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Prepare for rough weather ahead

Players in the offshore supply vessel (OSV) sector need to be financially disciplined to ride out a tough operating environment.
Wednesday, March 9, 2016 - 05:50

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Based on declining rig activity over the next three years and a growing fleet, experts forecast that the OSV market will be oversupplied for several years, and continue to weigh on rates and utilisation.

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"Chinese vessels built by speculators have flooded and are flooding the Asian market, and newbuilding resale prices are down approximately 30%." - Mike Meade, founder and CEO, M3 Marine Group

THE offshore marine sector is in a depressed state globally as a result of the plunge in crude oil prices and an oversupply of vessels. From shipyards and equipment suppliers to service providers and brokers, many industry players from this once-buoyant sector have their backs against the wall.

The offshore supply vessel (OSV) subsector - which supports offshore drilling platforms and offers everything from resupply functions to rescue services - has not been spared as oil exploration and production (E&P) companies slashed their rig counts in response to falling prices. Oil prices plunged from over US$100 a barrel in January 2014 to less than US$30 a barrel in January 2016.

Major mismatch

This has led to a major mismatch of supply and demand. As at June 30, 2015, the inventory of OSVs increased 38 per cent from January 2008 to June 2015, while rig counts rose only 5 per cent, according to data from research firm ODS-Petrodata.

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The industry in Asia faces the additional challenges of unwanted supply of vessels coming out of China, according to Mike Meade, founder and CEO of M3 Marine Group, one of Asia's largest independent offshore shipbroking and marine consultancy groups.

"Chinese vessels built by speculators have flooded and are flooding the Asian market, and newbuilding resale prices are down approximately 30 per cent," Captain Meade says.

Meanwhile, charter rates have dropped 50-60 per cent in some markets and utilisation is down by up to 40 per cent. Second-hand prices are also down by 40 per cent as there are few willing buyers out there.

While excess capacity affects many different types of vessels in the OSV market, the hardest-hit segments are platform supply vessels and anchor-handling-tug supply vessels.

"Dwindling rig counts serve as a negative bellwether for the increasingly beleaguered OSV market - a trend unlikely to reverse itself because oil prices remain low. In turn, fewer active rigs mean fewer anchor-handling-tug supply vessels in service. The sharp drop in the growth of rig installations also crimped demand for platform supply vessels," says a recent report on the OSV market by business advisory firm AlixPartners.

Based on declining rig activity over the next three years and a growing fleet, experts forecast that the OSV market will be oversupplied for several years, and continue to weigh on rates and utilisation. According to Clarkson Research 2016, there are 476 units in the order book to be delivered. There could also be up to an additional 200 new vessels being built in China that have not been reported. As a result, there is likely to be insufficient demand in the coming five years to meet this excess supply.

"I foresee no short-term improvement as there are few triggers for incremental demand and continued high supply growth even after adjusting for slippage. Even though owners have started to lay up vessels that could support higher rates, I believe that market will continue to be held back until supply is brought back into balance," says Captain Meade. He notes: "Overall, expect rougher weather in the oil-and-gas sector, especially in OSVs and rigs, well into 2017."

On a brighter note, industry players expect longer- term growth in demand for oil combined with the depletion of production and reduced capital investments to eventually push oil prices higher. When that happens, E&P spending growth will resume, more rigs will be employed and result in increased OSV activity.

"One positive I do see is that the excessive costs that were built into this business are being eroded and we will come out the other side a much healthier industry," explains Captain Meade.

However, even when the rebound comes, prices are also unlikely to climb to the US$100-plus a barrel levels that were seen a few years ago, and are likely to settle much lower.

Managing debt

To survive in this challenging environment, OSV operators have been hunkering down, keeping a lid on costs and trying to preserve cash, especially as debt burdens at many of these companies have risen rapidly in recent years.

The AlixPartners 2015 Offshore Supply Vessel Study found that the 33 companies studied - which averaged US$445 million in revenue in the 12 months through June 2015 - now have an overall debt load that is up 16 per cent from 2011's peak, totalling US$22 billion.

"The US$3 billion increase over four years will play a major role in determining which companies survive the downturn, which falter, and which get absorbed by competitors with stronger balance sheets," says AlixPartners in a report.

In the face of declining revenues and shrinking balance sheets, companies will have to focus on cutting operating expenses and improving efficiency to boost profitability rather than fleet growth.

Adds Captain Meade: "Going forward, the strong will survive. Those who were savvy in the structure of their balance sheets, did not build on speculation and have weathered similar storms previously will survive."


Pressing issues to be addressed

ASIA Pacific Maritime (APM) 2016, one of Asia's biggest exhibitions and conferences, will return with its 14th edition next week with a focus on shipbuilding and marine, workboat and offshore.

The three-day conference will comprise a line-up of regional and international industry figures as well as exhibitors under one roof to address challenges and explore the opportunities within the industry.

The conference will see industry experts discuss topics including:

  • An outlook on how consolidation in the sector is affecting future growth
  • Resourcing talent to sustain the market demands of a bear market
  • Owners as a key driver in OSV supply and its impact on overall global demand dynamics
  • Is the weakness in Europe, a strong US dollar diminishing growth in China, low energy costs and inevitable rises in interest rates causing concerns on this side of the world?
  • How are regional LNG markets maintaining their momentum in an uncertain business environment?

Asia Pacific Maritime 2016 will be held from March 16 to 18, 2016 at the Singapore Marina Bay Sands Expo and Convention Centre. More information about APM 2016 is available at https://www.apmaritime.com.

 

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