Sunday, 3 December 2017

A Peek into Offshore Support Vessel Companies' Prospects

I wrote about my speculative bets in Offshore Support Vessel (OSV) companies in Which Offshore Support Vessel Companies Will Survive? This is a defensive way of betting on OSV companies, as I look for companies that have low debts, low impact from asset impairment, low probability of receivable build-up/ impairment as well as no bonds maturing in the short term. Actually, there is another way of betting on the OSV companies, which is to look at the potential revenue streams the companies have in the future. As discussed in Oil & Gas, Show Me the Orders!, orders are a leading indicator of how well the companies are likely to do in the next few years.

How do you know the the potential revenue streams of OSV companies? OSV companies charter out their vessels to other companies. It is a form of operating lease. Hence, quite a no. of OSV companies report their operating lease commitments as lessor. The table below tabulates the lease receivables based on their latest available Annual Reports. All figures are reported in millions of US dollars. Please note that some companies include customers' options to extend the vessel charter in the figures.

Lessor Commitment
Company FY Current Previous
Atlantic Dec 16  $    240.1  $      15.2
Falcon Jun 16  $      48.3  $      85.8
Mermaid Dec 16  $         -    $         -  
Pac Radiance Dec 16  $      54.1  $      66.9
POSH Dec 16  $    337.1  $    176.4
Vallianz Mar 17  $    646.7  $    254.2
Ezion Dec 16  $ 1,451.3  $ 1,181.3

Thus, based on the above table, some companies are getting a lot of new orders, such as Atlantic, POSH, Vallianz and Ezion. 

However, before you get too excited, in order to meet these orders, the OSV companies either have to own the vessels already, order new vessels, or lease the vessels from some third parties. When companies order new vessels, they incur capital commitments. When companies lease vessels from third parties, they incur operating lease commitments as lessee. Both capital commitments and operating lease commitments as lessee are reported in the Annual Reports. The table below tabulates the capital commitments and operating lease commitments as lessee for the above-mentioned companies.

Capital Commitment Leasee Commitment Capital + Leasee
Company FY Current Previous Current Previous Current Previous
Atlantic Dec 16  $      42.2  $    100.9  $      50.4  $        1.7  $      92.5  $    102.6
Falcon Jun 16  $    501.1  $    501.1  $        0.4  $      14.2  $    501.6  $    515.3
Mermaid Dec 16  $        0.5  $    373.6  $      14.7  $      11.8  $      15.2  $    385.4
Pac Radiance Dec 16  $      69.6  $    209.4  $      48.8  $      55.3  $    118.4  $    264.7
POSH Dec 16  $      85.6  $    138.6  $      94.9  $    105.0  $    180.5  $    243.6
Vallianz Mar 17  $    198.2  $    270.0  $    177.4  $      98.8  $    375.6  $    368.8
Ezion Dec 16  $    440.9  $    258.5  $    124.5  $      83.5  $    565.4  $    341.9

As shown above, most of the OSV companies are cutting back on their capital commitments. On the other hand, some are increasing their operating lease commitments as lessee. This is a more sustainable and flexible way of operating the business, as they can return the vessels to the third parties after the expiry of the leases if business conditions were to go down. 

For companies that rely on capital commitments, it will mean that the debts of the companies will increase. In addition, there will be more assets to impair, bearing in mind that the capital commitments mean that the vessels are already ordered and waiting to be delivered. These vessels are likely ordered a few years ago when oil price was still high and therefore vessel prices were high too. Moreover, would banks be willing to provide further financing to the OSV companies to take delivery of the vessels, considering that they probably have had enough of non-performing loans from the Oil & Gas (O&G) industry? If there is no financing, there will be no new vessels, and there will be less orders to fulfil. For this reason, even though I like O&G companies with increasing orders, I am not prepared to bet on some of these OSV companies. I prefer to play more defensively.

Just a reminder, this post is not a recommendation for anyone to buy or sell any O&G stocks.

P.S. I am vested in CH Offshore, Ezion warrants, Mermaid and POSH.

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  1. Hi,

    Another criteria to consider is the age of their OSV fleets. In a bad market, newer vessels will be charted first. And vessels laid up a long time may never be charted again. I think POSH is the best here.

    Really hard to tell when the turnaround will happen. We are waiting for laid up vessels to become uneconomical to run. Like waiting for ships to rust! There are some numbers in the footnotes of

    1. Hi,

      Thks for pointing this out.

      You have a great blog there too!

  2. Hi CW,
    OSV is not really direct O&G unlike FPUs or Drill Rigs. OSV as the name suggests "supports". The OSV market is still very much over-supply in my opinion. Few orders, but many hungry OSV owners. Pricing and T&C are not favourable. Orders not necessary translate to profit as it is a complicated calculation of profit as we have to use the charted revenue over the depreciation life of the asset prices. Taking into account, price of vessel, maintenance & warranty unforeseen cost, loan and interest, how long the asset life projected, and even support from the various equipment suppliers to the vessel.

    A vessel owner can received an order, but the main equipment in the vessel are supplied by equipment supplier whom, because of other contracts with the buyer which they buyer had not pay them, the equipment supplier may choose not to support the Vessel owner. Without the main equipment supplier support, the vessel may not be efficiently operated. But in order to have the equipment support, the Vessel Owner may have to clear the previous bad debts which in this environment, they are running short of cash.

    Hence it is a difficult situation there. Just a new information for your knowledge.

    1. Hi Rolf,

      This for the info. I agree with you that the OSV market is still quite challenging.