploration and production (E&P) companies have drastically reduced their rig counts, causing demand for OSV services to plunge. Excess rig capacity has hit platform supply vessels (PSVs) and anchor-handling tug supply (AHTS) vessels the hardest. For the next few years, OSVs will have to confront their new reality: lower demand, shorter charter contracts, and reduced day-rates.
“There simply isn’t and won’t be enough work for all players going forward into the foreseeable future. And it’s hard to persuade others to scrap their vessels, because like your own, they were built to a high technological and engineering standard – read: expensive – just a few years ago,” said Albert Stein, managing director and leader of the shipping team for AlixPartners.
Offshore rig dynamics and its impact on the OSV sector
Over the past two years, total rig count has declined by approximately 4%, while marketed vessels have declined by 15% (owners tend to stack rigs in lieu of scrapping). However, in the same time period contracted rigs have declined by more than 30% with fleet utilization levels hovering between 65% and 70%. Operators continue to see a fall in operating income as day rates and utilization remain at depressed levels.
Due to this decline, the total global E&P spending on OSV’s has declined from USD $18.1 billion in 2014 to USD $14.8 billion in 2015 and USD $11.9 billion in 2016. That is a staggering 34% decline in just two years. Rates are down 60-65% in some markets, and utilization is down 40%. The rig count was reduced while the vessel population increased 73% to 3,510. These dynamics caused the OSV-population-to-working-rig ratio to go from 3.37 in July 2008 to 8.2 as of December 2016. Until the working-rig-to-OSV ratio drops back to a healthy level, the industry will see an ample oversupply, which puts pressure on day rates and utilization.
IHS Markit reported that as many as 1,000 vessels need to be scrapped or permanently removed from service to achieve market balance by 2020. The current scrap rate is only about 13% of what is needed.
Gulf of Mexico – While not unique to the region, the Chapter 11 filings of Tidewater and GulfMark Offshore will most likely allow these companies to operate with a much lower financial leverage. This could in turn put additional stress on other OSV players that still have significant leverage and resulting debt service to cover from their operating income.
“Operators who leverage the current market situation to successfully trim their balance sheets are likely better positioned to withstand a prolonged downturn and ultimately potentially drive the consolidation so badly needed within the sector”, said Esben Christensen, Managing Director and co-leader of AlixPartners’ shipping team.
North Sea - The North Sea market continues to be depressed. That is unsurprising, as this is the most expensive area worldwide to extract a barrel of oil. The vast majority of Norwegian owners are in debt restructuring talks with their creditors and bondholders. Some consolidation is afoot, with Farstad, Solstad, and DSS merging to create one of the biggest OSV operators with a fleet of 157 vessels this year. For operators to survive, they will have to withstand a cash burn for the next 3-4 years, as a recovery in utilization isn’t expected until 2020 or later.
Brazil - The Brazilian market remains subdued as Petrobras, the key driver, continues to deal with a corruption scandal and financial problems. Charter risk has been high for foreign OSV operators. Circularization rules, which allow owners of Brazilian flagged vessels to challenge contracts issued to foreign-flagged vessels, continues to put lucrative term contracts and non-Brazilian vessels at risk.
Southeast Asia - The downward trend in oil prices has put pressure on OSV firms in Southeast Asia, which has led to an unprecedented number of bankruptcy filings of firms, including Ezra, EMAS–Chiyoda, Perisai Petroleum Teknologi Bhd, and Swiber. Given the less than bullish tone of oil prices, reduction in chartering rates, and new builds coming to market from China, there will likely be more bankruptcy filings in the next 12 to 18 months. Deleveraging existing balance sheets and streamlining operations to keep costs low should be the main focus for operators going forward.
Notably, the Singapore government has taken proactive steps to help the ailing offshore marine sector. An agency under the Ministry of Trade and Industry introduced the “Bridging Loan for Marine & Offshore Engineering Scheme” in late 2016, and another agency introduced the “Internationalization Finance Scheme” to help the sector with alternative financing options. Pacific Radiance became one of the first firms to use the available financing schemes by borrowing S$85 million this June. However, it is yet to be seen how successful these steps will prove since the Singapore government only backs 70% of this.
“Many of the companies in this sector in Asia used debt to fuel very rapid growth, but this very debt is now crippling them.” said Lian Hoon Lim, managing director, AlixPartners. “Many companies are focused on buying time for recovery, but this is a risky proposition that depends on a massive demand rebound in the next couple of years.”
Middle East - The Middle East is the only region where OSV demand is holding steady because of favorable oil economics. Break-even prices are relatively low, the national oil companies continue to dominate the region, and OPEC members remain committed to maintaining oil production in line with market share. What the market has not been able to escape is downward pressure on rates, as new contracts have attracted tonnage into the region.
How can OSV fleet owners weather the storm?
Here’s the bottom line: there are excess shipyards, OSV operators, OSVs, and too much debt.
OSV companies need to be diligent and take some steps to survive:
- Companies need to be disciplined about capacity management and do everything they can to reduce tonnage – preferably through scrapping.
- Explore more radical or innovative ways to reduce overhead costs and adjust their operating structures in light of current market realities with lower day rates projected at least until 2020.
- Develop a liquidity plan with sufficient runway, based on realistic market assumptions. Identify and address key risks to any liquidity shortfall, while bearing in mind that this could be a prolonged market downturn.
- Aggressively seek to de-lever and trim balance sheet to remain competitive and position themselves for opportunities to consolidate
- Become realistic about priorities. Each company must identify and rank its own projects and cut out any spending that will not generate sufficient cash-on-cash returns.
All that said, a couple of positive trends may also factor into the OSV operator fortunes. some OSV operators have made significant strides reducing costs across the board, and in pursuing M&A, which generates opportunities for additional synergies and potentially greater capacity discipline. Another sign of hope is that many experts still see a positive environment for oil prices in the longer term, which will eventually lead to increased demand for OSV services.
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Crystal Leung, AlixPartners, Hong Kong
+852 2236 3512