OSV market sailing into rough water

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THE offshore support vessel (OSV) industry seems to be sailing into rough water as new vessels continue to be delivered. Charter rates, which have already retreated from last year’s peak, are expected to come under more pressure.

For OSV companies such as Bumi Armada Bhd, Alam Maritim Resources Bhd, Perdana Petroleum Bhd and Icon Offshore Bhd, this will not come as pleasant news.

Currently, OSV rates are estimated to be around US$23,000 per day compared with US$40,000 per day last year (the rates vary according to the features of the vessels).

Charter rates for other facilities, such as oil rigs, have also softened, declining to between US$375,000 and US$500,000 from last year’s peak of US$650,000 for deepwater rigs and to US$150,000 per day from an average of US$160,000 per day for jack-up rigs.

OSV companies that had gone through the down cycle in 2008, when the global financial crisis had halted exploration and production activities, have turned cautious, considering that the orders for new vessels have been rising since 2011. Furthermore, there have been new entrants into the market over the past three to four years.

“What we see now is everyone going into the OSV market, creating overcapacity in a period of static and declining demand,” says an executive of an OSV company.

He points out that “many have either been mispricing their projects or simply taking on projects”.

With analysts predicting high day rates and utilisation, and a bright future as Petroliam Nasional Bhd steps up its exploration and production spending, oil and gas players have been stacking their shelves with orders for new OSVs. In fact, seven new builds are expected to hit the seas between this and next year.

Currently, there are hundreds of OSVs in Asean waters: nearly 400 anchor handling tug supply vessels and platform supply vessels apart from 500 to 800 other types, for example construction support vessels, diver support vessels, tugs and crew boats, and counting.

However, as demand has not picked up as fast as the number of vessels, there is overcapacity in the market, which in turn has led to downward pressure on charter rates. Apparently, there are already signs of lower demand for OSVs.

Overly bullish sentiments, which encouraged new players to enter the OSV market, and mispricing of contracts, which resulted in narrow margins, are among the reasons industry observers and analysts cite for the fall in charter rates.

An industry player says there has been over-encouragement to enter the sector. “Are we really helping new players by dragging them into this industry?”  

According to him, these new faces have intensified the competition for charter contracts. Consequently, some are sacrificing their profit margins to charter out their vessels, he adds. “We will see many suffer because they can’t pay the banks and meet the margins as the cost of operating is just too high.”

He says there was a similar situation in the telecommunications industry in the 1980s when there were at least five telcos. “When telecoms was the next big thing, everyone wanted to jump on the bandwagon. But look at how many of those players have survived.”

At the expense of profit margins

In the OSV market, the competition is not only for contracts but also talent, another industry player points out. “There are too many OSV companies now. Those that don’t have competent workers will poach from other companies. The dilution of workers causes companies to miscalculate their costs, thus affecting their margins.”

Some analysts agree that the oversupply in the industry has caused many to accept contracts at the expense of profit margins. One tells The Edge that this may be why some of the local players have seen a sell-off in their shares. “Rates have become a big issue now as many are competing for the same projects. Investors are selling because these companies are not expected to get high margins from the projects they secure.”  

The tough operating environment has exerted selling pressure on the shares of such OSV companies as Bumi Armada (down 30.5% to RM1.72), Alam Maritim Resources (-31.9% to RM1.08), Perdana Petroleum (-17% to RM1.66), Icon Offshore (-25.7% to RM1.43) and Yinson Holdings (-20.5% to RM2.76).

Fearnley Offshore Supply, an international advisory, consulting and brokerage firm in the global offshore oil services sector, says the combination of steady demand and oversupply has kept utilisation at satisfactory levels, but this is at the expense of margins.

“Earnings are still at levels where owners stay in the black but company accounts don’t grow at the speed one has become accustomed to in the offshore supply space,” it says, adding that the market for OSVs is not as positive as most players had predicted.

The firm says rates have stagnated and started to fall in most categories with large anchor handlers bearing the brunt of it.

Nevertheless, the firm points out that although this may seem like hardship in the short term, many should be able to benefit from the down cycle in the future. “This will likely remove the market vessels that have reached pension age, creating a more balanced supply and demand in the longer term.”

As oil majors prefer new OSVs because of their longer usage life and low maintenance, the bulk of the old vessels is expected to be decommissioned.

About 12% of the OSV fleet in Southeast Asia are past their economic useful life (usually above 30 years) while about 21% are between 20 and 30 years old, making them useful but non-competitive assets.

This article first appeared in The Edge Malaysia Weekly, on October 13 - 19, 2014.