Weekly Offshore Rig Review: Leading Indicator - Floating Rigs

Over the last month, we have been looking at two different time factors that affect offshore rig contract day rates. For the first two weeks, we examined the relationship between contract lengths and day rates, looking for lower rates for longer contracts. Last week, we examined the relationship between contract lead times and day rates, specifically for the worldwide competitive jackup fleet. This week, we will be wrapping up this series of analyses by looking at the correlation between contract lead times and day rates for the competitive floating rigs of the world.

Floating Lead Times
As we discussed last week, we wanted to find out if a longer lead time from when the contract was awarded to when it actually began would lead to a higher day rate. The basic assumption being that longer lead times indicate higher demand, and higher demand in a supply-limited market generated higher day rates. We found that this relationship did exist as we expected for the jackup fleet.

Now, we will look at two major segments of the floating rig fleet to see how the relationship plays out among semisubmersibles and drillships.

Semisubs & Drillships < 4,000' WD
The graph below illustrates the relationship between contract lead times and average day rates for competitive semisubs and drillships rated for less than 4,000 feet over the last three years. What is most readily apparent is the constant upward trend, which points to the fact that longer lead times each year have lead to relatively higher day rates and that day rates have been increasing significantly year-over-year. The increases year-over-year were most significant between 2005 and 2006, when day rates for the shortest lead time contracts in '06 exceeded day rates for the longest lead time contracts from '05.

Average Day Rates by Lead Time and Year
< 4,000' WD Competitive Semisubs & Drillships
graph of day rates by contract lead time

While the graph above provides a solid overview of the trends in day rates versus contract lead times over time, what is missing is how prevalent are contracts with a given amount of lead time. By looking at the proportion of contracts awarded by lead time, one gets a picture of the overall demand in the market. The table below provides the breakdown of contract awards by lead time as a percentage of all the contract awards in each year.

Contract Lead Times as Percentage of Contract Awards
< 4,000' WD Competitive Semisubs & Drillships
  2004 2005 2006
0 to 120 days 37% 20% 14%
121 to 240 days 27% 21% 11%
241 to 360 days 9% 21% 23%
361 to 480 days 4% 11% 18%
481 to 600 days 2% 12% 14%
601 to 720 days 2% 9% 9%
721+ days 19% 5% 12%

From looking at the data in the table above, it is immediately apparent that contract lead times have been increasing in each of the last two years. In both 2005 and 2006, the proportion of contracts with lead times of 120 days or less has dropped from the previous year. In 2004, contracts with 240 or fewer days of lead time accounted for 64% of the contract awards. By 2005, that share had fallen to 44% of the contract awards. And by 2006, it had dropped even further down to just 25% of the contract awards.

At the same time, the number of contracts with lead times of 360 days or more increased markedly year-over-year. In 2004, contracts with lead times of more than 360 days accounted for just 26% of the awards. In 2005, that percentage grew to 37%. In 2006, contracts with 360+ days of lead time accounted for the majority of contract awards, with 53% of the awards being that far in advance.

This trend in contract lead times is consistent with the strong demand for rig time that has been seen since 2004 and which is reflected by rising day rates. Higher demand drives higher day rates and longer lead times, and contracts with longer lead times tend to have higher rates.

Interestingly, for the first quarter of 2007, a divergence has occurred. The proportion of contract awards with lead times of 120 days or less has risen back up to 23%, higher than both 2005 and 2006. At the same time, the largest proportion of contracts have been awarded with 241 to 360 day lead times and with 720+ day lead times, each of which accounts for 27% of the awards in the quarter. In both these cases, the proportion of contracts for these lead times has increased over the previous three years, with the proportion of 720+ day contracts jumping from 12% in 2006 to 27% in Q1 2007. So, while 2005 and 2006 had much more even distributions of lead times, Q1 2007 had peaks for shorter lead times and the longest lead times, and very few contract awards with one to two year lead times.

Semisubs & Drillships 4,000'+ WD
At the high end of the offshore drilling fleet are the semisubs and drillships rated for water depths of 4,000 feet or more. These rigs command the highest day rates, so it is not surprising to see in the graph below that the average day rates by lead time are markedly higher than for the lower specification floating rigs examined above.

The trend that was seen for jackups and for lower spec floating rigs is also readily apparent for the high specification semisubs and drillships. As contract lead times increase, average day rates for those contracts tend to increase as well.

Average Day Rates by Lead Time and Year
4,000'+ WD Competitive Semisubs & Drillships
graph of day rates by contract lead time

As noted above, average day rates only provide a view into the relationship between lead times and day rates, but it is necessary to also look at the proportion of contracts awarded to each group of lead times to get a fuller picture. The table below provides the breakdown of contract awards by lead time to illustrate the changes in rig demand.

Contract Lead Times as Percentage of Contract Awards
4,000'+ WD Competitive Semisubs & Drillships
  2004 2005 2006
0 to 120 days 46% 16% 12%
121 to 240 days 23% 14% 6%
241 to 360 days 10% 12% 11%
361 to 480 days 2% 17% 14%
481 to 600 days 6% 9% 8%
601 to 720 days 3% 9% 12%
721+ days 9% 23% 35%

As can be seen above, the proportion of contracts with 120 day or shorter lead times has been decreasing steadily over the least three years. In 2004, 46% of the contract awards were given 120 days of less in advance, and a further 23% were given 121 to 240 days in advance. The combined group of contracts award with 240 days or less lead time accounted for 69% of the awards for 4,000'+ WD floating rigs in 2004. By 2005, that percentage had dropped to just 30%, and in 2006, contracts awarded 240 or fewer days in advance were only 18% of the contracts awarded.

At the other end of the lead time spectrum, contracts awarded more than 720 days in advance have constituted a growing proportion of contract awards. In 2004, these contracts represented only 9% of the awards, the fourth-largest group. In 2005 that percentage increased to 23% making it the largest group of contract awards. And by 2006, 720+ day lead times accounted for 35% of the contract awards for 4,000'+ floating rigs, 250% more than the next largest lead time group.

Looking at the first quarter of 2007, the proportion of contracts with lead times of 120 days or less has jumped back up markedly, rising from just 12% in 2006 to 31% in Q1 2007. Also noteworthy is the fact that day rates for these contracts are about 10% lower than for contracts with 120 day or shorter lead times in 2006. At the same time, contracts with longer lead times are still constituting the majority of contract awards, and these contracts have tended to have higher day rates than in previous years.

Wrapping Up
As can be seen from the data provided here, for the worldwide competitive floating rig fleet, the correlation between longer lead times and higher day rates is quite strong. With few deviations, contracts with longer lead times have had higher day rates and vice versa.

After examining the correlation between contract lead times and day rates across rig types and within the subsegments of each rig group over the last two weeks, it is clear that longer lead times do in fact correlate to higher day rates regardless of the rig type or specifications. Thus, as a general rule, the further in advance a contract is signed, the relatively higher its day rate will be.

For More Information on the Offshore Rig Fleet:
RigLogix can provide the information that you need about the offshore rig fleet, whether you need utilization and industry trends or detailed reports on future rig contracts. Subscribing to RigLogix will allow you to access dozens of prebuilt reports and build your own custom reports using hundreds of available data columns. For more information about a RigLogix subscription, visit www.riglogix.com.

Events  SUBSCRIBE TO OUR NEWSLETTER

Our Privacy Pledge
SUBSCRIBE


Most Popular Articles
Related Articles


Brent Crude Oil : $55.86/BBL 0.73%
Light Crude Oil : $52.64/BBL 0.51%
Natural Gas : $3.42/MMBtu 0.00%
Updated in last 24 hours