Oil service sector nearing an OSV upcycle

Two momentum-building factors will stop what has been a three-year decline.

Here's more from UOB:

The sector is on the cusp of a new offshore support vessel (OSV) upcycle after three years in the doldrums, weighed down by a global fleet oversupply and weak balance sheets.  

A new upcycle has begun. The increase in the worldwide time-charter (TC) rates for small- and mid-sized AHTS vessels (ie. 5,000-12,000bhp, basic workhorses that account for 60% of the global AHTS fleet) in the last 6-12 months is concrete evidence that a new OSV upcycle has begun. While TC rates for large AHTS vessels (>12,000bhp) had seen an earlier recovery in 2H09, charter rates for small- and mid-sized vessels were still sliding before bottoming in 2H10 and 1H11. Since early-12, TC rates for all vessel sizes have been trending up in unison, signalling a broad-based recovery.

Fleet overcapacity is at tail-end. The last oil cycle was characterised by record capex on offshore marine assets. Orders for OSVs placed to shipyards over the 2004 to 2007 period quadrupled from US$3.5b to US$15.6b as oil price escalated from US$30/bbl to US$100/bbl. The OSV sector has suffered from fleet overcapacity in the last three years as a result of heavy vessel deliveries which are now at the tail-end. AHTS vessel deliveries are expected to taper off from 174 units in 2012 (delivery peaked at 296 vessels in 2009) to a low level of 48 and 22 units in 2013 and 2014 respectively. The AHTS fleet growth, which peaked at 14% in 2010, is forecast to shrink sharply from 11% in 2011 to 6-7% in 2012-13 and a mere 1% in 2014.

Oil price >US$80/bbl shores up capex confidence. Since bottoming out in 1Q09, oil price (WTI) has rebounded back to above US$80/bbl, and has hovered within the US$80-100/bbl band for the better part of the last six months. This is a level sufficiently comfortable for oil companies to be liberal with exploration and production (E&P) capex. The International Energy Agency (IEA) estimates breakeven costs for all oil companies, excluding taxes, to hover at an average of US$40/bbl, well below the current oil price. However, for certain OPEC countries that utilise oil revenue to balance their budgets, a higher oil price averaging US$80/bbl is required.

Asia-Pacific to see strong growth in offshore E&P capex. According to Infield Systems (Infield), offshore E&P capex levels in Asia are forecast to recover after stagnating between 2006 and 2009. Infield expects US$87.1b capex to be incurred in 2011-15. This is 45% higher than the US$60.0b capex incurred in 2006-10, the preceding five-year period. Southeast Asia is forecast to incur more than 70% of Asia-Pacific’s offshore E&P capex for 2011-15. Malaysia has surpassed China as the largest spender in Asia-Pacific while Indonesia is making a comeback. Both countries subsidise their domestic oil prices, hence self-sufficiency in oil production is important to avoid costly imports.