This week worldwide offshore rig utilization moved down slightly as one net rig came off contract, pushing utilization to 83.2%.
Over the next two weeks, we will be examining the day rate trends, both past and future, for the two largest segments of the offshore rig fleet: jackups and semisubmersibles. So, let's dive right in with a look at the jackup market.
Jackup Day Rates - The Last Big Peak
With the start of 1998, the jackup market began a rather steep decline in terms of day rates and utilization. Utilization reached a new low in February 1999 when only 70% of the fleet was working. Correspondingly, average jackup day rates also dropped off, falling more than 70% from their peak in 1997 to about $20,000 ($24,000 in 2006 dollars) during June thru August 1999. As with the peaks in utilization and day rates, the low point in day rates trailed the low point in utilization by several months.
Jackup Day Rates - Steady As She Goes
From late 2002 thru much of 2004, jackup utilization and day rates held quite steady. Utilization remained close to 80% for about 2 years straight, with only slight fluctuations of a few percentage points in either direction. Similarly, average day rates held fairly constant around $48,000 ($52,500 in 2006 dollars), with fluctuations of no more than 10% up or down (although mostly up).
Jackup Day Rates - Rising Again
The most interesting thing about this recent utilization trend is that day rates have not followed. When utilization peaked in September 2005, the average jackup day rate was about $56,000 ($58,000 in 2006 dollars). If day rates had followed the trend observed during the last two peaks in utilization, a decline in day rates would have occurred in early 2006. However, rather than declining, average day rates increased by more than $20,000 (35%) by the start of 2006. And they have continued to climb since then, averaging just below $90,000 for the month of August.
Jackup Day Rates - Where to Next?
An important point to note in terms of future jackup day rates is that the rigs that currently have long-term contracts set to keep them working into 2007, 2008, and beyond are generally higher specification rigs that earn higher day rates. As time passes and the future months become past months, these average day rates are likely to come down somewhat as lower specification rigs (mat rigs, shallow water jackups, etc.) which generally do not have long-term contracts begin to land lower paying contracts.
Of course the big question still remains: will the 200 jackups that are not contracted out past a year from now find work at higher or lower day rates than they have been over the last year or so? Given the historical trends and the fact that utilization still has not recovered to the level of one year ago, it would seem that jackup utilization has peaked and day rates will begin to trend down, albeit slowly. Add to that the recent drop in oil and natural gas prices, and it seems altogether possible that we may soon see that jackup day rates have peaked. However, don't expect a down turn of the magnitude of 1998-99. With the long, slow build-up in longer-term rig contracts coupled with commodity prices that are still high, day rates will most likely level off in 2007 and hold fairly steady.
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