Sunday, September 10, 2017

Offshore Support Vehicles

Owners of Offshore Support Vessels have have been hard by the oil price downturn.  Where are we in the price cycle?

What are OSVs?

Offshore Support Vessels (OSVs) are small vessels used to support both deepwater and shallow water rigs.  The main types are:
  • Anchor Handling Tug Supply (AHTS)
  • Platform Supply Vessel (PSV) 
  • Diving Support Vessel (DSV)
  • Construction Support Vessel (CSV)
  • Utility vessels.  Sometimes with Remote Operated Vehicle (ROV)
There seems to be a clear distinction between the first 2 types: AHTS (tug boats) and PSVs (supply boats).  There is a less clear distinction between the other types - an old AHTS may be converted into one of the 3 last types.

Different vessel types support different phases of a well's lifecycle:

Source: Pareto Securities: Introduction to OSVs

Industry Overview

There are currently around 5000 to 5500 OSVs globally, with around 1500 to 2000 currently idle 1,2,3,4

The industry is highly fragmented.  The largest player, Tidewater, has a global fleet of 300 vessels, but they are so small that they are also a price taker:


Vessels operate in certain areas (e.g.: SEA, North Sea, Gulf of Mexico (GoM)).  They can move from one area to another to balance out supply & demand, but there are legal restrictions on some areas, for example:
  • Vessels in Indonesia have to satisfy ownership and crewing restrictions.
  • Vessels in US waters (GoM) need to comply with the Jones Act: the vessel must be owned, crewed and operated by Americans, and must never have been owned by a foreign company.

The Capital Cycle

New Supply

The OSV industry has followed the normal boom-bust capital cycle.  The most recent boom cycle started in 2006, and has seen over 400 vessels delivered till now.  Vessels from this boom are still being delivered, but drop off sharply in the coming years: 410 vessels are expected to be delivered the remainder of this year, 98 in 2018, and 5 in 2019:



Some vessels on order may be cancelled (e.g.: from speculative buyers) and some may never be put into operation.

Scrapping

Despite lease rates being below operating costs, only a negligible number vessels have been scrapped.  Since January 2015, only 2% of OSVs have been scrapped.  OSVs have low scrap value since they have little steel.  Delivering the vessels to be scrapped may cost more than the scrap price.

Unused vessels have been stacked instead.  Its possible they will never be reactivated, as this costs more the longer the vessels have been stacked (e.g.: required 5 year survey)5.  Due to safety concerns, charters may not lease ships that have been in lengthly layups.

The industry has been rife with bankruptcies:
  • The largest global player Tidewater (TDW), has just emerged from bankruptcy.
  • Gulfmark Offshore (GLF), with 70 vessels, has filed for bankruptcy several months ago.
  • In the Singapore market this year we've had Ezra and Swissco. 
These bankruptcies are not reducing industry capacity.  Vessels are simply sold off at fire sale prices, giving a low cost base to the buyer.  Or the company is resurrected with new shareholders, a new pile of cash, reduced debt and a lower cost base.

Demand

Quite a few reports predict increased OSV demand:
  • Pareto predicts a gradual recovery: If oil remains between $50 and $60, they predict an additional 130 rigs from 2018 to 2020, leading to additional work for around 390 to 520 OSVs.
  • Douglas-Westwood predicts OSV expenditure to grow at a 4% CAGR between 2017-2021: DSVs at a 6% CAGR, MSVs (consisting of CSVs and Utility Vessels with ROVs) at 7% CAGR, and pipelay expenditure at negative 4%.

Summary

There will be a recovery sometime.  We are waiting for laid-up ships to slowly rust, until it is uneconomical to put them back into service, while...hopefully...demand rises gradually at a single digit CAGR over the next few years.  

I have no idea when the turnaround will happen.  From the numbers above - especially if the 400+ expected new ships are delivered - no one can see it happening this year.  But these type of industry numbers won't tell us anything till after the turnaround.  Technicals will tell us, but will give a lot of false starts.  If I was going to buy, I would take very small positions, and spread out my buying over time.



1 Tradewinds article: Crisis batters OSV hub (19th/Apr/17): "We have around 5,000 OSVs in the market and about 3,000 are working." 
2 Tradewinds article: Rig's Inflection Point offers hope of gradual recovery (7th/Sep/17): "About 1500 to 1800 OSVs are sitting idle now." 
3 Clarksons Offshore Support Vessels front page: "OSVs in service: 5301" on 10/Sep/17." 
4 Offshore Support Journal: Greenshoots of Recovery in downbeat OSV market (6?Apr/17): "There were also around 1200 vessels laid up globally of a fleet of around 5,500 vessels
5 Some numbers here: "According to Clarksons Research records, just under 50% of laid-up OSVs no longer have an active class certificate as of February 2017. Two thirds of these out-of-class vessels are older units built prior to 1990....However, 856 of the laid-up OSVs appear to still have an active class certificate. These are skewed towards the younger end of the fleet...However, this number might decline in the future: 22% are scheduled to have their five year special survey in 2017 and a further 24% in 2018.....Financing special survey costs is also an issue for active OSVs, as well as those in lay-up. Considering the active fleet (3,688 units at start February 2017), 641 OSVs have their special survey due in 2017 and a further 721 vessels in 2018. The majority of these (over 80%) were not under long-term contract. "