Offshore supply vessel sector - is consolidation inevitable?

News / / Dubai

The prognosis for the offshore supply vessel (OSV) sector remains pessimistic for 2016 with the industry continuing to experience difficult times caused largely by the decline in the oil prices , the reduction in investment and oversupply of vessels. 

The demand for OSVs is strongly connected to the number of rigs employed by the exploration and production companies. The demand for certain specialised OSVs may be driven by factors other than the oil prices, but those are the exception rather than the rule. According to Clarksons Research1, since the oil price slump, rig rates have dropped by more than 50% and more than 300 rigs are laid up as of June 2016. As a result  OSV rates have fallen by an average of 35% and reports state that there are as many as 1,400 OSVs laid up. 
This decrease in demand has put the industry under significant financial pressure and the question is what strategy will the OSV operators adopt in response? The first reaction of cost cutting, has in my opinion been taken.  It is clear that operators in this area have looked carefully at their expenditure and reduced costs where possible. The next answer to many of the industry’s problems should be consolidation however we have not yet seen major mergers or acquisitions in this sector. This article reviews the current state of the OSV market across the four major regions and considers the reasons behind the low rates of adoption of the consolidation strategy. 

North Sea 

The North Sea OSV sector is depressed, with supply exceeding demand, despite a few tenders becoming available in the market. Clarksons Platou expect 50 more OSVs to be laid up by year end with 2016 seeing the bottom of the market2. The OSV owners operating in the North Sea are exploring opportunities in other markets both geographically and industry-wise3. For example, it has been announced that Deep Sea Supply entered into a joint venture with Marine Harvest ASA which would build, own and operate aquaculture vessels4.  

Many of the OSV operators in the North Sea are also looking to raise finance. For example it has been reported that Oslo-listed Solstad Offshore will receive USD 58.8 million in new liquidity from Aker ASA. This investment resulted in unexpected consequences for the Norwegian OSV industry of which more below.   

West Africa 

The OSV rates in West Africa remain low together with the overall reduced level of activity. Topaz Marine has reportedly cut its operations in the region by placing three vessels in Turkey whilst Oceaneering International has experienced early termination of an OSV contract by BP earlier in the year5

Tidewater, reportedly the operator of 93 vessels in West Africa,  predicts a shift in investment focus towards natural gas in the region if oil prices remain at levels below US$40 per barrel. It seems that whilst existing oil projects are being completed  future developments and resulting demand for supporting vessels will come from the gas projects.6

US Gulf of Mexico 

The OSV utilisation rates in the US Gulf of Mexico fell dramatically in 2015 (below 60% compared to 80-90% prior to the fall in oil prices)7, which is to be expected given that the rig count in the US Gulf of Mexico decreased by over 25% between December 2014 to December 2015 according to AlixPartners.8 

Arabian Gulf 

The Arabian Gulf is a special case in the global OSV outlook. The fact that companies like Saudi Aramco and ADNOC sustained their production levels benefited the local OSV market even though there may have been pressure put on rates. The rig count has declined only by about 5% between 2014 and 2015.9 

Tradewinds reported at the end of June 2016 that medium-size platform supply vessels (PSVs) saw an increase of USD 1,000 per day in May 2016 although the market overall remained flat. There were also reports of some 23 vessel contracts being awarded by Saudi Aramco in May 2016.10  
However, the influx of the OSV owners has created additional supply which is negatively affecting the rates. 
Nevertheless some owners managed to ride the wave. For example, Seatrade reports offshore contractor, GMS (Gulf Marine Services) as a good example of an Owner enjoying buoyant demand for its vessels. GMS is reportedly expanding its fleet and introducing a new class of mid-size vessels whilst others are focusing on surviving the depressed conditions.11

To consolidate or not to consolidate?

Given the downturn affecting the OSV sector, many have predicted and advocated mergers or acquisitions as a solution to the industry’s problems. The rationale behind the consolidation strategy in an industry that is going through the difficult times is that companies that struggle to survive would benefit from the economies of scale by forming an alliance – the bigger the stronger. Consolidation helps to achieve greater efficiency and to reduce costs and overheads; it can give companies an opportunity for redeployment of the assets, expand their capability and gain access to larger projects and new strands of work. 

Other sectors of the oilfield services industry, have shown more of an appetite towards significant mergers, the most notable would have been Halliburton and Baker Hughes. 

However this interest in consolidation has not been as manifest within the OSV sector. That is perhaps surprising given that AlixPartners consultants’ study of major OSV companies found that more than half of those companies were headed toward bankruptcy unless they take measures.12 Swiber Offshore filing for liquidation at the end of July 2016 is a recent example of the perilous situation companies may find themselves in. 
I consider there to be a number of possible reasons for the lack of notable consolidations in the OSV sector. One reason is that the type of assets employed in the OSV industry varies greatly depending on the specialisation of the particular operator and their area of operations. This complicates the task of finding a suitable company although it may also be seen by some as an opportunity to grow into a new sub-sector of services. 
Another often quoted reason is that the offshore operators are often family owned businesses who  want to remain independent more than they want to be profitable. It is not easy to unite different business strategies and philosophies of the OSV operators where strong personalities are involved. It has also been said they are not experiencing pressure from the shareholders in the same way as other industries, which is usually one of the major drivers for consolidation. Additionally it has been commented that banks are not putting pressures on the companies to realise the returns that were expected. 
The recent acquisition of Rem Offshore by Aker shows that the decision can be soon taken out of the hands of the OSV operators. Having invested in Solstad, Oslo-listed Aker accumulated bonds issued by Rem Offshore and blocked the latter’s restructuring plan unless it agreed to merge with Solstad. Rem’s chairman has called Aker’s move hostile but other sources agree that it would ultimately benefit the Norwegian OSV sector.13  
With nearly 300 OSVs expected to be delivered before the end of 2017, in our humble opinion it is only a matter of time before companies realise that consolidation may be their only chance to remain in the game.

13 Tradewinds, 22 July 2016, page 24 
Rania Tadros

Rania Tadros Managing Partner

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