Offshore: Bet Your Bottom Dollar…But When?

Teekay-Offshore

Since the 2H 2014 offshore downturn, when investment in new exploration and development dried up, many offshore vessel owners will have tended to agree with the child heroine of the 1976 musical Annie: “It’s a hard knock life”. However after three years of setbacks and weak markets, some are now starting to see positives, as a few indicators show encouraging signs. But does that mean it’s time to invest?

You Gotta Hang On…

In any cyclical market, calling the bottom of the cycle is difficult, but key. Buying low and selling higher is an obvious way to financial success, whilst other decisions, from whether to lock in term rates at low values to whether to put a laid-up ship through special survey, may depend on expectations of a more rosy future.

Whilst far from guaranteed to continue, there are some signs that 2017 may have marked the start of a rebalancing for offshore. Dayrates in some areas, such as North Sea PSV term rates (up 17%), or the harsh environment drilling market (up 50%), showed year-on-year improvement. Requirements increased; for example the Middle Eastern OSV market was notable for an upturn in vessel tendering.

The Sun’ll Come Out…

At the same time oil companies are beginning to consider further project FIDs, having made cost savings via project redesign. In some cases this has come via savings which are negative for offshore owners (e.g. fewer wells, or elimination of need to construct infrastructure like platforms via greater use of subsea production). Equally, any general increase in activity is welcome after the weak 2015-16. It is estimated that 38% more CAPEX was committed to offshore projects in 2017 than 2016.

Such causes for greater optimism may also be generating a symptom: greater offshore S&P market activity, as shown on the Graph of the Week. More sales (230) were concluded in 2017 than in any year on record bar 2013. Clearly, this does not mean that markets are healthier than 2012 or 2014: as the lines show, indices of vessel values have fallen by 60% or more. Moreover, an upturn in sales activity may be more indicative of the issues owners face: some have had to sell to balance books, whilst in other cases outright distressed sales have occurred. However, there have been cases where buyers have begun to acquire low-priced tonnage, in the expectation that this could be the bottom of the market and the sweet spot for purchases.

Any consensus that the bottom is at hand can still be confounded. Risks exist: US onshore shale oil production is now 6.3m bpd, and has consistently surprised on the upside. At the same time, solutions still need to be found for the 790-strong mobile offshore orderbook and the almost 2,400 units in lay-up.

Tomorrow…Only A Day Away

By the end of Annie, our heroine has been adopted by a billionaire. Few offshore owners have found such simple solutions to their problems. The sector still has issues to confront on both the supply and demand sides, and any recovery still looks likely to be very protracted indeed. It seems likely that the coming year will feature more opportunities, both for chartering and potential asset play, but full market rebalancing is likely to be much more than “only a day away.”

grph

Source: Clarksons

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