The case for OSV Newbuilds

A decade ago, the offshore support vessel market saw newbuilds practically flying out of the docks as the industry seemed to know no bounds to its potential growth. Back then, “sky’s the limit” and anyone saying otherwise was simply left behind as there were far more people eager to participate in the circus than realizing that it was getting out of hand.

When the offshore activity hit a proportionally hard stop towards the end of 2014 and into 2015, the PSV newbuild orderbook stood at a record-high number of 360 vessels, around 30% of the total fleet. Especially large-capacity vessels were ordered in droves, and while the total PSV fleet grew by around 50% between 2010 and 2015, the number of units with more than 4,000 DWT grew by 250% in that same period. And while these numbers are significant in themselves, the orderbook delivery schedule at the time had PSV fleet growth at more than 150 and 400% respectively in the same period!

In the years thereafter, the OSV market struggled with devastating oversupply, not just in light of the far weaker market activity in the years following 2015, but even compared to the peak vessel demand in 2014. Regardless, the shipyards continued building already ordered units, and close to 200 PSVs have been delivered in the wake of the market crash.

As a result, at the trough of the market, in 2017, as much as 40% of the total supply fleet was laid up around the world, with dayrates suppressed to levels accordingly. Since then, however, less a Covid-19 induced detour, the market has recovered to a significant degree.

While there is admittedly still a rather large number of cold-stacked OSVs, the majority of these units are considered non-commercial due to their age, lay-up duration, and condition. Arguing to this effect is the fact that the market has been able to improve to the degree that it has while said vessels remain idle.

As the optimism in the OSV market continue to climb, addressing the elephant in the room become increasingly important. Newbuild orders has, perhaps unsurprisingly, been close to non-existing since the market deteriorated, leading to stagnated fleet growth and aging vessels.

Our market forecasts suggest strong cash flow earnings across most OSV segments, representing a change in most vessel owners’ financial situation compared to recent years. It is likely that shipowners will prioritize the free cash flow for servicing existing debt obligations and potentially treat themselves with dividends or share repurchases initially, as the financial flexibility in recent years has been limited.

Now faced with these vastly improved prospects, it is crucial to understand what market conditions are required for newbuilds to become commercially justifiable. Furthermore, it is also vital to consider how other market elements come into play for this exercise, including cost developments such as newbuild cost, operational expenditure, cost of, or even availability of capital, and lead times.

Analyzing the AHTS, PSV, and CSV markets, we note distinct differences in the supply and expected demand per segment. But in addition to fleet balance, these vessel segments have also seen different developments in respect to the above-mentioned market elements. As such we expect that the newbuild activity will vary despite the OSV market having improved overall.

In our view, the AHTS market is the least likely segment to see newbuilding activity due to the current market balance. With still some way to go on the demand side for the utilization to reach a level that generates satisfactory strong cash flows, it is unlikely that vessels will be placed in the near-term. Furthermore, the newbuilding costs in this segment is also significantly up from the last cycle. Thus, with both current term dayrates and utilization falling short of the required levels to justify the required investments and other associated cost for this vessel type overall.

It should, however, be noted that there are very different use cases for large-, medium-, and small-capacity anchor handlers both historically but even to a larger degree going forward. As commercial-scale offshore floating wind is set to kick off from 2025 onwards, we expect an additional demand driver for the high-end AHTS fleet that can lead to significantly tighter market balance in favor of the vessel owners.

The PSV market, especially considering the high-capacity units, appears more attractive than the AHTS segment. In fact, the number of working PSV with a capacity exceeding 4,000 DWT has never been higher. This has led to term dayrates for this segment specifically improving dramatically in the last 18 months. However, when examining the newbuild potential in respect of the aforementioned cost parameters, we find that here as well the market conditions have not improved enough to warrant newbuild orders quite yet.

We also need to note the upcoming EU Emissions Trading System that will come into effect in the coming years, leading to high technological risk due to the uncertainty of fuel and cost of operations. Hence, this is expected to serve as a delaying element in the newbuilding process.

The subsea construction support vessel segment on the other hand looks more promising when reviewing the cost development of newbuilds, market balance, and subsequent dayrate trajectories. Moreover, considering Norwegian shipyards’ position in this vessel class, where most high-end subsea construction vessels, and around half of all CSV tonnage were built herein, one could argue a favorable currency effect at present. Due to the relatively weak NOK when quoting the construction cost in USD, we find that in the current market environment allows for an interesting entry point at present compared to historical costs.

Furthermore, with a fleet growth that has almost come to a halt in recent years due to lack of deliveries and several high-end assets sold out of offshore, among them to government bodies recently, we note a significant tightness in the construction segment going forwards. Hence, the market balance in the CSV segment could possibly justify fleet additions in the years to come. The key limitation, however, remains available credit and high entry point, considering building assets in the 250-ton AHC crane segment would entail an investment cost significantly higher than that of the supply segment counterparts.

In summary, we currently see some way to go for the rates and overall utilization to justify OSV newbuild orders. Factors such as the pace of capacity deployment within offshore wind, banks stance on credit and emissions regulations will have an impact, leading to major complexity in the decision-making process towards actually placing newbuilds. That having been said, there are definitely justifiable cases within the industry in certain vessel segments, albeit far from the scale seen historically.