A study of 44 companies in the industry by AlixPartners found that these companies’ rising debt burdens are making it increasingly unlikely for most of them to maintain solvency. The OSV industry is undoubtedly facing 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 PSVs and AHTS vessels the hardest.
For the next few years, OSVs will have to confront their new reality of 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,” said Albert Stein, managing director and leader of the shipping team for AlixPartners.
“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,” Stein highlighted.
Over the last two years, the world’s total rig count has declined by approximately 4% while marketed vessels have declined by 15%. In the same period, contracted rigs have declined by more than 30% with fleet utilisation levels hovering between 65-70%.
Due to this decline, the total global E&P spending on OSV’s has dropped from $18.1bn in 2014 to $14.8bn in 2015 and $11.9bn in 2016, representing a 34% fall in just two years. Rates are down 60-65% in some markets and utilisation is down 40%.
To make matters worse, the rig count was reduced while the vessel population rose 73% to 3,510, causing the OSV-population-to-working-rig ration going from 3.37 in July 2008 to 8.2 as of December 2016.
Tidewater and Gulfmark Offshore, which have filed for Chapter 11 bankruptcy so as to continue operating with a lower financial leverage, could put additional stress on other OSV players that still have significant leverage and resulting debt service to cover from their operating income, according to AlixPartners.
And with the North Sea market continuing to be severely depressed, a vast majority of Norwegian owners are in debt restructuring talks. Some consolidation is afoot, with Farstad, Solstad and Deep Sea Supply merging to create one of the biggest OSV operators with a combined fleet of 157 vessels.
For North Sea operators to survive, they will have to withstand a cash burn for the next three to four years, as a recovery in utilisation is not expected until 2020 or later, AlixPartners warned.
The once active Brazilian market has remained subdued as the key driver Petrobras continues to deal with a corruption scandal and financial problems.
In Southeast Asia, the downward trend in oil prices has put pressure on OSV firms, which led to an unprecedented number of bankruptcy filings including Ezra Holdings, EMAS Chiyoda Subsea, Swiber, and Perisai Petroleum Teknologi.
AlixPartners said that given the less than bullish tone of oil prices, reduction in chartering rates, and newbuilds coming into the market from Chinese yards, there will likely be more bankruptcy filings in the next 12-18 months.
The Middle East is the only region where OSV demand is still holding steady because of favourable oil economics. Breakeven prices are relatively low, national oil companies continue to dominate the region, and Opec members remain committed to maintaining oil production in line with market share have provided support to the region’s offshore segment. However, the region has also not escaped downward pressure on rates as new contracts have attracted tonnage that is driving rates down.