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Is the liftboat market going the same way as the jack up?

Is the liftboat market going the same way as the jack up?

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In an interview with Maritime CEO last February, I was reported as saying that the “worst was yet to come for the jack up rig market, and it was on the edge of a precipice”. I thought that it would be prudent to review the observations made at the time, and was encouraged by the degree of accuracy in what had been projected at the time.

Much of what was said was greeted by the market with a great deal of scepticism, with many a CEO stating that I was out of touch and that this market – with a special focus on Southeast Asia – was robust and immune from the increased volatility in the oil patch. This debate got heated when I started drawing comparisons between the jack up market and liftboats, citing that the liftboat market was starting to show the same trend and that one would need to be cautious when evaluating this sector.

This opinion piece will do a quick review of those observations made in February 2015, with an update on the current status of the jack up rig sector – with additional projections. It will also have an overview of the liftboat market as it is held up as the new saviour to the offshore sector. There has been a rapid increase in interest in liftboats in recent months, just as was evident in 2014/Q1 2015 jack ups, and whilst not quite a precipice for liftboats, this sector is in for some severe headwinds.

First, the review and the one observation, that proved to be way out – the oil price. The outlook was based on an oil price of $50 – $70 and as we now know, oil has been around the $40 mark for the last quarter. By all observations and analysis, my price reduction / stabilisation claims were overly optimistic and conservative. This has caused me to rethink some of the outlook for the JUR market, particularly as it needs to find balance in terms of capability and capacity.

Other observations made at the time were that H215 would see a significant decline in the market and that the oversupply of rigs would only start to be felt late in 2015. Furthermore we would see an increase in cancellations of contracts and new orders, delayed deliveries and that there would be a move to tankers and bulkers by many to offset the decline in the sector, particularly in Southeast Asia. These have all come to pass. Whether using sources such as Icarus, Rigzone and Asia Pacific Offshore Reports, the current situation is as follows:

· 8 construction/new build contracts cancelled
· 25 have now been stacked
· 15 heading to scrapyards
· Only 34 of the 68 units are contracted (50% utilisation) with the balance being stacked
· 117 jackups ordered and still under construction, of which 99 have no contracts
· 10 tender rigs under construction with nowhere to go
· 212 (122 of these are JURs) of the worldwide offshore drilling fleet of 833 are idle and out of work, with 173 new rigs due to enter the market in the next 12 months

Furthermore, my biggest fear was that the oversupply and poor oil price would translate into liquidity and free cash flow issues. All has come to pass with a number of companies having large impairment costs, knocking significant value from balance sheets. The most notable event was Hercules Offshore going into Chapter 11 bankruptcy, and significant impairment costs for Transocean, Ensco and Diamond Offshore.

Let us take a quick look at the lLiftboat market. In this market we see the headlines such as “Liftboats Orders to Act as Lifeline to Asian Shipyards” etc. We have seen a number of yards turning to fill spare capacity by building liftboats, and the liftboat sector has been creative in selling their assets advantages. The advantages include:

· Self-propelled and lower mobilisation costs
· Large deck space for carrying loads
· Efficient jacking systems
· Market growth potential using the age old liftboat to platform ratio in SE Asia being very high as compared to the GOM

Rather than look at the efficacy of these advantages, it is prudent to look at market indicators that suggest the liftboat market is looking eerily similar to that of the JUR market. These indicators include the following:

· As of June 2015, charter rates trended around the $40,000 – $80,000 mark a day, now dropping down to day rates between $24,000 –$57,000
· Cost to build ranged from $50m to $100m, now starting at US$30m mark
· Significant discounts offered to buyers to take over build contracts, in some cases up to 15%
· Increased number of mid-range liftboats now being offered on the open bid market
· The likes of Pemex and Petronas are negotiating charter rates on existing day rates between 10 and 40%
· Scaling back of offshore capex, for example Petronas cutting back by 20%
· Credit Suisse reports have scaled down the need for liftboats in the SE Asia region from 80 to 50 in the last six months (due to lower capex, improved efficiency etc)
· Major declines in international liftboat utilisation (down to 37%) could lead to market incursion
· 22 current newbuilds in SE Asia, with only 10 having contracts

All of this adds up to the barriers to entry in SE Asia being lowered, and this will be a challenging period as liftboat owners enter the free cash flow / liquidity issues that has recently confounded the JUR.

So what is the outlook for 2016?

Within the JUR market, we will see a further decline in liquidity resulting in increased:

· Consolidations, bankruptcies and mergers
· Rates of scrapping of older rigs to bring about greater balance in supply / demand availability
· Volatile H12016 with settling by the Q416 as balance in rig supply is worked on

Within the liftboat market, we will see:

· Ongoing pressure on liquidity as charter day rates continue to fall and contracts reviewed
· Increased insolvency as many in this sector are already leveraged beyond 1:1 and fail to meet even interest repayments
· Oversupply of assets due to market creep from the likes of MENA and GOM markets where underutilisation forces redeployment to new regions coupled with the number of new builds coming into the markets i.e. we are now witnessing a realignment of the ratios of liftboat to platform that more accurately reflects improved design, efficiency and planning.

In conclusion, both markets will not be that attractive in 2016, but if I had to make a choice, I would choose the liftboat sector for the following reasons:

· Offers new niche markets in offshore windfarm development (through the entire life cycle of these farms)
· Opportunities in decommissioning of offshore platforms
· Less vulnerable to decline in daily charter rates as the quantum would be in the 10 – 15% range

However to take advantage of this one needs good management, sound balance sheet and free cash flow. Whether there is a Southeast Asian entity that can do this, well that is a question for another day.

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Andre Wheeler

In mid 1997 Andre established Wheeler Management consulting which in 2014 became Asia Pacific Connex. His key industries are oil, gas, construction, EPCM, marine services and mining. He is particularly experienced at project management and business development that focuses on financial return, customer solutions and innovative process design. Based in Perth, Andre spends considerable time with clients throughout Asia, and is a specialist advisor to five different fund managers.

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1 Comment

  1. Thomas S. Wissmann
    January 4, 2016 at 9:20 am

    In my view the market for larger modern liftboats will keep going because with the low oil price it is more attractive to maintain/upgrade existing wells than drilling new ones…the offshore wind market is very specialized and in my experience it is not to be expected that liftboats from ME or SEA will be moved to work in the North Sea…