This article first appeared in The Edge Malaysia Weekly on January 15, 2024 - January 21, 2024

THE offshore support vessel (OSV) sector has been waiting a long time for the tide to turn after a slump of many years. The time appears to be now, as oil majors globally ramp up their capital expenditure investment, especially for offshore activities, increasing the demand for OSVs.

“Many people don’t understand the OSV industry. I often tell people that unless you can walk on water, you’re going to need OSVs. It is one of the most essential segments for offshore activity,” observes a player in the industry.

Not only that, the global shortage of vessels has moved charter rates to levels that would put a smile on the faces of OSV owners. Spot charter rates have risen by 10% to 20% in 2023, a similar quantum of increase that was seen in 2022.

Many believe that charter rates will continue to rise this year as OSV supply remains limited.

“I wouldn’t be surprised if spot charter rates might have the same quantum of increase this year as in 2023, as Malaysian flagged OSV fleets are in tight supply. Furthermore, many of the regional vessels are moving to the Middle East, where there is also strong demand from Aramco and Adnoc (Abu Dhabi National Oil Company),” says Malaysia OSV Owners’ Association (MOSVA) president Jamalludin Obeng (Jamal), who is also the managing director of Perdana Petroleum Bhd.

This means that the OSV sector, which saw low charter rates crimp profitability, could see brighter days ahead.

Upstream activities in the Middle East have been rising as upstream budgets in the oil rich nations grow with higher investment in offshore facilities and assets.

Last December, Erik Tonne, the managing director (shipbroking, offshore and renewables) of the world’s biggest shipping service provider Clarkson plc, was reported as saying that offshore spending in Saudi Arabia, the United Arab Emirates and Qatar could rise more than 25% through to 2025 compared with 2022 budgets.

Activity is picking up in other parts of the world due to many years of underinvestment. In Malaysia, the Petronas Activity Outlook 2024 to 2026 (PAO 2024-2026) has indicated a brighter outlook for the OSV segment as well.

In the PAO 2024-2026, Petroliam Nasional says it targets to sustain and grow Malaysia’s oil and gas production of two million barrels of oil equivalent per day by 2025 and beyond, which will be supported by projects such as Kasawari, Jerun, Rosmari-Marjoram and Lang Lebah, Gumusut-Kakap Redev and Belud Clusters, among others.

“In the coming years, over 45 upstream projects are to be executed and more than 25 wells are expected to be drilled per annum, focusing on shallow water wells in West Malaysia and Sarawak, and deepwater wells in Sabah,” RHB Research says in a Dec 21, 2023 report.

The POA also forecasts that the number of vessels to support drilling and projects will increase 29% to 249 in 2024 from 193 in 2023 while the number of vessels supporting production operations is expected to increase to 148 from 144.

“The higher demand in 2024 mainly comes from anchor handling tug and supply (AHTS), fast crew boats (FCB), platform supply vessels/straight supply vessels (PSVs/SSV) and work barges. We believe this will improve overall vessel utilisation for local OSV players such as Perdana Petroleum Bhd, Icon Offshore Bhd, Alam Maritim Resources Bhd and Marine & General Bhd,” says RHB in its report.

Kenanga Research has also weighed in on the issue. In its Dec 27, 2023 report on the sector, it says it expects daily charter rates to remain robust in 2024 as a result of supply tightness both locally and globally.

“Underspending by OSV and rig owners due to ESG (environmental, social and governance) initiatives have constrained new-builds for OSV and drilling, resulting in a significantly reduced supply of vessels and rigs in the market. This bodes well for existing OSV and drilling rig owners with working assets due to the lack of alternatives,” it says.

It is also worth noting that there have been no new-build orders for new assets since 2019 owing to uncertainties, says Kenanga Research. Furthermore, the research house points out that no major player has announced fleet expansion plans, which further reinforces the expectation that the spot charter rates market is expected to strengthen with an increase in upstream spending.

MOSVA’s Jamal says the biggest challenge for the OSV industry is financing. “One of the main challenges the Malaysian OSV industry is facing is financing — getting support from the local financial institutions especially for construction of new vessels. Banks are clouded by the past experience in the O&G  (oil and gas) industry and there is also this question of how green we (OSV industry) can be. A few OSV players have opted for a hybrid vessel model, but it has not been widely established yet what the future of OSV engines will be.”

Some investors may have started to pick up on the trend in the OSV industry. Over a six-month period, Marine & General, Icon Offshore and Perdana Petroleum have all seen share price gains, with Icon Offshore’s share price increasing nine times, closing at 69.5 sen last Thursday, while Marine & General and Perdana Petroleum gained 32% and 26% respectively. Only Practice Note 17 (PN17) company Alam Maritim has remained flat at three sen over the same period. 

Meanwhile, OSV owners are already reflecting the impact of the higher charter rates in their accounts. Take, for example, Perdana Petroleum. Its net profit for the third quarter ended Sept 30, 2023 doubled to RM22.76 million from RM11.41 million a year earlier, while revenue rose 49.7% to RM103.92 million.

The company attributed the higher profit to improved spot charter rates following an upward trend in offshore production operations that resulted in a higher demand for offshore support vessels, better contribution from the chartering of third-party vessels and ancillary chartering services activities, as well as a lower net realised and unrealised foreign exchange loss in the current quarter.

For the first nine months of FY2023, it made a net profit of RM23.15 million on RM215.19 million in sales, in contrast to a net loss of RM9.13 million on revenue of RM141.42 million in the previous corresponding period.

Icon Offshore reported a lower net profit of RM6.21 million for the third quarter ended Sept 30, 2023, compared with RM7.65 million a year ago. Revenue was also 25% lower at RM58.49 million compared with RM78.51 million previously.

However, the lower reported earnings and revenue were due to the loss of income from the disposal of its jack-up rig business in November 2022. It is currently left with its OSV segment.

Icon Offshore says in its financial performance announcement that comparing the OSV segment against the same period a year ago, OSV revenue saw an increase of RM5.6 million due to higher daily charter rates. However, net profit for the segment declined by RM300,000 compared with a year ago due to higher depreciation as a result of the change in useful life of the vessels from 25 years to 20 years.

At Marine & General, its upstream division — which constitutes 75% of the group’s revenue — recorded a 12% increase to RM68.2 million thanks to higher charter activities and charter rates. Profit before tax for the segment was, however, lower at RM11.9 million from RM22.1 million a year ago due to non-recurring adjustments from the extension of useful life of its OSVs from 15 years to 20 years in the corresponding period in the previous year.

As a group, it reported a 12% increase in revenue to RM91.83 million for 2QFY2024 but net profit halved to RM8.22 million compared with a year ago.

PN17-status Alam Maritim Resources Bhd saw a turnaround in its first quarter ended Sept 30, 2023, recording a net profit of RM2.7 million against revenue of RM29.66 million. Its OSV segment saw a 45% increase in revenue, thanks to higher spot charter rates but was dragged down by the 87.5% decline in its subsea services/offshore installation and construction (OIC) segment. As a result, group revenue was 67% lower in the quarter compared with a year ago.

Its OSV segment’s loss before tax narrowed to RM674,000 as charter rates and utilisation rates improved, from RM4.93 million previously. Meanwhile, its subsea/OIC segment saw profit before tax more than double to RM3.45 million from RM1.61 million previously, largely due to a higher share of profit from a joint venture.

All eyes will be on the earnings of the OSV players in the quarters ahead to see how they will fare in a market of tight supply and higher rates. 

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