Physical resources

Solstad is fully dependent on its ships being in operations and on contract in order to maintain any kind of revenue stream. Therefore, the firm’s fleet is vital to the company’s earnings. 17 of the current operational fleet of 32 vessels (53%) are servicing markets outside of the North Sea; three in Brazil, five in the Gulf of Mexico, one in Australia, four in Asia, one the Mediterranean, two in Africa and one the Middle-East. The company has also laid-up 12 vessels and is preparing for more in the likely scenario that the economic trend continues.

As a result of an increased trend of deep-water exploration and production in the petroleum industry, demand for more technologically advanced, bigger and sophisticated vessels have also increased. The demand for modern ships are expected to bounce back again in the long-term.⁹⁸ Newer fleets thus have a competitive advantage in response to this developing trend.

97 Hesterley, B., & Barney, JB (2011). Strategic management and competitive advantage - concepts and cases.

98 Solstad Offshore ASA, “Annual Report”, 2015 Figure 26: Solstad EBITDA segments 2016Q1

Source: Solstad, “Q1 Report”, 2016 97%

10%

-2% -5%

CSV AHTS PSV Lay-up

56 Newbuilds are more cost-efficient, and the operational costs of vessels surpassing 20 years in service increase substantially.

An already heavily competitive AHTS-segment creates economic issues for Solstad. Compared to its competitors, the average age of its vessels at 8,4 years is relatively high. A clear competitive disadvantage measured against the Norwegian counterparts in the OSV-market. However, in return, Solstad has great representation of ships in the subsea segment which provides a competitive advantage that take away some of the increased risk associated with competition on a saturated and oversupplied market, especially within the AHTS and PSV-segments. With high service coverage and expertise in supplying CSV’s globally, increased revenues from operations in Thailand, and the arrival of one new build with delivery in July 2016 it is apparent that Solstad’s subsea fleet is by a large margin the most important revenue-driver going forward.⁹⁹ Figure 26 above shows that of Solstad’s total EBITDA in the first quarter of 2016, 97% came from the CSV-segment, while the AHTS-segment had a 10% contribution to the margin. Lay-ups and PSV’s combined ended up with a -7% EBITDA margin of the total.

Although Solstad have diversified OSV-fleet, the vessels are not especially rare and they are imitable at least long-term.

This means that newbuilds can imitate the newest technology on the market, but companies are limited by the time it takes to make and deliver them to the market. Shipyards can spend upwards of two years to design and build OSVs.

Furthermore, the increased level of

sophistication of these vessels has a great impact on cost and the amount of investments required.

A capital intensive industry implies costly investments for companies (or whole industries in this case), which puts Solstad in a tough spot in periods of economic downturns where earnings are hovering below break-even.¹⁰⁰

5.1.2 Geographic location

The North Sea is only a couple of nautical miles off of the coast of Norway where Solstad has its corporate headquarters. The close proximity to its largest market provides managerial flexibility,

99 Solstad Offshore ASA, “Financial Report”, 2016Q1

100 Fearnley. (April 2016: 6). The Offshore Report.

Solstad fleet overview ultimo March 2016

Segments Current Fleet

New Buildings

Weighted Average Age CSV

AHTS PSV

19 15 9

1 7,5

10,6 10,1

Total 43 1 8,4

Table 7: Solstad fleet - April 1st 2016

Source: Solstad 2016 Q1 Report

57 controllability and coordination of their vessels and day-to-day operations. Furthermore, being a Norwegian company situated in Norway that largely deals with customers operating in the North Sea enables Solstad to manage and nurture customer relations more effectively.

While approximately half the operations in terms of vessels are concentrated in and around Norwegian waters, the company has as established offices spread out across the globe servicing the most important petroleum markets. The strategically placed offices give the company access to local expertise and new customers in the areas their vessels are employed. A spread-out fleet operating in several markets ensures that Solstad is well-diversified and decreases the risk of economic volatility. In 2015, 67% of revenues came from operations outside the North Sea-segment.¹⁰¹ In the years to come, it seems likely one of the scenarios for economic recovery for the industry and in extension Solstad, is dependent on the deepwater drilling market. A primary reason to this is because of the segments long lead-times and cyclicality. Since the company has a solid presence in this market, with operations in the Gulf of Mexico and Brazil, its geographical location is deemed strategically valuable, but not rare. However, Solstad along with most other foreign supply vessel operators in South-America in particular is currently being cut off in favor of local companies as previously discussed (A.5: Fleet locations). Furthermore, location is not difficult to imitate as vessels can be somewhat easily moved to a new location is necessary. However, imitation of a globally reaching firm like Solstad cannot be done without rigorous planning, restructuring, capital investments, risk management, and long-term strategizing.

5.1.3 Crew

Solstad describes its employees as being “[their] most valuable asset.”¹⁰² Although the firm highly values the employees, it still had to lay off approximately 300 throughout 2015 along with major lay-ups of idle vessels. This is considered a huge downsize for a company that has a strong reputation for attracting the very best and ambitious human resources in the industry. Furthermore, the company is known for its working environment and internal employee training programs which solidifies their workforce as an important and valuable resource in the competitive landscape. There is heavy focus on recruiting Norwegian youth in to the maritime sector as the country plays a significant role in educational programs and influence on maritime transportation. This translates to a potentially well-educated and academically strong workforce which Solstad is actively recruiting from.

101 Solstad Offshore ASA, “Annual Report”, 2015

102 A.6: Full quote

58 5.1.4 Management

Solstad was up until 2002 managed and run by its founder Johannes Solstad and his brother Per Gunnar Solstad when Johannes’ son. In 1999 Lars Peder Solstad took over the company as the new Chief Executive Operator. Along with keeping most of the business within the control of the family, both on the managerial side and the ownership side, Solstad has maintained and developed its managerial resources over the years greatly. Human capital in terms of special knowledge about the industry such as how to handle economic downturns has therefore accumulated over the last five decades, and has stayed largely within the company. This is considered a valuable resource for Solstad, but not a rare one. Skilled, educated and experienced management can be procured quite easily in the market, especially during periods of aggressive layoffs. However, imitation of the human capital accumulated within the organizational boundaries of Solstad is deemed hard to imitate – but might not always be of much use to other companies operating in the same industry because of their specificity.