Content Revised 14 November 2013 by Request of Company to Remove their Named Reference
Another Quick-Look Near-Term Analysis of the 3D Marine Seismic Market
Marine seismic company Dolphin Group (Dolphin) delivered their Q3 2015 earnings on 28 October 2015. Dolphin mentioned that it had received a notice of time charter termination for two vessels, Sanco Swift and Sanco Sword, from the owner of the vessels, Sanco Shipping AS (Sanco). While there was no reason given for the announcement by Dolphin, it is speculated that Dolphin was in charter default. However, it was stated by Dolphin that they had reserved the right to have the cancellation reviewed. Wait a minute here! On 23 October 2015 marine seismic sector rival made a surprise announcement during their Q3 2015 earnings release. I was stated that they had entered into favorable lease terms for both Sanco Swift and Sanco Sword and would be cold stacking to of their older vessels. This was in addition to the already announced stacking of another older vessel. So, what is going on? Dolphin did not provide vessel utilization / allocation percentages for their fleet during Q3 2015, but indicated that their vessel utilization was negatively impacted by operating permits and delayed contract start-up. However, what can be assumed is that Dolphin experienced revenue generation problems to the extent that it concerned Sanco Shipping AS enough to venture into negotiations to charter vessels to a rival. Vessel utilization was weighted toward multiclient projects for Dolphin in Q3 2015.
It was stated that the charter agreement entered into with Sanco Shipping AS would be CAPEX neutral by saving maintenance costs on its older vessels. There are a couple of mysteries regarding these Sanco vessels. The main question is how a company that cannot keep its current fleet busy was able to take on the Sanco vessels. When asked about this, the CEO only said, “Now, what I can say is that Sanco came in a position where they had a right to cancel and we took that opportunity.” More than that is beyond what we can answer that’s a question to Dolphin or Sanco for that matter.” Of course, the other question is why really would anyone want to add more capacity to their fleet when there is overall 3D streamer vessel over-capacity and they had fairly low vessel utilization, especially in proprietary contract work?
Additionally, while the company postponed delivery of their fourth and final ultra high-capacity vessel until Q1 2017, they are still scheduled to receive the third new build in Q1 2016. This will leave them with a number of vessels to find work for in a market which many believe will be very soft until 2017. By their own estimate, there will still be over-capacity in the market even after cold-stacking their vessels. older. And by chartering the additional Sanco vessels they will have more streamer capacity than before the agreement. The company also stated that their future will be aimed at chartering vessel capacity and not owning vessel capacity. Not withstanding the fact that they are the only main player still building and adding significant new capacity beyond their new – disputed – charter agreement with Sanco. Vessel utilization numbers can also be deceptive in a non-uniform fleet with both 2D and 3D vessels. A more useful percentage would be the streamer utilization. A primarily 3D company with work for their 2D vessels, but no work for the same number of 3D vessels would provide the same allocation percentage.
I believe that the ambitious company wants to control and dominate the top-end 3D seismic vessel capacity market and knock-out competition. The Sanco Swift and Sanco Sword are both capable of towing wide streamer arrays matching their new builds. In fact, under Dolphin management, the Sanco Sword established a tow-width record. This in spite of the ultra high-capacity vessels much wider back deck than the contested Sanco vessels. The 16 streamer @ 100 meter separation spreads are also more efficient and cost effective than the older 12 streamer @ 100 meter separation spread capability. The Sanco vessels compete directly with the new builds and threaten the primacy in wide-tow capability.
The fact that competitors are both vying for the same Sanco vessels makes for an interesting Q4 2015 and beyond. There is vessel over-capacity in the 3D marine seismic streamer market. There will still be over-capacity even with older vessels being cold stacked. Who loses vessels is now the question. One company is betting that controlling the upper-end capacity market will put them in a dominant position and that the competition will be forced to deplete their fleets for the weakened market. It is a gamble. And it is now more complicated as Dolphin looks prepared to challenge their competitors plans for the Sanco vessels. Exciting Q4 2015, I guess. Or as it was written in an e-mail to me, “it’s carnage in boat land!”