Stocks that Float: TANKERS & DRY BULK SHIPPERS

[xanadu90]

More information about offshore services: Boat types ATHS, OSV/PSV

The Offshore Supply Boat Sector
by Dan Barrett


Sector Background

The offshore supply boat sector provides transportation services to offshore drilling rigs, fixed platforms, and floating platforms. The main services provided are: 1) Delivering drilling supplies, fuel, water, and food. 2) Moving personnel to, from, and between offshore installations. 3) Towing rigs from one location to the next and placing or retrieving its anchors. 4) Providing safety and emergency response services and, 5) Supporting offshore construction projects.

Boat owners charge a daily fee for the use of a vessel. The rate depends upon a multitude of factors. Those factors include: the type of boat, the length of the contract, the supply/demand balance at the time of the contract, and where the boat is located (e.g. W. Africa, Gulf of Mexico, etc.). Boats can trade the spot market, meaning contracts are short in duration and only last as long as the task at hand or they can be on long-term contract, ranging in length from a few months to a few years. In the Gulf of Mexico and the North Sea boats typically trade on the spot market, but places like West Africa and Brazil typically have long-term contracts. Crew boats typically charge the least, followed by supply boats and then anchor handlers. Rates can range from as little as $2000/day for a crew boat during lean times to $40,000/day for an anchor handler during peak times. We describe boat types, typical rates, and regional differences in Section 3 of this report.

The supply boat market is cyclical with a high degree of operating leverage. This is a tough business to operate. Business volumes, measured in operating days per vessel, can climb or fall 15% or more during periods of rapid expansion or contraction. For example, during the crash from Mar-98 to Mar-99, Tidewater, the biggest supply boat company, saw its operating days per vessel drop 15%. This business also has a high degree of operating leverage. About 70% of the daily cash operating costs are fixed, so changes in activity levels have a dramatic effect on profitability. Again using Tidewater as an example, from fiscal 2001 to fiscal 2002 revenue climbed 18% but operating income increased 133%.

The industry has been plagued with over-capacity. There was a massive boat building boom in the late 1970s and early 1980s when the oil industry was experiencing record oil prices and activity levels. Many of those boats are still with us today and, over the past 20 years the excess capacity was only absorbed twice (1997 and 2001). However, the expected useful life of a boat is around 25 years, so we should see a fair number of boats leaving the market over the next 5 years. The health of the supply/demand picture in 5 years will depend on how many new boats are built between now and then where demand stands. We think that the situation will be marginally better but market power will likely still favor oil companies. We discuss our expectations in greater detail in the outlook section of this report.

Barriers to entry – they have risen substantially over the past 25 years, but are still relatively low. In the early 1980s, if a group of affluent individuals wanted to invest in the booming oil business, they could raise three million dollars, build a boat, find an ample supply of captains and crew, and presto, they were in the supply boat business. Things have changed since then, but not drastically. It would cost about $20-$40 million to build a competitive boat today, depending upon its type and features. Crews would be harder to find as technical and regulatory requirements have increased markedly and the supply of skilled personnel has declined significantly. Nevertheless, those barriers are far from being insurmountable. An industry veteran with access to capital can easily jump into the business. For example, Larry Rigdon, who founded Rigdon Marine after losing his bid to become CEO at Tidewater, is on his way to having 10 state of the art supply vessels in the Gulf of Mexico.

Boats are a commodity item. Although there are substantial differences between boats built today and those built 25 years ago, there is little to differentiate between two new boats or two old boats. Even the decision to use a new boat or an old boat for a particular job boils down to the overall economics. Therefore, boat owners compete primarily on price. The underlying reason is that there is nothing extraordinarily proprietary about a boat’s design or abilities. If one company can design a boat to carry 5000 tons of cargo and discharge fuel and water at 1000 gal/minute, so can the next company.

Boats Types

There are many different types of boats that provide services to the oil & gas industry. Some are designed to transport crews to, from, and between oil rigs and platforms, while others are used to deliver supplies to rigs or tow a rig from one location to another. The line between different asset classes can become blurred as many boats are built with functionality that crosses over into another boat’s domain. Below we describe the main types of vessels used in the oil industry, the evolution of each, and factors that affect day rates.

Anchor Handling Towing Supply (AHTS)
Anchor Handling Towing Supply vessels, or AHTS vessels, tow rigs from one location to another and are equipped with powerful winches which are used to lift and position the rig’s anchors. In addition, many can carry moderate amounts of supplies such as drilling fluid or drill pipe and also support offshore construction projects. Variations of the AHTS vessel include those that can only handle anchors and tow rigs (i.e. they can’t carry supplies) and others that can only do towing work. AHTS vessels are usually specified in terms of horsepower (BHP) and towing capacity.

The current size of the AHTS fleet at 1562 vessels with another 120 on order, according to Clarkson research. Almost 75% are over 20 years old. We do not believe that all 1562 are still working in the oil industry and would not be surprised to find out that many of those boats are not actively employed or that they are in such a state of disrepair that they will never work.

New generation, deep-water capable vessels typically have much greater horsepower (at least 8000 BHP) and winch strength (at least 250 tons). Winch strength determines the size of an anchor and the maximum depth to which it can be placed. In addition, their winches also have longer spooling lengths, which are needed to place anchors in deeper waters. Most have dynamic positioning capability (although that is not an absolute requirement). Dynamic positioned vessels use global positioning systems and computer controlled propulsion systems that allow the boat to maintain an exact position, regardless of wave and wind forces. In addition, a vessel that is typically built today can carry more supplies than its 25-year-old peers.

Offshore Supply Vessels (OSVs)
Offshore Supply Vessels, or OSVs, deliver drilling supplies such as liquid mud, dry bulk cement, fuel, drinking water, drill pipe, casing and a variety of other supplies to drilling rigs and platform. OSVs are also referred to as PSVs (Platform Supply Vessels) – they are the same thing, although some industry participants like to think of a PSV as the larger version of an OSV. Offshore supply boats are usually specified in terms of cargo carrying capacity, measured in dead weight tons (dwt), but it is more common just to specify the boat by its length (in general, the two specifications are highly correlated).

We estimate the size of the current OSV fleet at about 1014 boats, with another 84 on order. Sixty-three percent of the fleet is over the age of 20 years. We do not believe that all 1014 are still working in the oil industry and would not be surprised to find out that many of those boats are not actively employed or that they are in such a state of disrepair that they will never work.

The majority of boats in service are old, legacy boats built during the boom in the late 1970s/early 1980s. A typical boat from that era is about 180 ft. (55m) long, can carry about 1200 barrels of liquid mud and about 1000 tons (dead weight tons, or dwt) of deck cargo. In addition, keeping this type of boat on station beside the rig or platform was closely tied to the captain’s ability to read the wind and waves and make adjustments using a single bow thruster and an antiquated control system. New generation boats can carry three to ten times as much liquid mud, two to four times as much deck cargo and the captain has a joystick and computer assisted global positioning systems with multiple thrusters to control the boat. We summarize the differences between the boats built in the late 1970s and early 1980s relative to boats built today in Table 4 below.

One important point worth mentioning is that not all new generation boats are deepwater capable. This is particularly true for OSV class boats. New generation OSVs that are not deepwater capable are still much superior to their older 180 foot peers. However, they still cannot challenge new generation deepwater boats when competing for work in deepwater environments. We believe that most new boats under construction will be deepwater capable (but not all). Tidewater, the largest player in the industry has a relatively large number of new generation boats that were not designed for the deepwater.

Crew Boats
Crew boats transport personnel to, from, and between offshore rigs and platforms. These boats are much smaller than their AHTS or OSV cousins, and can range in size from 75 ft to 190 ft (23m – 58m). Crew boats are generally specified by cruising speed. The smallest boats (75 ft) are typically used to transport crews between offshore installations and not to and from shore.

Newer generation crew boats, called Fast Supply Vessels (FSV) can also carry very limited amounts of supplies and as such are often used for emergency or time sensitive deliveries of supplies in addition to transporting crews. Differences between old, legacy crew boats and new generation boats are shown in Table 5 below. We believe that there are at least 500 Crew boats worldwide.

Standby / Rescue Vessels
Standby/Rescue boats typically operate in the North Sea due to regulatory requirements. These vessels are required to remain in the vicinity of offshore rigs and platforms in order to provide emergency response services, such as personnel rescue, fire fighting, and first aid. There are about 235 of these vessels in service and we believe the vast majority are located in the North Sea as we are not aware of any other region with the same regulatory requirements.

Other Types of Vessels
There are a variety of other types of vessels used by the oil & gas industry, Vessels include:

* Utility/Workboats, which perform a lot of work in support of offshore construction projects.
* Survey vessels, which collect geophysical data.
* Well stimulation vessels, which perform fracturing and acidizing of producing wells.
* Multi-Purpose Supply Vessels (MPSV) which can provide and combination of remote subsea intervention services, remote operated vehicle (ROV) operations, deep-water lifting & installation, delivery of supplies, fire fighting, and oil spill recovery.

In addition, there are other boats that carry out maintenance work, pollution control, and diving support.

There are over 700 of these various types of vessels worldwide.

Market Outlook and more

Click here to download a full report (1 MB) including Outllook, Day Rate Analysis, and more information pertaining to the Offshore Supply Boat Sector.

Dan Barrett is a Senior Analyst of the Oil Services and Shipping industries for Fortis Bank. To contact Mr. Barrett directly you can email him at [e-mail] or by phone at [phone].

brought to you by Rigzone.com
URL: http://www.rigzone.com/news/insight/insight.asp?i_id=163