This is the fourth or fifth attempt at writing this article as the current market situation is not only volatile but also fluid. On a daily basis one gets bombarded with information that not only conflicts with trends, but also seems to look for green shoots business opportunities to address the declining market sentiment.
Whether one monitors Oil Pros, Splash, Houston Energy Insider, Rig Zone or other reputable oil sector monitors, it is clear that the current situation with regard oil price and associated reduced capex/E&P spend is here for a while and will not be abating anytime soon. Headlines have been interesting with a number of fund managers and investment houses claiming that the likes of Transocean have turned the corner with better than expected forecasts – ignoring the simple fact that they beat a forecast based on poor market conditions and very conservative assumptions, so much so, that it could be argued that if they had not done so, the sector would be in even worse shape.
Despite claims by some in the offshore market, that they are immune from the fall out, I am now finding that fund managers are questioning the validity of these claims that some businesses / sector are immune from the current fallout created by the volatile and low oil price. In particular, there have been claims by those involved in the provision of marine services to offshore shallow water plays as well as those active in the liftboat market. These are arguments used as companies scramble to raise funds in a market that is increasingly finding itself under cash pressures.
In my response, I refer to a recent article that I wrote in which I warn that that one needs to look at the basic underlying fundamentals of a business / sector to test whether the claims given by commentators stood up to scrutiny. This piece will extend this notion and test the claims made in the recent statements made by the likes of the CEO of Triyards (Liftboats) and MEO (Mycelin Express Offshore), both based in Southeast Asia. In essence both suggest that their particular sectors provide services to shallow water fields and this sector will remain robust as these services target the operational / maintenance part of the oilfield cycle. This suggests that operators / owners of this class of oilfield asset, will be largely immune from the current market malaise. Whilst they may be spared from a full frontal assault, I do not believe that they are immune from the fallout. Furthermore, I am of the belief that the liftboat market is on course to create the same market conditions that has led to the despair currently being experienced by the jack up rig market.
When looking at the liftboat sector, we need to dispel the myth that has emerged in recent times. It is agreed that the liftboats offer significant advantages over the likes of a jack up. These advantages are best described as: mobility due to self-propulsion, more efficient (faster) jacking /elevating systems, better value in terms of open deck space, deck load and crane capacity. This makes them more cost effective in terms of the support services they offer during offshore construction and maintenance to well intervention services.
However, players in the market (such as Ezion Holdings) have developed the notion that service rigs perform operate in the same market as the liftboat. Whist they work in the shallow water offshore waters, a service rig is not a liftboat. A service rig is by and large, a refurbished old jack up rig that does not offer the advantages of a liftboat, and are used mainly in the supply of accommodation to offshore drilling operations, in which more personnel are required during the offshore construction phase than in well intervention work. Furthermore, the jack up / self elevating design and systems for liftboats is far more robust than that of the old jack up, after all a liftboat performs more jacking operations in a single year than a jack up rig does in its entire lifetime.
Other indicators about marine service providers to offshore oil and gas fields include:
· There is an oversupply of jack ups in the market with a number of vessels now being left to idle or destined for the scrap heap as a means to rebalance capacity in the sector. Currently there are 55 idle or cold stacked jack ups that are in excess of 30 years of age, more of these will come off contract by the end 4Q15 or 1Q16 – the cost of maintaining certification of these old rigs when newer more efficient rigs are available would suggest that the level of scrapping will increase.
· Liftboats appear to be heading down the same route as the jack up sector with venture and equity capitalist seeing a ‘green shoots opportunity’ in the sector, just as they did with jack ups. We now see the likes of East Sunrise Group order three new SE -300Lb this month, over and above the 10 they ordered in 2014. Triyards has received orders for five units (two of which, introduced by Ezion and raises the question as to why the perceived market leader in Southeast Asia would participate in eroding its own market share?), Keppel has received orders for two high spec vessels, Vahana Offshore is currently building two units, Mekers Machinery has ordered two units, Tianjin Haiheng has ordered four units and Atlantic has said that it has ordered a number of units on a speculative basis as well. All of these are destined for delivery in the 2H16 or 1Q17 – does this look similar to patterns in the jack up capacity story?
· Utilisation rates of liftboats are coming down with Seacor reporting a decline from 77% to 69%. Furthermore it has cold stacked two vessels and four are being redeployed out of GOM. Gulfmark sees Sotheast Asia as challenged and GOM deteriorating.
· Much focus has been given on the decline in rigs within the onshore sector, primarily due to the sheer volume in number. Overall we have seen a decline in onshore rigs for its high of 1046 units to a current 846 that is an 18% decline. However, in the offshore rig market the decline is in the region of 23% (down from 341 to 264).
· In the OSV sector we see that Bourbon has laid up 26 supply vessels, five of which do subsea related works, Mermaid / Jaya announced that they will be offloading 10 vessels as well as having to announce a $100m impairment as they devalued their fleet by about 10%.
· Impairment costs that are now coming to the fore would suggest that balance sheets are about to take a severe knock and that institutional lending to the sector is going to be more difficult. IHS has reported that impairment costs in the 1H15 have impacted 66 companies and are valued at close to the $30bn level.
· These impairment costs as well as cash flow considerations are forcing companies to reduce expenses by up to 30% and this is being taken into the market where we are seeing the new version of ‘contract cancellation’ emerging, with more contracts being reviewed and charter rate renegotiated (blended) with the contract duration then extended. Companies that have recently done this include the likes of Transocean, Hercules Offshore, and Diamond Offshore along with operators such as Statoil, Pemex and Chevron. Technically we may not see contract cancellations, we are seeing the sector experiencing charter rates being reduced by as much as 40% despite ‘binding contracts’ in place, making forward earnings visibility a little less predictable than is claimed.
In conclusion, I do not believe that there is any sector in the offshore marine service provider sector as being immune from the current downturn in the oil patch. This will only get worse when one considers that in excess of $200bn in project value has been delayed since 2014, the significant reductions in capex by the likes of BP, Statoil taken with the cash flow constraints of Chevron, Total and Shell suggests that we have not bottomed out. Before taking a companies / sectors claims of ‘robust’ earnings and immunity seriously, take a close look at indicators in the market, the companies balance sheet and their business plan / strategy to live with lower charter rates and reduced utilisation of overvalued assets.