The offshore sector needs to have fewer and bigger companies in order to get out of the current crisis. And the costs must be reduced even further.
This is the mantra at one of the world's biggest shipping and offshore banks, Norway's DNB, which on the one hand still has significant involvement in the maritime sector, but which has also reduced – and is continuing to scale down – its exposure to the sector.
Lending to shipping has been reduced by 40 percent over the past five years, while loans to offshore-related businesses have been scaled down 14 percent since the crisis in offshore began in the late summer 2014.
According to DNB's Head of Shipping, Offshore, and Logistics, Kristin Holth, who oversees a portfolio of close to USD 22 billion, the bank will continue this development in 2017 as part of its policy aimed at reducing its exposure to capital-heavy sectors, though the bank has no plans to take more drastic steps as, for instance, the German banks, which are divesting massive loans or are planning to withdraw from shipping entirely.
The sector will remain important to DNB, she stresses.
"We are focusing on the long term. But there's no doubt that this is a very trying time, especially for the offshore sector. 2017 will also be difficult for the sector, which is going through a challenging transition. But it will be necessary to create bigger and fewer companies while also reducing costs," says Holth in a comment to ShippingWatch following publication of the banks annual report.
Impairments for close to a billion dollars
In the past year the bank made impairments totaling NOK 7.4 billion, around USD 888.1 million, which was significantly more than 2015's NOK 2.3 billion. A considerable part of the increased impairments relate to shipping, oil, and logistics, where the bank had to impair NOK 2.9 billion, corresponding to 41 percent of the combined impairments for the year.
This also marks a major increase compared to 2015 when impairments on loans to shipping, oil, and logistics totaled NOK 1.3 billion. But this is not surprising, in light of how the markets developed last year, says Holth.
"It's a tough period for the maritime segments, so it's only natural that this results in larger impairments," she says, maintaining the bank's confidence that there will be a need for oil for "decades into the future."
The costs of producing oil on the Norwegian shelf have dropped significantly within just a few years. For the two major fields, Johan Castberg and Johan Sverdrup, break-even prices in terms of when oil extraction is profitable are significantly lower today.
According to DNB's own estimates, break-even for Johan Castberg now hovers at USD 45 per barrel, while break-even for Johan Sverdrup has dropped to USD 30 per barrel. But the levels could turn out to be even lower. It recently emerged that the break-even price for Sverdrup, according to Aker BP, is down at less than USD 20 per barrel in phase one, less than USD 30 per barrel in phase two, and below USD 25 per barrel for the final phase in which the field will be fully developed.
Too many vessels
Holth has been pleased to see how a large consolidation in Norwegian offshore is emerging and picking up speed. She points to the latest example of Farstad and Solstad with the two Norwegian shipping icons Fredriksen and Røkke as masterminds, an example which more will hopefully follow.
"One of the problems is that there are still too many vessels on the water. It is therefore positive when we see the industry consolidate, as is the case now," she says.
The plan is for the coming company "Solstad Farstad" to have a fleet of 154 vessels, while also achieving annual synergies of NOK 400-600 million.
The strained oil price and low employment for offshore carriers have sent Farstad Shipping and the carrier's fleet of 55 vessels into a financial crisis, just as virtually all players in Norwegian offshore are hit by developments in the sector. Add to this the fact that the sector has invested too much in building its fleet when the oil price was high, which resulted in massive debt stakes for many of the companies. As such, close to one fourth of the entire Norwegian offshore fleet was stacked at the turn of the year.
New niche banks emerging
There have also been signs of consolidation in Norwegian shipping. Last year Stolt-Nielsen acquired similarly Norwegian Jo Tankers ahead of Odfjell, a carrier which is calling for consolidation in the sector.
In recent months, well-known Norwegian shipping people have spearheaded two new banking and financing initiatives aimed specifically at the shipping sector, and which are not least motivated by the fact that the traditional banks are gradually withdrawing from the sector.
English Edit: Daniel Logan Berg-Munch