It’s dangerous to assume that a current situation might be different than something similar in the past, but this just may be the case for the OSV industry in the US GOM. The reasons for this are becoming more clear as the level of US GOM offshore activity has remained relatively static over the past several quarters.

In this time, the deepwater rig count in the US GOM has been locked between 20 to 22 rigs. However, the amount of activity driven by production, including active drilling from production platforms, has kept OSV demand robust. Deepwater OSV supply remains at near full utilization with less than a handful of boats remaining stacked. The supply of OSVs will not increase in a meaningful way either through vessel reactivation or new building. While new build vessels are cost prohibitive at current market rates, the compounding issue is the prospect of financing new construction. In prior OSV market cycles, full utilization of the current fleet triggered new building campaigns with the vast majority of the vessels being built on speculation. Financing was readily available with companies using of every possible dollar, resulting in the oversupply that partially contributed to the collapse of the industry in 2014/2015.

In today’s market, while there is incremental demand for additional vessels, all of the existing vessels are being fully utilized. At the same time, charter rates would need to nearly double and contract terms increased to support the cost of a new build vessel. Unless a 10-year contract at double today’s rates can be secured, there will not be any new vessels built. This is entirely a function of financing availability. There is not a single bank that would lend any vessel owner the sum of money needed to build a new vessel today without a minimum 7-year, non-cancellable contract at double the current charter rates.

This dynamic is what makes the current OSV up-cycle different than prior cycles. JOO remains very well positioned to take advantage of this up-cycle.