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Perfect storm or islands of opportunity?

Robin Kirkpatrick, from Global Air and Energy, surveys the OSV scene.

Sadly, the industry has succumbed to the classic supply/demand driver. However and disturbingly it has suffered a ‘double whammy’ effect in the form of even more newbuilding vessels still in hand coupled with client demand falling off the proverbial cliff for the reasonably foreseeable future.

Present industry commentary is trending in the direction of ‘gloom and doom’ but is there really only that direction to choose?

Let’s take a look at what is happening.

The number of vessels actively in service is dropping due to declining demand. Vessels fortunate enough to be gainfully employed are usually generating lower income returns for owners due to reduced charter and associated service rates.

As earnings fall, cash flow tightens and debt service capability shrinks resulting in a less than ideal situation for owners and indeed the supporting supply chain, however this is preferable to the layup option.

Many hundreds of offshore vessels (of all types) are in layup and of this many are in cold layup. Compounding this, additional vessels join the laid up global fleet weekly and it is not unusual to see newbuild vessels delivered to owners and then steam off in the same direction. Gone are the days of old, decrepit, less capable tonnage dipping out of markets in this way, it affects all vessels, old and new.

In days of old it may have been hoped that scrapping would help to address any supply/demand balance however, not this time, not even close. In reality it wasn’t historically really a factor to consider. It is certainly not now.

Owner levels of leverage are not sustainable in such a market. The headlong rush of recent years into building many vessels of varying types was quite unprecedented.  That rush that was encouraged by ‘clients’ and facilitated by ever easier and imaginative financing which resulted in equally imaginatively high asset valuations and corresponding eye watering levels of finance. Demand drops, reduced utilisation follows, charter rates plummet and the combined effective earning capacity of these high value assets hit the seabed.

In a more balanced market some owners might expect to mitigate the situation through sales and or purchase activity. This is a far from balanced market meaning that S&P activity takes on a completely new twist due to tumbling asset values, necessary write downs, falling share prices and even in some cases sheer sustainability. The client side of the supply/demand equation is not immune either as they too struggle with the very same issues in some cases placing question marks over their own sustainability.

Undeniably it is going to take many years to bring redress to the supply/demand cycle and, sadly for shipyards and equipment suppliers, there has to be the realisation that new build tonnage may be a thing of the past for the next few years. Potential investors please note, even for what used to be tempting ‘niche’ tonnage plays: they no longer exist and we are well and truly in a commoditised market.

The perfect storm with no clear horizon in sight? Seems to be the case, or is it?

There is however an ‘island of opportunity’ in the form of S&P ‘morphing’ into activity more akin to merger and acquisition as individual vessels lose their attraction in favour of fleets and business that really can bolster balance sheet, cash flow and even profit and loss.

There has not been much evidence of this to date mainly due to each and every asset owning company struggling to adjust to and accept the new reality of the size and shape of their business but many are now through that process and will be looking to make the smart acquisition whether softly via merger in the first instance or straight to the deal. This will happen. Of course constraints are many and varied but each and every one can be overcome. Some are even now reportedly considering the merits of private versus public ownership and making the switch. I’m sure they are.

In any storm there is always damage and this is no exception. Investors and shareholders will feel pain in many cases. Companies will cease to be and assets will reappear in different guises. Businesses will merge and there will be pressure on employment ashore and afloat but ultimately the industry will spring back from this

Clients may ultimately be faced with fewer suppliers and this is perhaps no bad thing in the long term, on either side of the equation.

Shipping is a long-term game and many lost sight of that in the headlong rush of recent years to make the proverbial quick buck.

Splash

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