During the last sector boom leading up to 2014, the industry invested heavily in new equipment and infrastructure to support a level of activity that has yet to return. This has had and continues to have brutal implications for asset-heavy businesses, but particularly offshore, where the investment required to build a rig or a high-end construction vessel is measured in the hundreds of millions or even billions of dollars.

In the offshore sector there is simply far too much capacity in the industry that will not be absorbed even with a recovery to 2014 levels of activity. As a result, we are currently seeing heavily depressed vessel values, dayrates, and utilization rates. Question is, at what point should we expect this to turn?

There are three key aspects of the recovery to consider; the state of the exploration and production (E&P) companies, the global oil supply outlook and the anticipated demand-side story.

E&P companies have responded swiftly to the downturn by curbing new investment, cutting costs internally and pressuring the supply chain to do the same. Despite a modest recovery in oil prices over the last year, we still see the same internal focus on cost within our client base and lack of confidence in oil price growth in the near-term.

This is major challenge for the offshore sector. There will, of course, be a handful of exceptional discoveries that will be economic regardless of oil price swings. There will also be satellite discoveries for which much of the costly infrastructure required to produce (platforms, export pipelines) will be in place already and time to first oil is short.

The bulk of greenfield activity, however, will require E&P companies to have strong free cash flow for investment and an expectation of higher oil prices in the mid-term. This aversion to mid/long time oil price risk is why we see a dramatic recovery in short-lead time investments such as U.S. tight oil, but not elsewhere in the industry.

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