Forecasting day rates – AHTS segment

To forecast the AHTS day rates, a multiple regression analysis based on historical data for the period 2005-2015 was performed. The 10-year period captures the 7-9-year cyclical interval which the OSV-industry seems to follow. The dependent variable used was high-end AHTS vessels¹⁵⁴ (>18 000 BHP) and the explanatory variables used were the international rig count, oil price, and the number of high-end AHTS vessels in the market. The output is summarized below and the complete output from the regression can be found in Appendix A.18.

154 Solstad is most exposed to this segment; see section 3.6.1 for fleet composition

88 The output from the analysis reveal that an increase in both number of rigs and the oil price will affect the day rates positively, while an increase in number of AHTS vessels will have a negative effect on the day rates. The rig count is significant at an ~91% confidence level, the oil price at an ~89% confidence level, and the number of AHTS vessels at a

~98% confidence level with an R-squared of 64%. The interception of -4,4710 is the constant in our equation. This leads is to the following equation:

Equation 6: 𝑨𝑯𝑻𝑺 𝒅𝒂𝒚𝒓𝒂𝒕𝒆𝒔

= −4.4710 + 3.2359 ∗ 𝑟𝑖𝑔𝑠 + 1.8981 + 𝑜𝑖𝑙 𝑝𝑟𝑖𝑐𝑒 − 1.2440 ∗ 𝐴𝐻𝑇𝑆 𝑣𝑒𝑠𝑠𝑒𝑙𝑠

As the inputs in the model is in Logarithmic terms, the forecasted day rates in the regression model is found through the following equation:

Equation 7: 𝑨𝑯𝑻𝑺 𝑫𝒂𝒚𝒓𝒂𝒕𝒆𝒔_𝒕 𝒓𝒆𝒇𝒐𝒓𝒎𝒖𝒍𝒂𝒕𝒆𝒅

𝐷𝑎𝑦𝑟𝑎𝑡𝑒𝑠_𝑡 = 𝑒𝑙𝑛 𝑑𝑎𝑦𝑟𝑎𝑡𝑒𝑠

It has to be emphasized that the data set we operate with is relatively small and some statistical interference may be plausible. However, it is important to note that these are strictly scientific tools that try to paint the most realistic picture possible given the data at hand. The authors are aware of, and has already mentioned in section 1.1. that data was difficult to attain and some of the analysis might be not be as robust because of the relative short period the sample data represents.

Nevertheless, given the output from the regression, we found them to be plausible and in line with most analysts’ consensus and as such assume the results representable and applicable when making our forecast due to the reasons summarized below:

o The parameters in the regression is in line with the findings in our strategic analysis, where rig and oil growth is positive, and AHTS vessel growth is negative in relation to the day rates. Capacity increase implies more ships, tighter competition and consequently lower freight rates.

o R-square is a good indicator of jointly explaining the relation between the parameters, and 64% is an acceptable value.

Summary – AHTS dayrates output

R-Square 0,64109

Beta coefficient P-value

Intercept -4,4710 0,5784

Ln Rig 3,2359 0,0814

Ln Oil 1,8981 0,1064

Ln AHTS -1,2440 0,0118

Table 25: AHTS day rates regression output

Source: Appendix A.18

89 o The results seem to be in line with respected OSV brokerages’ and analysts’ consensus.

Among these are Clarksons (formerly RS Platou), DnB Markets, Pareto, and Fearnley.¹⁵⁵ o The sample size was fairly small, and a larger one would most likely increase the accuracy

of the test. Weekly or monthly observations could also possibly have increased the validity.

The forecasted day rates for the AHTS segment is summarized below, and will be used when forecasting the revenue stream for the AHTS segment.

Table 26: Forecasted AHTS spot rate (£) – North Sea region 2016E-2023E

Year 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E

North Sea spot rate AHTS 16 895 10 484 12 389 13 861 15 765 18 068 20 163 23 379 27 378

YoY growth -38 % 18 % 12 % 14 % 15 % 12 % 16 % 17 %

Source: Appendix A.18

In 2016 we forecast a fairly large dip in the AHTS day rates of -38%. This is due to a significant drop in rig count activity, and expectations of a stagnant oil price. Through the analysis and calculations, it is found that 2016 will possibly be the bottom line for the segment and the market, and most likely signal an end to the significant downturn the market has experienced the last couple of years. We expect day rates to slowly recover in 2017 in conjunction with a growth in the oil price. The order book for AHTS vessels have decreased recently, and a high amount of slippages and scrapping leads us to believe that market balance will slowly be renewed over the forecasted horizon. Because of the large decrease in day rates in 2016 we forecast an upwards YoY growth throughout the forecasted period in order for the day rates to stabilize to normal levels.

Based on the comparison between our forecasts and the findings from the strategic analysis, we find the forecasted data plausible. There is data to justify some indication that the market will slowly recover. However, the degree of increase and the tempo of which the day rates will increase is certainly hard to predict, but we believe our estimates to not be too aggressive nor too moderate based on the analysis we have done in the strategic analysis and financial analysis. To further illustrate how the growth rate is relatively moderate in the forecasted period, the 2013 fiscal year average rate for AHTS vessels (>16-19,999 BHP) operating in the North Sea spot market was GBP 26,738 and GBP 41,141 for AHTS vessels (>20 000 BHP). Looking at the forecasted period our estimates state that AHTS vessels (> 18 000 BHP) should be expecting an average rate of GBP 27,378 in 2023.¹⁵⁶ Thus, we expect the market to neither perform on par with the “golden years” of

155 Resources used in the strategic analysis shows to be in line with the outcome of this thesis’ forecasts

156 RS Platou. (June 2014). Weekly North Sea Spot Market Update.

90 OSV-industry growth nor be without a certain, gradual recovery as the memory of the 2014 oil crash left behind.