Valuing Offshore Vessels in a Distressed Market

With the COVID19 pandemic hopefully behind us soon enough, the shipping markets have shown signs of strength both internationally and domestically. From the mega containerships to the lowly inland barges, as demand came back, so did utilization rates, freight rates, and, yes, asset prices. There is overall, a sigh of relief that a repeat of the 2008 calamity seems to have been avoided.

Liftboats aplenty (Karatzas Images)

However, not all shipping sectors have bounced back equally vividly, and some markets seem lingering stubbornly close to a distressed state; clearly, we are talking about the offshore drilling market in the US Gulf (USG) and the Gulf of Mexico (GOM). For anyone who has driven about in south Louisiana recently, offshore assets seem to be docked up and down the coastal line and the bayous by the dozen, smaller and larger vessels, some vintage but quite a few rather modern, sophisticated and expensive. Despite some signs of life, the market overall—highly correlated to the fortunes of oil—stays depressed to the dismay of many owners, operators, investors and bankers.

Besides the strategic question of a market recovery, the most pressing question for now in this area is what is the value of these offshore assets? How much cash on the barrel are worth now? How much one should be paying to buy them in this market? And, even more interestingly, what a seller should be accepting in order to part with them? These are not just curiosity questions or philosophical questions: huge amounts of money are at stake given how much money these offshore assets had cost originally in the not-too-far past. From an accounting and appraisal point of view, huge numbers are at stake as well—potentially to be written off—that will affect lending and investment portfolios of lessors and banks alike.

For vessels whereby an active market exists, when sale and purchase transactions take place regularly and the assets can find employment in the charter market, the so-called Market Valuation Method can establish an asset’s value, the Fair Market Value (FMV) to be specific: check what other comparable assets have transacted at, adjust for features like age and incremental specification, and the market value can be found. However, for quite a few of these offshore assets in the USG / GOM, there has not been a bona fide sale for several months now (even for more than a year), or any of the recorded sales were effectively at fire sale levels just to get rid of the asset, setting an abysmally—and artificially— low benchmark for all similar type of assets in the market.

Given that the charter / employment market for offshore vessels has been so sporadic, no estimate of cash flows for the foreseeable future can be prepared and any buyers have to depend on speculating about market prospects and thus they were mostly opportunistic (“vulture”) buyers at prices that could not be wrong. Under such market conditions, the Income Valuation Method, the second valuation method valuing assets on reasonable assumptions of the earnings, has been of little utility—good luck trying to estimate the value of a DP1 platform supply vessel when they are laid-up by the dozen and stacked on top of each other in the bayou, whe