Offshore Service Companies Finally Show Some Restraint

Implications: Perhaps a bit too late, we are seeing signs of a cut off in new vessel orders for the offshore service sector.

Analysis: When it comes to shipping cycles, few segments match the offshore service sector for repeating the process of ordering too many vessels in a strong market and thereby hastening the beginning of a soft market.

In the early part of the current cycle, restraint in new orders contributed to the very strong rates that peaked in 2006.  Alas, it was too much to hope that the industry had finally learned its lesson.  In 2007 alone, 97 new AHTS vessels were ordered along with 59 new PSV's.  In early 2008, Petrobras alone signaled that it would be ordering over 100 new vessels.

Currently, the order book stands at 24% of the AHTS fleet and 15% of the PSV fleet.  Compared to their larger brethren, these numbers do not appear too large, but these numbers essentially represent a 24 to 28 month orderbook.  Delays in equipment for smaller vessels have not yet reached the size of larger ships.

Of more concern is the potential for the newbuild rigs that these vessels were ordered to service being delayed or delivered after the new service vessels enter the market.  While a significant portion of the supply vessel fleet is well past retirement age, until rates drop significantly they will continue to operate.

As long as this restraint continues, the period of pain should be relatively brief, and may not materialize at all.  However, based on many years of history, restraint is unlikely to become a virtue in this industry.