We have reached and passed the three-year mark from when oil prices took a nosedive in October 2014. Since then, innumerable offshore services companies have had to restructure their balance sheets, resize their teams and rethink their futures.
Utilisations range, more often than not, in the low 50s. More than 250,000 onshore jobs have evaporated. Many vessels are, even when working, barely covering opex. Banks are becoming de facto owners of hundreds of vessels. More than 1,400 vessels are idle, many of them cold-stacked and unlikely to sail again. Shipyard quays are crowded with partially or completely built vessels, deteriorating rapidly.
The tunnel seems interminably long, and exhaustingly dark.
In this dank and gloomy environment, it is difficult to believe that there may be opportunities to exploit. But, opportunities exist, if one is willing to step back and look at the situation from differing perspectives.
First, consolidation. Historically, very little consolidation has taken place in the much fragmented offshore services domain. This is due to, in most part, the very generous valuations most owners accorded to themselves. When the markets were buoyant and utilisation was in the high 80s, it was impossible to find two promoters willing to agree on relative valuations. Any offer was lowball. Any approach was suspect.
Today, battered egos are much more amenable to discussions. Given that most equity has little or no value, relative valuations can be established with simple formulae. Small, sub-optimal, regional vessel owners can look to entering into cashless mergers that build a larger, more economically viable, multi-market capable company. This will reduce fixed costs as well as make operations more cost effective. A larger fleet can be more optimally deployed across more regions, increasing utilisation efficiency. The company can invest in more capable teams and more robust systems.
In time, consolidation can lead to a less fragmented, more efficient and more accountable ecosystem, benefiting the industry, the clients and the offshore players themselves.
Secondly, there’s the issue of new equity. This is the perfect moment for fresh, ‘patient’ equity to enter the market. Vessel prices are at an all-time low. Assets are available at the buyer’s whim. Putting together a 40-vessel fleet that would have cost about $400m in 2013/14 can be put together at less than $100m today. Buttressed by a capable board and a strong management team, this fleet can be made to deliver breakeven and above within 12 – 18 months. Low or no leverage will also allow opportunistic growth, when the time and price is right. In three to four years, given normal expectations of a gradually recovering market, it would be no great feat to sell the company/operation at two times or even 2.5 times of investment delivering mouth-watering returns.
Thirdly, merging assets and services. In hindsight, one of the most common errors in the offshore services domain was to drive a narrowly vertical strategy, and in many cases, a purely asset-based strategy. The reason for this approach is not hard to determine – buying a vessel needs little or no knowledge or expertise, and can be deployed quickly. Services need knowledge, technology and time, and thus are viewed with more reluctance. This approach has led to many of the ills that we face today. Ideally, a company should have at least two prongs, one that delivers the platform and the other that delivers one or more services from the platform. This allows for a higher value-add offering as well as a greater return on every invested dollar. It also makes for more sticky relationships and differentiation, leading to a premium rather than a me-too brand position.
Finally, we should not forget technology. While it may seem counter-productive to invest in technology in a really adverse market, this is a necessity if one wants to survive and thrive in the coming years. Our domain is going to see much disruption – autonomous vessels, battery-powered and LNG/battery hybrid propulsions, underwater drones, real-time well-tracking, remote operational control – that many of us are already behind the likely curve. This is no more a ‘nice to have’ augment to business, it is embedded in and will drive business.
None of these opportunities are easily wrought. Each of these will take courage, effort and persistence. And an outlook that extends beyond the tunnel that engulfs our vision today.
This article first appeared in the just published latest issue of Maritime CEO magazine. Splash readers can access the full magazine for free by clicking here.