What Makes the OSV Operator Still Optimistic in a Very Uncertain Market

Photo: Sugiman Layanto, Managing Director at Wintermar Offshore Marine Tbk

The offshore support vessel (OSV) business has been running unsatisfying for the last five years. Though there is no conclusion yet on how far its impact, but the coronavirus (covid-19) outbreak will totally hit any sectors of economy activity, including in shipping. But, some OSV operators are still optimistic? How?

In its yearly report, one of the Indonesia’s leading OSV player Wintermar Offshore Marine (Wintermar) affirmed the slow growth of the sector in the last five years and future uncertainty due to the crisis of covid-19.

“At this time while the world adjusts to the reality of the economic costs of the COVID-19 crisis, it is not possible to accurately predict what will happen to the OSV industry. What is known is that the OSV industry has already had a 5-year downturn, which has led to consolidation amongst surviving companies and a healthier balance of supply and demand from increased scrapping of OSVs as many highly indebted companies have been liquidated,” Wintermar said in its yearly report.

Within those challenges and business uncertainty, Wintermar presents some opportunities that will give OSV players with optimism, naming at least two aspects: OSV running in longer term charter contracts and the more demand for offshore services from ramp up of oil production.

“As the industry is not directly exposed to retail demand, we believe there will be a lag before the impact of COVID-19 is felt. In the meantime, the projects which have started in the past year were already delayed from the oil crisis of 2014, therefore we expect them to continue,” the report said further.

As the OSV business is on a contractual basis, there has not yet been an immediate impact on the business activity. There are still some projects which are in the tendering stage, and there may be a risk of delay for these if government funding is diverted to the more immediate needs of COVID-19 relief and stimulation packages.

“We have seen in the past that the OSV industry does not have an immediate impact from falling oil prices, as many of the contracts are for long term work and we expect the contracts we have won recently will continue to operate. Because there has been such significant cutbacks investment into offshore exploration and development in the past 5 years, there will be some capacity constraints in the coming years as existing oilfield reserves are being depleted without replenishment,” it said.

According to Wintermar, in the past few months there has been strong demand from Malaysia and Brunei for OSVs due to government led offshore projects which commenced operations. Nigeria and the Middle East have also continued operations.

The Saudi production ramp up will also raise utilization of rigs and OSVs. Due to the shorter investment cycle in shale oil and relatively higher production costs, researchers are projecting that lower oil prices will have a bigger negative impact on the US Shale production than offshore.

But, in the longer term, Wintermar affirmed some probable impacts. “It is evident that the world will experience a significant economic impact from this global COVID19 crisis, and all countries and businesses will have to review and assess their individual responses. We are no different,” Wintermar said in its report.

There may be an impact on the future business if there are significant cutbacks in the level of investment into offshore exploration and development. “Management are monitoring the situation very closely and will adapt to the circumstances as required.”

The recent isolation measures implemented globally to stem the spread of COVID-19 has caused a significant decline in demand for oil and gas. At the same time, OPEC’s market share war has led to a ramp up of oil production, which together with the COVID-19 impact has led to the oil price falling to unprecedented lows.

 

Picking up-Utilization Helps a Better Net Loss

Wintermar’s fleet utilization has picked up gradually over the past three quarters, led by the high tier vessels which have also been awarded some longer-term contracts which have commenced, supporting this company to have a better net loss compared to previous years, according to its report.

Wintermar Offshore Marine has reported results for the 2019 financial year, with a smaller net loss of US$13.3 million for FY2019, a drop of 48% from the previous year, as utilization picked up consistently throughout the year.

In line with fleet utilization which recovered from 46% in 1Q2019 to 77% by 4Q2019, revenue continued to pick up on a quarterly basis, totalling US$15 million in Q42019 from US$14.6 million the previous quarter. This was driven by high tier utilization which reached 85% in 4Q2019.

FY2019 started poorly as the Presidential elections in Indonesia caused delays in project commencement, meaning the vessels which had been prepared for operations stayed idle while operations were postponed until the second half of the year. Due to these project delays, Owned Vessel revenue for FY2019 fell 17% YOY to US$41.4 million compared to the previous year. As a result, the Owned Vessel Division recorded a loss of US$2.75 million for FY2019 compared to a loss of US$0.6 million in FY2018.

Towards the second half, the fleet utilization rose consistently, led by high tier vessels which were employed in drilling projects. Utilization for high tier vessels picked up to 85% in 4Q2019 compared to only 60% in 1Q2019. The Company was awarded a seven year contract (including options) for 2 Platform Supply Vessels supporting drilling in East Indonesia, which was the first long term tender in the high tier vessel market since 2013. Wintermar also successfully tendered for other contracts for over 2 year durations during the past year, boosting the contracts on hand to US$81.5 million by end of February 2020.

Due to the rising utilization of offshore vessels throughout the world, there is starting to be some upward pressure on crew salaries. The Company has tried to maintain some control over crew salary inflation and managed to cap the rise to 1% through exiting some smaller vessel segments. However, there is unlikely to be any more cost savings in crewing costs due to a higher proportion of foreign contracts which are more exposed to salary inflation.

The strongest recovery was in the Platform Supply Vessel segment, and our 4 PSVs have shown nearly 69% utilization for the year. “We continue to be optimistic about this market as deeper water offshore projects are starting to be commissioned in the region, and charter rates in this segment have started showing a slight improvement,” Wintermar said in its report.

The company continued to streamline the owned vessel segment by selling 5 more vessels in 2019 and laying up 6 vessels to reduce maintenance and certification costs. The total fleet size therefore continued to shrink to 48 by year end 2019 from 59 at the beginning of 2019. Most of the shrinkage in fleet resulted from selling and laying up low tier vessels.

Building on management strategy to increase fee-based income, more chartering business was won, resulting in a 33% increase in chartering revenue to US$11.28 million for FY2019 and a doubling of gross profit from Chartering to US$1.2 million for the year, compared to FY2018.

Other value-added services fell in tandem with Owned vessel revenue, booking revenue of US$3.4 million (26%YOY) but still recorded a gross profit of US$0.3 million.

Total Direct costs fell 7%, largely driven by a fall of 12% in Owned Vessel direct cost. All cost categories recoded double digit reduction except for crewing due to cost pressures on crew wages as the industry has been picking up globally.

Total Gross Losses for the full year 2019 were US$1.27 million, compared to a profit of US$0.96 million in FY2018.

Source: Wintermar Offshore Marine Group

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