The fallacy of composition and offshore equilibrium…

There is a really eloquent quote from the Hornbeck conference call that I didn’t want to get lost in my other post (courtesy of Seeking Alpha):

James Harp (CFO, Hornbeck Offshore):

The recent rise in commodity prices has led to a generally positive sentiment for the broader oilfield service industry including the offshore sector. But as Todd said we see little that leads us to believe that deep and ultradeepwater exploration will see a sharp rebound in activity in the immediate near-term.

While of course we are encouraged by equity analysts and larger oilfield service companies calling the bottom on this offshore cycle and it is certainly nice to hear major oil companies announcing more deepwater discoveries, FIDs, and FEED studies in our hemisphere. We are still a long way from reaching OSV market equilibrium. There is always a lag effect from when these types of macro sound bites actually result in increased demand for marine transportation and subsea services.

Investment research should be forward looking (my thoughts here), so it’s no surprise there might be a valuation gap between the current price and when cash flows into a company, but it is also true there have been a number of people claiming a market recovery when it doesn’t seem to be reflected in how owners feel? Both might be right: it is a recovery but off a low base and this recovery¬†is miles away from an economic equilibrium. Also some sectors will do well, and others less so, this certainly won’t be a broad recovery.

Everytime a new offshore project, especially a major one, is announced people seem to try and use it to illustrate a turning point in the cycle, despite the fact that the macro numbers are clear: investment is way down from 2014 and the number of working rigs/ jackups etc is so low that anything other than a slow recovery is unlikely. This is the fallacy of composition: inferring the whole is true based on a small part of it being true.

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