The current downturn in the offshore oil market is probably one of the most severe since the 1980s. Oil companies are deeply cutting E&P spending for 2016. During its midyear analysis of the oil market, investment banker Cowen & Company reported that it expected global E&P expenditures in 2015 are now estimated to be down by 22% from the 2014 level to $545 billion. The “Original E&P Spending Survey,” initiated by Cowen’s James Crandell, estimates a 13 percent decline in E&P spending by the super majors— ExxonMobil, Royal Dutch Shell, Chevron, BP, ENI, ConocoPhillips and Total—for next year.
Offshore drillers are feeling the pinch—as are the shipyards that support them. Last month, another South Korean shipbuilding giant was hit with the cancellation of an offshore drilling unit order.
Pacific Drilling S.A. exercised its right to rescind the construction contract for the ultra-deepwater drillship Pacific Zonda “due to the failure by Samsung Heavy Industries (SHI) to timely deliver a vessel that substantially meets the criteria required for completion of the vessel in accordance with the construction contract and its specifications.”
Pacific Drilling says it made advance payments totaling $181.1 million under the shipbuilding contract, and will be seeking a refund of the installment payments.
The company inked a contract for the drillship with Samsung Heavy on January 25, 2013 that provided for a delivery date of March 31, 2015.
The cancellation comes after the October 27 news that Fred Olsen Energy had cancelled an semisubmersible drilling rig order at Hyundai Heavy Industries and the October 26 announcement that Transocean, Shell and Daewoo Shipbuilding & Marine Engineering Co. (DSME) had agreed to push back the operating and delivery contracts of two newbuild ultra-deepwater drillships – the Deepwater Pontus and the Deepwater Poseidon – by 12 months each.
Transocean is also scrapping rigs. Cowen & Company reports that the latest is GSF Rig 135, bringing the total number of scrapped rigs by company since October 2014 to 21, by far the largest number of retired units by any company this down cycle. Cowen and Company says, “With 14 rigs still cold stacked, we expect further rig retirements are likely.”
OSV operators hunker down
To survive in such a challenging environment, offshore support vessel operators have been hunkering down, enacting cost controls, including cold stacking vessels and preserving cash.
That was the strategy outlined last month by Hornbeck Offshore Services Chairman Todd Hornbeck during a recent conference call discussing the company’s third quarter of 2015 results. Hornbeck Offshore Services (HOS), with a fleet of 66 offshore support vessels (OSVs) and Multi-purpose Support Vessels (MPSVs), currently has 27 vessels stacked and expected to stack an additional 3 vessels by the end of the year.
When you cold stack a vessel, it means that you preserve that asset until there is an upturn in the market (and a rise in dayrates) that justifies putting that piece of equipment back in service. Cold stacking cuts OPEX costs. The downside is that you lay off valuable mariners and shoreside staff that are involved in operations.
CFO Jim Harp says that those 30 stacked vessels would save about $125 million in costs on an annual basis. HOS had also delayed cash outlays of $10 million on regulatory dry docks in 2015 by stacking vessels and expected to save $15 million in regulatory dry docking costs in 2016.
On a deadweight tonnage basis, the 30 stacked vessels represent 81,000 dwt or 28 percent of the company’s 295,000 dwt fleet. Hornbeck’s entire remaining operational fleet will be high spec 300 Class vessels and Multi-Purpose Service Vessels, all 6,000 dwt and above, DP2 Jones Act vessels.
Hornbeck believes that market conditions will continue to deteriorate and that the next two quarters are “going to be choppy.”
HOS has taken delivery of 17 of the 24 vessels under its HOSMAX newbuild program and another three OSVs will be delivered before the end of this year. There are an additional four MPSVs under construction for delivery in 2016. HOS has newbuild programs at Eastern Shipbuilding in Panama City, FL, Leevac Shipyards in Jennings, LA, and VT Halter Marine at Moss Point, MS.
HOS is trying to push back the delivery dates from the shipyards. “We are delaying their delivery as much as we can. We’re slowing the build process down to better align for the market recovery,” says Hornbeck, “and tweaking systems to make sure they are going to be the most optimal for the customer.” Hornbeck says the system modifications are based on the operational experience of the previously delivered HOSMAX vessels in the newbuild program.
A silver lining for HOS has been the sale of four 350 EDF Class OSVs to the Navy. During the quarter, HOS received $38 million for the sales of the fourth vessel to the U.S. Navy. As a result, HOS received $152 million for the purchase of the vessels and continues to operate them under contract. “It was a timely development during the industry downturn,” says Harp.
Investment analyst J.B. Lowe of Cowen & Company rates HOS as an “outperform.” In his latest equity research, Lowe outlines some of the highs and lows for the company during the quarter. “Effective utilization across the 41.5 average vessels that were active during the quarter (i.e., excluding the 18.1 average stacked vessels) was 72.2%, below our forecast for 43.0 average vessels and 76.8% utilization. Average OSV dayrates of $25,699 fell 3% shy of our estimate of $26,428, while off-hire days were 17% higher than we had forecast. While the company continued to withhold data on its MPSV segment for competitive purposes, we note that our estimated MPSV segment revenue of $37.5mm was 7% below our $40mm forecast. The OSV segment was even weaker, by our estimate, with revenues of ~$71mm trailing our ~$80mm forecast by 12%.”
Continues Lowe, “Although cost guidance for full-year 2015 was lowered by ~7% at the midpoint (to $223.9-$228.9mm from $238-$248mm), we do not expect it will be enough to alleviate investor concern over the weakness of the GOM market.
“Additionally, 2016 cost guidance was not released and will likely be a focus on the call this morning. Full-year 2015 G&A guidance was also lowered to $49.1-$50.1mm (from $50-$53mm).”
Shares of publicly traded OSV operators have been under pressure and are now trading substantially lower than they were one year ago (see Table 1). Last month, GulfMark Offshore, Inc., went so far as to part ways with its Senior Executive Vice President and Chief Operating Officer David Rosenwasser.
It would be no surprise during this downturn to see some consolidation among OSV operators as well as the shipyards that support them.
Harvey Gulf International Marine, New Orleans, LA, which purchased the Gulf Coast Shipyard Group, in June, has put the Trinity Yachts business up for sale. The sale would include the New Orleans facility, 20 fully engineered designs and a partially built 168 ft megayacht.
Squeezing out old tonnage
The current conditions are squeezing out older tonnage that might not ever return to the market.
According to Clarksons Platou, there are currently 5,301 OSVs in service and another 602 on order. The average fleet growth over the last 10 years has been 7 percent.
In its monthly blog examining the surplus of offshore support vessels in the market, Clarksons questions whether OSV operators will follow the lead of Mobile Offshore Drilling Unit (MODU) operators are begin to scrap vessels.
“OSV demand has fallen—at least 11% of the total fleet was laid up at start September,” writes Clarksons. “So far in 2015, 23 removals have been recorded from the OSV fleet (18 AHTS/AHT and 5 PSV/Supply vessels). For AHTS/AHTs this is a 29% increase on 2014 on an annualized basis. PSV removals, however, are down by 46%. In either case, the number of removals seems below what might be expected given the challenging market conditions.”
Clarksons points to several reasons for the low number of removals from the OSV market. It says the “likely reason for the low uptake in OSV removals relative to the MODU sector is that there is comparatively more value in scrapping rigs (in particular, floaters), compared to OSVs, on account of their larger size and steel content.
“Furthermore, it is relatively easy and cost-effective to lay-up or stack OSVs, which has been the preferred option for owners—at least 340 AHTSs and 254 PSVs are estimated to be laid up, although in reality this number may be even greater. Similarly, the sale of vessels for use in other sectors (e.g. utility support) provides some means of reducing active vessel numbers, although sales activity for OSVs in 2015 is currently down by 25% on an annualized basis.”
But Clarkson sees stacking as a temporary solution because the current size of the orderbook is “equivalent to 11% of the active fleet and, although some slippage is expected, 293 units are slated for delivery by end 2015.”
Clarksons concludes that with no significant upturn in oil prices likely in the near term, it expects pressures to continue. It says that fleet growth stands at 2.3% year-over-year, and “the issue of OSV oversupply is expected to remain significant. Against this background, the discussion of removals is likely to be ongoing theme.