Most offshore supply vessel companies surveyed by AlixPartners are unlikely to maintain solvency as 2017 shapes up to be one of the most difficult years in decades for the sector, the global consultancy warned in a study released July 10.

“There simply isn’t and won’t be enough work for all players going forward into the foreseeable future. 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,” said Albert Stein, managing director and leader of the AlixPartners shipping team.

In its study, the firm cited drastically reduced rig counts brought about persistently low crude oil prices that have crippled demand for OSV services. To a sector with members already shouldering rising debt burdens and a slew of bankruptcy filings and distressed mergers, add excess rig capacity that has dealt sharp blows to the platform supply vessel (PSV) and anchor-handling tug supply (AHTS) vessel segments.

For the next few years, AlixPartners said in a statement, OSVs will have to confront their new reality: lower demand, shorter charter contracts and reduced day-rates.

E&Ps have lowered the total rig count by about 4% in the last two years as the number of marketed vessels was reduced by 15%, the study said, explaining that owners tend to stack rigs in lieu of scrapping.

More deeply felt, however, is that in the same time period contracted rigs declined by more than 30% with fleet utilization levels at 65% to 70%. With day rates and utilization down, operators have suffered a fall in operating income.

The bottom line in this decline, AlixPartners said, is a staggering 34% falloff in global E&P spending over just two years.

Specifically:

  • US$18.1 billion in 2014;
  • US$14.8 billion in 2015; and
  • US$11.9 billion in 2016.

“Rates are down 60-65% in some markets, and utilization is down 40%,” the study said. “The rig count was reduced while the vessel population increased 73% to 3,510.”

These dynamics wreaked havoc with the OSV-population-to-working-rig ratio, soaring from 3.37 in July 2008 to 8.2 as of December 2016. Until that ratio drops returns to a healthy level, the industry’s oversupply will continue to apply pressure on day rates and utilization.
AlixPartners cited an IHS Markit report that estimated that as many as 1,000 vessels need to be scrapped or permanently removed from service to achieve market balance by 2020. The current scrap rate is only about 13% of what is needed.
How To Survive

AlixPartners offers these suggestions to members of the industry:

  • Be disciplined about capacity management and reduce tonnage if possible—preferably through scrapping;
  • Explore different ways to reduce overhead costs and adjust operating structures, with the realization that things are unlikely to improve before 2020;
  • Develop a liquidity plan based on the reality that the market downturn could be prolonged;
  • Aggressively trim balance sheet to remain competitive and position themselves for opportunities to consolidate and
  • Set priorities and cut spending that will not generate sufficient cash-on-cash returns.

—Joseph Markman

Offshore