The Boring Investor

Author:   |   Latest post: Sun, 17 Jun 2018, 11:06 PM


A Peek into Offshore Support Vessel Companies' Prospects

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I wrote about my speculative bets in Offshore Support Vessel (OSV) companies in Which Offshore Support Vessel Companies Will Survive? This is a defensive way of betting on OSV companies, as I look for companies that have low debts, low impact from asset impairment, low probability of receivable build-up/ impairment as well as no bonds maturing in the short term. Actually, there is another way of betting on the OSV companies, which is to look at the potential revenue streams the companies have in the future. As discussed in Oil & Gas, Show Me the Orders!, orders are a leading indicator of how well the companies are likely to do in the next few years.

How do you know the the potential revenue streams of OSV companies? OSV companies charter out their vessels to other companies. It is a form of operating lease. Hence, quite a no. of OSV companies report their operating lease commitments as lessor. The table below tabulates the lease receivables based on their latest available Annual Reports. All figures are reported in millions of US dollars. Please note that some companies include customers' options to extend the vessel charter in the figures.

Lessor Commitment
Company FY Current Previous
Atlantic Dec 16  $    240.1  $      15.2
Falcon Jun 16  $      48.3  $      85.8
Mermaid Dec 16  $         -    $         -  
Pac Radiance Dec 16  $      54.1  $      66.9
POSH Dec 16  $    337.1  $    176.4
Vallianz Mar 17  $    646.7  $    254.2
Ezion Dec 16  $ 1,451.3  $ 1,181.3

Thus, based on the above table, some companies are getting a lot of new orders, such as Atlantic, POSH, Vallianz and Ezion. 

However, before you get too excited, in order to meet these orders, the OSV companies either have to own the vessels already, order new vessels, or lease the vessels from some third parties. When companies order new vessels, they incur capital commitments. When companies lease vessels from third parties, they incur operating lease commitments as lessee. Both capital commitments and operating lease commitments as lessee are reported in the Annual Reports. The table below tabulates the capital commitments and operating lease commitments as lessee for the above-mentioned companies.

Capital Commitment Leasee Commitment Capital + Leasee
Company FY Current Previous Current Previous Current Previous
Atlantic Dec 16  $      42.2  $    100.9  $      50.4  $        1.7  $      92.5  $    102.6
Falcon Jun 16  $    501.1  $    501.1  $        0.4  $      14.2  $    501.6  $    515.3
Mermaid Dec 16  $        0.5  $    373.6  $      14.7  $      11.8  $      15.2  $    385.4
Pac Radiance Dec 16  $      69.6  $    209.4  $      48.8  $      55.3  $    118.4  $    264.7
POSH Dec 16  $      85.6  $    138.6  $      94.9  $    105.0  $    180.5  $    243.6
Vallianz Mar 17  $    198.2  $    270.0  $    177.4  $      98.8  $    375.6  $    368.8
Ezion Dec 16  $    440.9  $    258.5  $    124.5  $      83.5  $    565.4  $    341.9

As shown above, most of the OSV companies are cutting back on their capital commitments. On the other hand, some are increasing their operating lease commitments as lessee. This is a more sustainable and flexible way of operating the business, as they can return the vessels to the third parties after the expiry of the leases if business conditions were to go down. 

For companies that rely on capital commitments, it will mean that the debts of the companies will increase. In addition, there will be more assets to impair, bearing in mind that the capital commitments mean that the vessels are already ordered and waiting to be delivered. These vessels are likely ordered a few years ago when oil price was still high and therefore vessel prices were high too. Moreover, would banks be willing to provide further financing to the OSV companies to take delivery of the vessels, considering that they probably have had enough of non-performing loans from the Oil & Gas (O&G) industry? If there is no financing, there will be no new vessels, and there will be less orders to fulfil. For this reason, even though I like O&G companies with increasing orders, I am not prepared to bet on some of these OSV companies. I prefer to play more defensively.

Just a reminder, this post is not a recommendation for anyone to buy or sell any O&G stocks.

P.S. I am vested in CH Offshore, Ezion warrants, Mermaid and POSH.

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