An analysis of the global offshore support vessel fleet by online valuations provider VesselsValue confirms that now might well be a good time to pick up secondhand vessels.
Some entities have begun to do just this – despite over-capacity in the market. It might seem counter-intuitive to do so in the midst of a downturn of historic proportions, but counter-cyclical investment can pay off if you acquire the right asset at the right price.
VesselsValue recently launched daily discounted cash flow (DCF) valuations for offshore support vessels. It says the global OSV fleet’s DCF value is currently 2.5 times higher than its market value, that is, US$79.9 billion and US$30.9 billion, respectively.
By comparing DCF values to market values, customers of VesselsValue can look for buy/sell/hold signals. For instance, if you can acquire a vessel when the market value is lower than the DCF value, you could potentially earn more money over the course of its lifetime than you spent. This is therefore a buy signal.
On the other hand, if the DCF value is lower than its market value, this implies you can sell the vessel for more than it will earn you for the rest of the vessel’s life.
For example, the platform supply vessel (PSV) Standard Viking (the former Volstad Viking) was acquired by SD Standard Drilling on 19 January 2017 for US$13 million. The day before the sale VesselsValue was providing the large PSV with a market value of US$10.1 million and a DCF value of US$29.4 million. This meant that, based on VesselValue’s assumptions, Standard Viking had the potential to earn double the amount SD Standard Drilling spent on the vessel.
SD Standard Drilling has made an entry into the offshore vessel market at a time some observers of that market describe as an all-time low. Its all-equity financed structure means that it has no debt costs and low break-even. It sees significant upside in the OSV industry and is buying vessels at a huge discount to newbuild costs for like-for-like vessels. It has acquired a fleet of PSVs and other vessels with the lowest possible entry with significant upside potential.
It did something similar back in the 2010-13 investment cycle with a total of seven KFELS Mod V-B jack-ups that were ordered and re-sold pre-delivery. It acquired Standard Viking and other assets from Volstad at 47 per cent below newbuild parity (47 per cent below the 25-year newbuild parity of a nine-year old vessel with an implied value of US$25 million). At the time of the acquisition, Standard Viking, which was built in 2007, was in warm layup and reported to be in good condition.
The DCF valuation module calculates the long-term value of each asset by calculating the discounted cash flow for every individual vessel for each year of its remaining life. Focusing on the revenue, cost, commission and other factors provided by VesselsValue, these assumptions are vessel specific to reflect the differences in earning potential and running costs for vessels of the same type but of different specification and quality.