OSV upturn remains uncertain despite positive market signals

Recent rise in offshore activity pales in significance compared with pre-crisis levels

Positive sentiment may have filtered into the sector for offshore support vessels since the middle of last year, but the sober reality is that OSV owners still have a mountain to climb.

Clarksons wrote in a recent review that there are some fledgling signs in the OSV supply and demand picture that there may rebalancing under way.

“However, the severity of the post-2014 market imbalance is such that it is still uncertain when a brighter day will dawn for OSVs,” the shipbroker's research division said.

Among the positive signs has been a rise in offshore activity: more rigs back at work, few OSV newbuilding deliveries and a rush of secondhand sales.

For example, the year-on-year increases in oil prices — 25% for Brent and 18% for West Texas Intermediate — helped attract an additional $22bn in offshore spending, as well as 62 final investment decisions (FIDs) offshore, up 5.1% from 59 the year before.

“More specifically for the OSV sector, rig utilisation increased by three percentage points year on year to stand at 66%,” wrote the analysts.

This is still down from rig utilisation of 96% in 2013, before the downturn started.

At the same time, the OSV-to-rig ratio fell by 2.2% to 7.6x in 2017, which is down from a ratio of 7.8x in 2016. Prior to the downturn, the ratio was 5.3x in 2013, back when rigs had utilisation of 96%.

“A further encouraging signal was the meaningful uptick in sale-and-purchase activity, which increased by 71% year on year from 2016. Meanwhile, the 113 OSV sales reported during 2017 was the highest number of sales on record,” wrote the analysts.

Clarksons said the S&P rush could show that owners are preparing for an upturn or it could also be spurred simply by rock-bottom values.

The Clarksons OSV Index, which measures vessel earnings weighted by regional deployment, had its baseline of 100 pegged in 2005.

In 2014, at the start of the severe downturn, the index registered at 164 but then fell by 35% in 2015 and a further 30% in 2016. It continued to fall in 2017 but at a much slower pace of 5%.

For OSVs as a group, the index was at 74 in December 2017, breaking down as 69 for anchor handling tug supply (AHTS) vessels and 77 for platform supply vessels.

In terms of actual day rates for medium-size AHTS vessels, average rates fell 53.8% from $16,361 per day in 2014 to $7,545 per day by December 2017. For medium PSVs, the fall was 60.7%, down from an average of $21,168 per day in 2014 to $8,315 last December.

Despite the further decline, Clarksons' research pointed to marginal rate rises in some areas, such as in PSV term rates in the North Sea, and is forecasting the index to remain “steady” this month, with perhaps a 2% increase.

Clarksons also believes that most of the newbuildings on order will be delivered eventually.

About 25% of the fleet is still in lay-up, at about 1,100 ships. The analysts said there is good reason to believe that many of these ships will be “scrapped in place”, or otherwise left to rust away.

“While it is difficult to assess precisely when such units are no longer employable vessels, there is potential that the underlying supply excess could be less onerous than it seems,” Clarksons said.

Globally, only one OSV was registered as sold for demolition at the end of last year. This was the 12,000-bhp AHTS vessel Hurricane-I (built 1988) scrapped by owner Hermes Maritime Services in India.

Even though a reduction in the oversupply of ships is sorely needed, the lack of scrapping is not unusual for the offshore sector because OSVs have so little steel content.