Shipping firms sail offshore to beat weak core business

Top Indian shipping services companies, still reeling under margin pressure due to soft rates in the dry bulk and crude carrier segments, are looking to expand their presence in the oil and gas segment hoping the oil rally to continue.

"The shipping sector is facing tremendous pressure due to excess supply of tonnage entering the market over 2011-2013," said VSR Sastry, senior vice-president at brokerage Firstcall India.
The Baltic Exchange's main sea freight index, which tracks rates to ship dry bulk, has fallen more than 63% in the past 12 months from 4,041 points to 1,485 points as of Thursday.
Indian companies are primarily exposed to dry bulk and tanker segments.
"...And these two segments will remain subdued for the near future," Sastry said. He expects offshore to be the much-in-demand segment in the near future.
To cash in on the emerging situation, firms such as Shipping Corp of India, Great Eastern Shipping and the Essar Group have lined up major expansion in the offshore segment, with some of them even cutting exposure to the traditional shipping business.
Oil has been rallying due to the geopolitical supply worries and expectations the dollar will stay under pressure. By Thursday, Brent crude futures were at USD 115.13 a barrel and US oil futures at USD 100.46 a barrel.
Helped by the surge in crude prices, oil companies are increasing their thrust on exploration and production, which has resulted in more offshore orders for shipbuilders like ABG Shipyard.
"The offshore segment is looking good on paper. Though at lower prices, all rigs are getting engaged. Because of higher oil prices, the drilling work will start vigorously. If you see the rig utilisation levels, it is also showing an improvement," said Gaurav Oza, analyst at AK Stockmart.
State-run Shipping Corp plans to spend USD 250 million to acquire 10 offshore vessels, nine of them in the current fiscal, its Chairman S. Hajara said.
"If you see our list of vessels on order there are plenty of offshore vessels. And, definitely, we would like to increase our presence of offshore. Offshore is a small part of our overall business," Hajara said.
The offshore segment contributes under 5% of Shipping Corp's overall revenues at present and the firm plans to raise USD 500-600 million this year through external commercial borrowings to fund part of the offshore expansion.
Great Eastern Shipping, meanwhile, is planning to redeploy cash from its shipping business, where it is cutting exposure by selling three large vessels, and focus on offshore segments.
The company has a capex commitment of USD 450 million in the offshore segment for an orderbook of seven vessels over the next two financial years.
"We thought we should derisk in some other area. The outlook for drilling units is currently looking that much better than the outlook for, say, crude carriers," said Great Eastern Shipping's Chief Financial Officer G Shivakumar.
Essar Shipping expects charter rates to improve in the offshore segment as one of its vessels is the lowest bidder for a USD 150 million contract with Oil and Natural Gas Corp for an 18-month period.
The company has earmarked a capex of 24 billion rupees in this segment to acquire two jack-up rigs by the end of 2012.

Wait and watch

Despite the boom in the sector, shares of pure-play offshore services firms such as such as Aban Offshore and Great Offshore have failed to rally, falling 11% and 39%, respectively, thus far in 2011.
Oza of AK Stockmart attributes this to oversupply, which is keeping the day rates for older jack-up rigs soft.
"This is a time to wait and watch, no doubt the picture looks rosy, but valuations are still to pick up. If oil prices remain at current levels for a longer period of time, then you will see more demand," Oza said.
The Organization of the Petroleum Exporting Countries, which pumps more than a third of the world's oil, is due to meet in Vienna on June 8 to discuss output and its response to a sharp rise in oil prices that could be a drag on economic growth.
However, analysts are doubtful of the effect of such a decision.
"I believe that a higher ceiling would only be a gesture towards the call from politicians in major importing countries for more oil and would not have much impact on the level of crude prices nor on the economy," said Roy Jordan, research associate at Facts Global Energy.
"The offshore segment is looking very bright. What we are doing is targeting the higher end vessel (orders) which have higher pricing," said Dhananjay Datar Chief Financial Officer at ABG Shipyard.
ABG Shipyard expects to deliver over 20 vessels in FY12, a majority of them in the offshore segment, while Pipavav Shipyard has submitted bids for several offshore projects.
"There are many orders available for the lower category anchor handlers, but we are trying to see if we can jump to the next level," Datar said.