In order for the offshore service vessel market to turnaround, overcapacity must be addressed.
That was the message Quintin Kneen, the president and chief executive officer of Tidewater Inc., the world's largest OSV operator, delivered Thursday at the International Workboat Show in New Orleans. Kneen, who assumed the top job at Tidewater several months ago, had come to the Houston-based OSV operator after a lengthy stint at GulfMark, which was acquired by Tidewater in 2018 following financial restructuring at both companies.
As a result of the offshore energy downturn now in its fifth year, the financial environment in the OSV business can only be described as “bruising.” Indeed, Kneen’s experience at Gulfmark (which he led from 2013 up until the November 2018 merger with Tidewater) informs greatly on his outlook. For the OSV business to turnaround, “consolidation” will be vital in Kneen's view. Indeed, he described Tidewater as a “consolidation machine” —acquiring newer vessels and scrapping older units, with a mission of being profitable.
Kneen said that further consolidation must be fueled by deals that make sense financially. “It does not make sense for us to consolidate with a company having a high level of debt,” he stressed. With his slide deck showing a roster of industry leaders, most with extremely high debt levels, it may be inferred that further acquisitions may come in conjunction with restructuring. Besides being selective financially, Tidewater is also focusing on internal efficiencies and has been able to “focus on regions where we can make money.” Rather than operate everywhere, he stressed that “it’s about being the most profitable.” Regions where Tidewater has increased its presence include the Gulf of Mexico, the North Sea/Mediterranean and West Africa.
In Kneen's view, the industry’s overcapacity extends beyond vessels into the realm of the executive suite, with too many management teams with too much debt supporting too many vessels. He said that the number of vessels scrapped by Tidewater in the past 18 months is comparable with the number of vessels acquired from GulfMark. Kneen lamented the lack of scrapping, which he suggested is caused by the thinking that there is always some hope. He said that many older units will be “scrapped in place,” meaning that with expensive reactivation costs (which he pegged at $1.5 million/vessel typically, with a 45-day timeline), these OSVs will never return to service. “Nearly 40% of all stacked vessels are 20 or more years old, and are effectively obsolete,” Kneen said, adding that many vessels on order might never actually deliver.
He did offer a glimmer of hope, with industry demand improving and high spec PSVs at the forefront of the recovery. For larger PSVs, leading edge day rates are reaching up to nearly $18,000 in the Gulf of Mexico, compared to about $11,000 a day three years ago. In the North Sea, Kneen compared charters today of nearly $15,000 a day with those at the 2016 nadir of less than $7,000. While these may not be fully compensatory, these present charters — trending upwards, are importantly, covering operating expenses.