Investors pile into booming offshore sector

The booming offshore sector, where tonnage is incredibly tight at present, could lay claim to being the most investible sector in shipping today.

A presentation given by Pareto Securities on September 20 showed the OSV sector market cap was up by 2.7 times in the space of just 12 months.

A strong upward movement in offshore vessel utilisation and dayrates coupled with improved demand has pushed Clarksons Research’s offshore index to its highest level for almost 15 years.

The cross-segment rate index, which covers rigs, offshore support vessels (OSVs), and subsea construction vessel dayrates, has exceeded the 2014 peak and is at its highest since the start of 2009.

The offshore index reached 102 points at the start of October 2023. Since 2021, the index has climbed at a pace not seen since the boom years of 2005 to 2008. Increased demand has met constrained supply and, as of this month, the index has just exceeded the peak level seen in mid-2014 – albeit still 10% below the levels at the start of 2009.

Dayrates for both jack-ups and floaters began in 2021 at levels that were a little above opex. But today, floater rates are pushing $500,000 per day whilst those for high-spec jack-ups have exceeded $150,000 per day, both doubling since the start of 2021. Clarksons’ rig-specific dayrate index is up 83% since start-2021 but remains 21% below the 2014 peak and 23% below 2008. However, limited supply is a key factor. Significant scrapping occurred between 2015 and 2020, and owners have generally stated that they will not reactivate cold-stacked units without contracts. Rates could continue to firm as a result.

With offshore rig contracting at the highest it has been in 10 years for both floaters and jack-ups, 15- and 10-year deals are now being awarded. Global utilisation is currently sitting at 92% and around 95% for premium, high-specification assets while contract lead times are also starting to stretch when rig availability becomes sparse.

According to Clarksons, OSVs have also made a very significant rate improvement. This was led by the North Sea PSV term charter market, which has been improving since the first quarter of 2021. In general, demand has been more positive in the PSV sector than for AHTSs and a shortage of large PSV supply has been evident relative to the availability of small AHTSs.

Norway-listed vessel owner Standard Supply said last month it expects rates for PSVs to reach all-time highs in the North Sea in the coming 12 months, one of a host of bullish statements coming from offshore owners in the last few weeks.

However, in 2023, with signs of greater Middle Eastern OSV demand and small AHTS markets east of Suez now improving, all OSV markets are registering gains, and Clarksons’ overall OSV dayrate index is up 30% year over year and 107% since its September 2020 low. The OSV-specific index is now slightly above its 2014 peak but 15% below the highest level reached in 2008.

Subsea support vessel markets, meanwhile, have been amongst the best-performing parts of the offshore sector, with very tight availability in the key North Sea market at times during the 2023 summer season. The index of subsea MSV rate assessments peaked in June 2023, before softening seasonally, at 120% above its late 2020 low point and the highest level since mid-2013 – very much due to an upturn in inspection and maintenance.

The demographics of the OSV fleet show an ageing sector. At the end of April 2023, the average build year of the total OSV fleet stood at 2006. On average, around 240 units joined the market annually between 2007 and 2014, however, this peaked at 290 vessels between 2009-2010. Those vessels cover 54% of the total tonnage while vessels older than 20 years absorb 25% of the total tonnage.

Since 2015 newbuild deliveries have sharply declined. Over the last five years, only 177 units in total have been built and delivered. When observing just PSVs, there were several recent years during which not a single PSV vessel was delivered meaning that there are no five-year-old PSVs. Every offshore cycle ends with an orderbook that is over 30% of the fleet. The orderbook for PSVs is currently at just 2%.

“Considering the almost complete lack of fleet renewal and the fact that the age limitations typically employed by the largest industry operators will soon practically exclude half the fleet – which is far from sustainable and thus something has got to give,” a recent report from Fearnleys stated.

Looking at offshore fleet valuations, Mike Meade, who heads up brokers M3 Marine, said: “There have been a significant number of S&P transactions over the past year, with transactions reducing as supply diminishes. Now we are seeing the value of the transactions significantly on the rise as the younger fleet has been mopped up and the values of older vessels are skyrocketing, albeit from a low base.”

The picture in the offshore markets is far brighter than three years ago. After a prolonged period of weakness through the second half of the previous decade, the near-term outlook for the sector seems well set for now.