EARLY last month, Houston-based Tidewater Inc president and CEO Quintin Kneen said this year marked an inflection point for the offshore support vessel (OSV) industry — a key component of the oil and gas (O&G) exploration sector, which has spent the last eight years or so in limbo.

Kneen’s insights are often taken seriously as he helms Tidewater, the largest OSV operator in the world with 203 ships. With its shares trading at just above US$22 apiece, the company’s market capitalisation is just over the US$1 billion (RM4.48 billion) mark.

When announcing Tidewater’s financials for its second quarter ended June 30, Kneen said, “We believe the second quarter of 2022 marked the inflection point in the industry that we have long awaited and is now evident in our financial performance. Revenue, gross margin, average day rate and utilisation all improved meaningfully during the second quarter as the building momentum in offshore vessel activity reached critical mass.

“The average day rate improved by nearly US$1,900 per day sequentially, which is in excess of the improvement we would typically expect to realise over the course of an entire year in a normal market up cycle ... We expect activity to continue to improve throughout the remainder of 2022 with another likely step-up in 2023.”

According to Tidewater’s press release, average daily charter rates in the second quarter strengthened 17% quarter on quarter to US$12,544, and last hit such levels in the third quarter of 2016.

Nevertheless, the company was still in the red, having suffered an after tax loss of US$37.7 million on the back of US$269.2 million in revenue for the six months ended June 30. For the corresponding period in 2021, it suffered a net loss of US$64.8 million from US$173.5 million in revenue.

On the home front, however, local OSV players have not been able to fetch such high charter rates as cabotage laws are preventing Malaysia-flagged ships from securing jobs in other countries. Whether the inflection point will be felt by the local players will depend on various factors.

Challenging times for local players

The three local pure OSV players — Icon Offshore Bhd, Perdana Petroleum Bhd and Alam Maritim Resources Bhd — have definitely seen better days.

Alam, for one, has suffered losses for seven straight financial years. For its consolidated financial year ended June 30, it suffered a net loss of RM190.73 million from RM277.89 million in revenue.

As at end-June, the company had cash and bank balances of RM55.38 million while its short-term and long-term debt commitments stood at RM106.11 million and RM3.09 million respectively. Its accumulated losses came to RM382.38 million.

At the time of writing, Alam’s shares were trading at 3.5 sen each, which translates to a market capitalisation of RM45.95 million.

Perdana has been in the red for seven consecutive years as well. For the six months ended June, it had a net loss of RM20.54 million from RM71.99 million in revenue.

The company’s cash and cash equivalents at end-June were only RM14.82 million, while its short-term borrowings and long-term debt commitments stood at RM19.89 million and RM41.25 million respectively. It also had negative reserves to the tune of RM337.29 million.

There is speculation that Icon Offshore may exit the OSV business and divest its fleet, but this remains to be seen. Bumi Armada Bhd has already trimmed its fleet to seven OSVs from the 49 it had in 2016.

Many other players are also disposing of their OSVs as their vessels age. Perdana, for instance, has eight anchor handling tug supply (AHTS) vessels, all of which were built in 2008/09. This means the vessels are approaching the 15-year cap set by Petroliam Nasional Bhd (Petronas).

Things could pick up

OSV players’ earnings could pick up, depending on the outcome of ongoing negotiations on higher charter rates between national oil company Petronas and the various players in the many segments of the O&G sector.

There are also negotiations to increase the age of vessels allowed to participate in tenders. For instance, the cut-off age for AHTS is 15 years but there are ongoing talks to increase it to 20 years.

Late last month, Petronas president and group CEO Datuk Tengku Muhammad Taufik confirmed that renegotiations between Petronas and various contractors and service providers were ongoing.

“Daily charter rates [for OSVs] have increased due to rising demand while the cost of [chartering] OSVs soared by 30% to 40%. We are looking at contract strategy and access to finance, and we will always take into account the market rates,” he said.

However, he remained tight-lipped on the quantum of the rate increase for existing contracts and the timeline for the negotiation process. Muhammad Taufik told The Edge on the sidelines of the press conference that the rates would be reflective of market conditions yet be “prudent throughout the cycle”.

“Equally, the OGSE (oil and gas, services and equipment) players must also work together towards shared prosperity. It may seem to be asymmetrical given the numbers you are seeing, but we need to look at it in the long-term period to make sure the returns are equitably shared to ensure that we go through the full cycle … If we are going to work in partnership, we are going to have to go through cycles because [oil prices] are not going to be above US$100 forever,” he told the media during the press briefing on Petronas’ 2Q financials.

He added, “Costs are a lot higher than expected and have put a lot of pressure on Petronas when it comes to sanctioning projects because even though oil prices are high, Petronas needs to take a long-term view … That does mean as we go to the market and we look to share risks with contractors, a lot more stringent cost estimations need to be locked in.”

Petronas has been doing well, buoyed by the higher oil prices.

For the six months ended June 30, Petronas chalked up an after-tax profit of RM46.4 billion from RM172.1 billion in revenue. For the previous corresponding period, the national oil company registered an after-tax profit of RM18.8 billion on RM109.6 billion in turnover.

With the better showing, largely brought about by higher oil prices, Petronas recently announced an additional RM25 billion in dividend to the government, doubling the year’s pay out to RM50 billion.

Petronas’ strong performance is in stark contrast to that of the OSV industry, which has been bleeding losses despite the availability of contracts.

In its Activity Outlook for 2022, the national oil company has indicated that it will need 138 vessels to support production operations and 198 vessels to support drilling and projects (see chart).

The main issue faced by OSV operators is low charter rates, brought about by Petronas’ Cost Reduction Alliance 2.0, or Coral 2.0, which commenced in 2015 and ended in 2019. In 2017, it was reported that Coral 2.0 had resulted in a cost savings of RM5 billion for the national oil company.

In a nutshell, Coral 2.0 was a five-year cost optimisation programme that came about when oil prices tumbled. It involved Petronas working with its petroleum arrangement contractors (PACs) and OGSE providers.

To recap, Brent crude was trading at US$145 a barrel in mid-July 2008, but it tumbled to US$26 in February 2016. After several short-lived rallies, oil plunged more than 65% to US$20 a barrel in April 2020 — its lowest since early 2002.

Brent crude has been trading higher lately and is now at about US$95 a barrel, having fallen below US$100 in late August. The commodity averaged at about US$95.43 a barrel over the past 12 months.

Despite oil prices having strengthened, the charter rates for OSVs have yet to pick up.

An industry player says that in 2018 and 2019, the charter rate for a 60-tonne AHTS was RM20,000 a day, with OSV players taking a cut of between 30% and 50%. The current charter rates for the same type of vessel are between RM26,000 and RM28,000 a day. “Any increase is very much welcome,” he adds.

Mosva’s take

The low charter rates for OSVs and the 15-year cap for AHTS, which are currently being renegotiated, could have a big impact on OSV players.

When asked about the renegotiation of daily charter rates with Petronas, Malaysian Offshore Supply Vessels Owners Association (Mosva) president Jamalludin Obeng, in a brief chat with The Edge, says: “Petronas has agreed to discuss the issues that the players are facing, and we hope to receive a positive outcome soon to ensure the sustainability of the OSV ecosystem in Malaysia. It took many years to build up the current ecosystem, billions in capex has been injected to build the assets.

“While we have seen some improvement in rates, especially for the spot charters, many OSVs players only enjoyed incremental improvement in rates, especially those supporting the EPCC (engineering, procurement, construction and commissioning) contractors, as those rates are still tied to the so-called ‘legacy rates’ that were set back in 2018/19, when crude oil prices were depressed.”

Jamalludin says that due to the geopolitical issues since early this year, OSV players are bracing for higher operating costs in the face of higher bunker prices, which have gained about 100%, and growing inflationary pressure that has adversely impacted bottom lines.

“The cost to maintain and operate vessels has gone up due to the spike in energy prices, higher machinery and equipment costs due to a weaker ringgit against the US dollar and other currencies, as well as higher logistics expenses,” he points out.

According to Jamalludin, Petronas has been receptive to the negotiations. “Discussions are ongoing and, of course, we need to assess this matter seriously from an HSE (health, safety and environment) perspective too,” he says.

The initial idea is for the age cap to be increased to 20 years. This would be meaningful as about 60% of the OSVs that are in service in Malaysia are 11 years old on average.

“The last fleet build-up of new OSVs in Malaysia was from 2012 to 2014 before the oil price plunge. We need to ensure the sustainability of the key OGSE players in the country to support the long-term growth of the O&G sector,” says Jamalludin, who is managing director of Perdana.

Financially strapped players

Jamaluddin says the association has reached out to the Ministry of Finance to suggest incentives for the OGSE sector in the upcoming federal government budget, as the industry has taken a beating since the collapse of oil prices in 2014. The margins for OSVs are single digit despite the high risks involved.

Malaysian banks have been wary of funding O&G companies due to the volatile oil prices amid other industry-wide challenges, and even more so after the fall of highly geared Sapura Energy Bhd, the many issues at Serba Dinamik Holdings Bhd and several problems at Barakah Offshore Petroleum Bhd.

More recently, TH Heavy Engineering Bhd, an oil and gas fabricator that is 65% controlled by Minister of Finance Inc, had its application for a ninth extension to submit a regularisation plan rejected by the stock exchange regulator. The company’s stock will be delisted on Sept 5, after being placed in the cash-strapped Practice Note 17 category since April 2017.

Due to the difficulty of obtaining funding, some OSV players have resorted to taking loans at high interest rates from their parent companies.

Icon Offshore states in its FY2011 annual report that its wholly owned Icon Fleet Sdn Bhd had taken a RM174.2 million loan from state-controlled Yayasan Ekuiti Nasional at 11% interest per annum to purchase a jack-up drilling rig. Yayasan Ekuiti Nasional, via wholly owned Hallmark Odyssey Sdn Bhd, has a 56.06% stake in Icon Offshore.

With so many issues facing the fragmented OSV industry, perhaps Petronas could nudge the players to consolidate. Since 2015, when Tan Sri Shamsul Azhar Abbas was president and group CEO of the national oil company, he had mooted consolidation of the fragmented sector.

Other than SapuraCrest Petroleum Bhd and Kencana Petroleum Bhd, which morphed into Sapura Energy Bhd in 2012, and Dayang Enterprise Holdings Bhd taking a controlling stake at Perdana in 2015, there have been no major consolidation exercises in the sector.

In 2017, Velesto Energy Bhd — in which state-controlled Permodalan Nasional Bhd, both directly and via its units, has a shareholding of about 55% — was slated to merge with Icon Offshore, but the deal fell through.