Thursday, April 12, 2012

A study of Offshore Support Vessel Industry ... Part 1

I need to make this clear before I write further. I made two statements recently:

1. China market is one of the cheapest in the world
2. Buying opportunities should emerge in 3 - 6 months

A 3rd statement of I'm going to study OSV industry will certainly make me look like a bimbo when the markets are hardly corrected - yet.

All the statements do not represent I want to jump into the market now. It's just that I'm getting to hunt but I have no idea when I'm going to pull the trigger.

The thing that prompting me to look into OSV segment is I'm keep hearing bad news of the industry is having over capacity and the charter rates are recovering from depressed level. If the crude oil price is to soften further by 10-20%, that is going to add more pressure to the sector. The share prices of many of OSV players are tanking everyday. It's one of the sectors that is hated by most now. I'm just sniffing around to see whether there are any mis-pricing stocks.

OSV market is a commodity market. The barrier of entry is low. All you do is raise funds, buy ships and rent it out. There may be some technical know how required but it is relatively easy to master if you are in this trade. ISL estimates about 500 vessels in SEA. It's a very fragmented market as well.

Over expansion in 2005 - 2008 cycle led to charter rates collapsed. In 2009, the charter rate was about US $ 2.20 - US 2.70 per bhp but it had a free fall to US $ 1.70 - US $ 1.75 per bhp. That was a 20-30% drop. At one point of time, the rates fell by almost 50-60%.

On top of that it is a very capital intensive industry and most of the players have a big sum of loan on their balance sheet.

Does that sound scary? Why the hell am I wanting to write something about this with such unfavorable conditions? I will come to that later.

For a start, let's try to understand the scope of OSV market. OSV market can be defined as vessels with anchor handling duties("AHTs") which are used for towing rigs and platforms onto location or platform support vessels("PSV") which are primarily use to supply to assiting platforms and assist with construction duties as well..

The drivers that can lead to revenue increase(beside raising capacity, better charter rates) are depending on

1. Global energy consumption
2. Seismic surveying activity(E&P)
3. Compulsory drilling requirements on old license blockage
4. # of rigs in the market
5. Depletion of existing fields

In short, it's all depends on exploration or production of crude oil activities, global economy health, crude oil price and demand and supply of vessels.

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