The Clock’s Ticking on Aging Fleets of Offshore Support Vessels

The Malaysian and Singapore offshore support vessel (OSV) sector is at a crossroads, and things are getting dicey.

The fleets are rapidly ageing and supply is tight, according to reports this month (Dec) by AmInvestment Bank, Kenanga Research, and CGS International.

Malaysia's OSV fleet, which serves its vast oil & gas sector, is pushing 14 years, which is basically ancient in this industry.

This is uncomfortably close to the critical 15-year threshold that necessitates major refurbishments or replacements in order for the vessels to participate in job tenders.

This aging trend, coupled with years of underinvestment, is not a local issue -- it's happening worldwide too.

The supply crunch is driving up charter rates and reaping healthy gross margins across the sector.

AmInvest 12.24

A significant number of vessels were built during the last industry boom (2005-2007), and little subsequently, noted Leong Seng Keat, CEO of Singapore-listed Nam Cheong Ltd, an investor briefing last week.

Nam Cheong is in a favourable position given the average age of 7 years of its fleet of 36 vessels, one of the largest OSV fleets in Malaysia. (See: From Debt Restructuring to Big Profits: This company is a nice turnaround story in 2024)

Aging Fleet and Supply Challenges

"Around 2005-2007 was a hyperactive period of new vessel construction.

GPmargin9m24 "Many vessels will soon reach 20 years of age, and they will be obsolete -- at least in Malaysia. The country used to limit it to 15 years and has extended it to 20 years," said Mr Leong.

This supply constraint is driven by factors such as high building costs post-COVID and ESG-driven financing restrictions, which limit loans for non-renewable energy projects.

"Given this scenario, it doesn’t matter if demand or oil price fluctuates because Trump is going to drill more or China is going to spend less. The key issue is vessel supply. The reduction in supply is supporting high charter rates moving forward," said Mr Leong.

Kenanga Research highlights 2 key features of Malaysia's OSV market -- it operates cabotage policies restricting foreign vessels and its tender requirements permit vessels up to 20 years old.

Operators face a dilemma: refurbish aging vessels to extend their lifespan or invest in newbuilds to meet long-term demand.

Kenanga Research suggests that sustained demand could trigger a wave of newbuild orders, benefiting Malaysian shipbuilders like Shin Yang Group.

Future Scenarios for the Malaysian OSV Sector

1. Fleet Renewal and Expansion

Fleet renewal is emerging as a priority for players like Keyfield International, which has strategically expanded its younger fleet through acquisitions.

AmInvestment Bank emphasizes Keyfield’s strong financial position post-IPO, enabling it to capitalize on current market dynamics.

The company’s recent acquisitions of vessels enhance its position as a key player in the sector.

CGS market12.24 Source2. Refurbishment as a Stopgap

For operators unable to secure financing for newbuilds, refurbishment offers a cost-effective alternative.

However, this approach only extends operational viability by five years in Malaysia, making it a short-term solution compared to the long-term benefits of fleet renewal.

3. Market Consolidation

The capital-intensive nature of fleet renewal may drive consolidation within the sector.

Larger players with stronger balance sheets could acquire smaller competitors or their assets, further concentrating market power.

4. Newbuild Demand Surge

AmInvestment Bank predicts that robust demand for OSVs—driven by decommissioning projects and increased offshore exploration—could lead to a surge in newbuild orders.

This would require significant capital investment from operators.

Any increase in newbuilds won't materialise overnight as they typically take 2-3 years.

Strategic Implications

Kenanga12.24 Kenanga Research maintains an "Overweight" stance on the sector, favoring maintenance-driven players like Dayang Enterprise and Keyfield International due to their exposure to resilient upstream maintenance activities.

The Malaysian OSV sector stands at a pivotal moment where strategic decisions on fleet renewal versus refurbishment will shape its trajectory.

With robust demand supporting charter rates and opportunities for consolidation or expansion on the horizon, players with younger fleets and strong financial positions are best positioned to navigate this evolving landscape.