Here’s another little-known victim of the oil slump: The supply ships that service drilling platforms and rigs.
Even before crude prices collapsed and triggered a retreat from expensive deepwater projects, the offshore supply vessel industry was struggling with rising debt and too much competition jockeying for the same work. In the past seven years, the service vessel fleet expanded by 38 percent, fueled by Chinese shipyards and access to easy credit that helped drive up vessel counts. At the same time, offshore rig counts grew just 5 percent, according to an analysis by AlixPartners, a global business advisory firm.
“The situation is precarious to say the least,” the analysts wrote.
The picture has only worsened since the downturn spurred oil companies to slash spending and demand deep discounts in service costs and vessel day-rates, leaving offshore supply vessel companies strapped for cash at a time when many have large amounts of debt to pay back.
“Rising debt burdens will add to the struggle of those companies to maintain positive balance sheets as their earnings likely decline,” the AlixPartners analysis found. “The industry faces grave financial pressure as demand has receded, mirroring the slide in oil prices.”
Among the 33 offshore service vessel companies studied by AlixPartners, overall debt load had spiked $3 billion, or 16 percent, in the past four years. As revenues continue falling amid waning demand, companies may struggle to make their interest and amortization payments, forcing some into financial distress if they don’t make changes soon, AlixPartners said. The firm in its report said it identified at least 17 companies facing a high probability of heading toward bankruptcy, but did not reveal names.
Shipping firms have responded to the difficult business conditions by stacking vessels, laying off crew and delaying projects to build new ships. On Monday, Houston-based Helix Energy Solutions announced that it had delayed delivery of its Q7000 well intervention vessel for the second time to Dec. 31, 2017 in the latest sign that tougher market conditions for companies that provide offshore vessels could persist for several years.
“The Q7000 was likely entering a difficult 2017 market characterized by unfavorable pricing for deep-water well intervention vessels – a result of an oversupplied offshore rig market – and lower demand for deep-water well intervention, a consequence of the decline in offshore drilling,” analysts at Raymond James wrote in a note to investors. “While a net negative for Helix, we see the deferral as a necessary defensive move to preserve cash as well as an opportunity for Helix to secure a potential long-term charter for the vessel.”
To alleviate the pain of waning demand, rising debt and plummeting revenues, offshore service vessel companies need to take immediate steps to realign their portfolios, including reducing overhead costs; locking in longer-term contracts, even if they have to do so at a less-than-desirable day rate; slashing nonessential spending and projects in the same aggressive fashion that exploration and production firms have; and working with their providers to get lower rates, the AlixPartners study found.
The market faces “many strong undercurrents” and good financial preparation is key to determining which companies “thrive and which may falter or fall prey to consolidation,” the analysis said.
The long-term outlook for the offshore industry still looks good, as exploration and production firms remain committed to their investments they’ve already made in expensive offshore infrastructure. That means offshore vessel companies with the best, most coveted technology will be in a better position to meet demand when prices recover, AlixPartners said.
“The most modern fleets will likely have am ore robust outlook,” the analysis found.