Must-know: Why Omega Advisors' 13D filing discloses new position (Part 4 of 4)
Increased demand for platform supply vessels
Nordic American Offshore (NAO) expects that the demand for vessels in the Barents Sea, the Arctic regions, and potentially offshore Greenland will continue. Its initial public offering (or IPO) filing said, “As the worldwide growth in the rig count is expected to outpace the growth of the PSV fleet in the coming years, the demand for PSVs should increase. Additionally, we believe there will be higher utilization for PSVs in the North Sea market during 2014 as vessels leave the North Sea for other regions.” The company added that available platform supply vessels (PSVs) in the North Sea are being chartered for international deep water activity such as West Africa and Brazil, and offshore activity in Arctic areas such as Canada and Russia.
NAO noted that, “PSVs are becoming more and more relevant as a support vessel worldwide, as the oil and gas recovery is moving into deeper waters and more remote locations.” Also, oil companies have been focusing more on health, safety, and environmental issues, including reduced environmental impact that has driven demand for larger and newer PSVs having new technology and equipment.
According to a quarterly insight from IHS, the number of PSVs being built and ordered is more than the current demand forecasts. IHS added that the “forecast for large PSVs shows a need for 75 additional vessels by the end of 2017, far fewer than the current supply scenario of more than 200 vessels.” An increase in supply could lead to lowering of charter rates and utilization rates, which in turn, would impact revenues.
The company further said the “demand for offshore assets fluctuate with the level of offshore exploration and production spending, or E&P spending, carried out by the major oil companies. In the last decade, E&P spending has increased significantly, growing by about 15 to 20% per year on average.” Newswires cited a recent report from Barclays titled “Global 2014 E&P Spending Update” and said that exploration and production (E&P) spending is expected to rise by 6% this year to $712 billion driven by small, independent oil and gas companies. The U.S. is expected to see an increase in deployment of capital because of geopolitical risks in other regions, especially Iraq.
NAO peer Tidewater (TDW) said in its 10Q filing that surveys by some oil and gas industry analysts of 2014 E&P expenditure (both land-based and offshore) have pointed out that global capital expenditure budgets for E&P companies are forecast to increase by 4%–6% this year over calendar year 2013 levels, with global offshore spending expected to grow at a considerably faster rate than global onshore spending. The trend could benefit other offshore support vessel (or OSV) companies such as Hornbeck Offshore Services (HOS), Gulfmark Offshore (GLF), and Seacor Holdings (CKH).
According to NAO, key fundamental risks to the OSV market are the oil price and the size of the PSV fleet. A stable high oil price is a condition for new investments in offshore oil and gas fields, especially in remote areas. A lower oil price may reduce the activity level and the demand for support vessels.
Oil prices have recently increased on rising political conflict in Iraq. A report on the Market Realist website this week noted that the West Texas Intermediate (or WTI)-Brent spread recently widened partly due to escalating tensions in Iraq. For more, please read Why geopolitical tension and weather moved energy commodities.
Browse this series on Market Realist:
- Part 1 - Why Omega Advisors opens position in Nordic American Offshore
- Part 2 - Why Nordic’s platform supply vessels acquisitions seek expansion
- Part 3 - Why Nordic posts earnings increase, declares dividend
- Commodity Markets