OSV Market Belongs to the Far-Sighted
Op-ed by Dr James Driscoll, associate partner, MarinOIL.
We are going through a deep and unusual shift in the global hydrocarbon industry. The transition of the U.S. from being energy deficient to energy rich in hydrocarbons has and will continue to have an enormous impact on the global exploration and production (E&P) market.
Oil price stability over last few years around $90-$100 had been considered sufficiently predictable for E&P budgets to be drawn around a much higher ‘to the surface’ barrel cost index. Today these calculations are in question and oversupply remains a potent issue.
We have already seen some very large production projects cancelled, and we expect to see more.
There is approximately an 18 month buffer between new assumptions of oil price at the oil company level, the establishment of E&P budgets and their knock-on effect into service provider market segments. The writing would appear to be on the wall in this regard, as we have seen that the benchmark Barclays E&P report estimates of oil company E&P budgets are clearly, this year, far above reality.
Delayed projects and slowdowns in production engineering are very likely, and this will have a significant impact on the service provider sector. Indeed we are already seeing a significant collapse in the jackup rig market, with similar metrics of newbuilding oversupply (much of it speculative and not tied to charters) and very limited apparent employment opportunities.
Over the next 18 to 24 months we expect to see this downcycle play out with severe consequences to many jackup owners. The midwater floater market is in a catastrophic state today with day rates approaching 50 percent of levels achievable only a couple of years ago.
There is of course a clear link between the number of operating offshore rigs and the demand for OSVs and AHTS vessels. So the rig market is an important foundation driver for OSV demand and the signs are not encouraging.
If the political impasse with Iran was to be solved and sanctions lifted, a significant market pressure would be eased, and this may have positive impact on the OSV, construction and especially jackup markets.
Going forward we envisage a challenging time for the foreseeable future, but as with all challenging markets, tenacity and strategic vision will always identify opportunities. They are likely to be less easy to secure, and there will be more challenges geographically and contractually, but we see that strong opportunities exist for far-sighted OSV operators.
At present, there seems to be a disconnect between Asian and Non-Asian offshore owners and builders and the gap is becoming ever more pronounced. Day rates achievable in Asian fixtures tend not to support the costs and operating dynamics of newbuilds from European or even Singaporean yards.
We are therefore seeing more and more Asian, Indian and Middle Eastern owners placing orders in China, as this is the only way to achieve the economic balance required for their target markets. The recent decisions by three offshore companies operating in Asia (including Hallin) to close down their operations there clearly illustrates the ‘gap’ challenge of current markets. Yet Asia remains a key and vital destination for offshore vessel operators to leverage.
Managing distress
As mentioned earlier, we are in a challenging market cycle, and one other significant issue for all offshore companies is the fundamental change in bank lending policies, which has precipitated a significant change in the way vessels are financed.
It is arguable that this is too a cyclical pattern - banks lend increasingly aggressively into rising shipping and offshore markets and then in falling markets must manage distress among borrowers unable to realize the anticipated returns on such lending.
But here the situation appears to us to be a little different, as coming on the heels of the global banking sector issues in fall out from the financial crisis we are seeing regional government policy frameworks coming into play restricting the banks’ fundamental lending abilities in significant ways.
This has led to a real upsurge in new types of vessel financing, which include capital raising through bonds (Norwegian high yield and U.S. market) as well as private equity or small investor groups acquiring 100 percent interest in vessels and then financing the transaction to the ultimate buyer through sale and leaseback or bareboat and demise agreements.
This is a significant change in the dynamics of offshore vessel financing and requires a whole new approach by owner operators concerned with fleet replenishment or expansion.
The sophistication of oil company contracting grows ever more intense, and it is increasingly difficult for supply vessel owners to achieve the kind of long term contracts that their financing and stability depend upon. In a lean market, oil companies are very aware of their strengths, and we are seeing them leverage these time and again to their benefit.
To summarize today and in the immediate future, it is clearly a buyer’s market on the sale and purchase side and a charterer’s market on the contracting side.
About MarinOIL
Over the last 15 years, MarinOIL has built an established market presence in the offshore space both as a consulting firm and an equity investor. Our client base today includes a significant number of offshore vessel owner/operators, offshore vessel focused shipyards, banks and equity funds, oil companies, drilling contractors and third and fourth tier sectoral service providers in specialist offshore niche markets.
Our focus is deeply strategic: we work with our clients to conceptualize, evolve and implement innovative business models, transactions and investment structures that consider the intricacies of the changing landscape of the offshore industry.
We often operate within market sectors and geographies that are complex and challenging and have invested considerably in building our teams and on the ground expertise in such markets to a very great degree.
In practical terms we get involved in sale and purchase of offshore vessels, corporate mergers and acquisitions in the offshore vessel space, ordering and building offshore vessels; owning and operating vessels through and with our partners, associates and our own operating subsidiaries, as well as providing a full spectrum of services to banks and finance entities in support of both new lending and investment as well as management of distressed debt portfolios.
Our extended team includes some of the most experienced and seasoned professionals across offshore vessel operations, engineering, regional business segments, naval architecture and ship design.