Off to a Good Start
Currently, 337 out of 366 worldwide competitive jackups are under contract. That amounts to a 92% utilization rate for this month, which is one of the highest jackup utilization rates seen in any given month over the last several years. In addition, 337 competitive jackups under contract is the most jackups that have been contracted during one month for at least 10 years.
Looking at the current day rates for these rigs, the average day rate for a competitive jackup stands at $134,000. This is the highest average day rate that jackups have ever seen. So, clearly, 2008 is starting off well for the jackup fleet.
But Where Are Things Headed?
As of Jan 24th, there are 205 competitive jackups that have contracts in place for December of this year. Those 205 rigs account for 56% of the worldwide competitive jackup fleet, indicating that more than half of the current fleet is currently contracted for work at the end of the year.
There are 30 new competitive jackups that are set to join the fleet in 2008, with an almost-even split between first half (13 rigs) and second half (17 rigs) deliveries. Of these new rigs, the overwhelming majority do not have contracts pending for when they are delivered. Only 9 out of these 30 rigs already have contracts in place for after they leave the shipyard. This is just 30%, while 70% of the newbuild jackups are still looking for contracts.
Adding in these newbuilds brings the total rig count in December 2008 up to 395 jackups. Given that larger fleet size, the percentage of rigs contracted for work in December drops to 51%.
In terms of day rates for those contracted rigs, the average day rate for jackups currently under contract to work in December 2008 is $154,000. That is about $20,000 (15%) higher than the current average of $134,000.
Thus, more than half of the competitive jackups in the world are already contracted for work nearly a year out, and day rates for those contracts are 15% higher than current rates. Those are strong indicators of a very healthy level of demand.
In order to put things in context and see how that demand really looks, it is necessary to look back at previous years and see how 2008 compares.
Looking Back at 2006
At that time, a total of 206 jackups were contracted for work in December 2006. Given a total competitive jackup fleet size of 347 rigs in December 2006, about 60% of the jackups in the world were contracted in January 2006 for work in December 2006.
In terms of day rates, jackups were earning an average of $75,000 per day in January 2006. For contracts for work in December 2006 that were pending at the start of 2006, the average day rate was $93,000, which is $18,000 (24%) higher than the ongoing day rates in January 2006. When December 2006 actually arrived, average day rates had risen even higher to $101,000.
Looking Back at 2007
Looking at pending contracts in January 2007, there were 237 jackups that had contracts pending for work in December 2007. Given that the competitive jackup fleet would grow to 364 rigs in December 2007, that means that 65% of these rigs were contracted for work in December of that year.
As for day rates, jackups were earning an average of $106,000 per day in January 2007. On the pending contracts for work in December 2007, the average day rate was $142,000, about $36,000 (34%) higher than in January 2007. However, unlike in 2006, when day rates continued to climb throughout the year, when December 2007 actually arrived, average day rates were at $133,000. That is a $27,000 (25%) increase over the January day rates, but it is $10,000 less than the average day rates for contracts that were already in place in January. So, the 97 rigs that landed contracts for December 2007 after January received an average day rate of $111,000 (22% less than contracts in place in January).
What That Means for 2008
A second important point for the competitive jackup fleet is the fact that 30 newbuilds are expected to be delivered by the end of the year. That will add more rigs in 2008 than in both 2006 and 2007 combined. Given that most of these high-spec rigs are not contracted, any supply-induced price pressure will be greatly reduced, meaning that day rates are almost certainly going to be declining on new contracts signed this year.
Speaking of day rates, a third point jumps out. As noted above, in 2007, contracts signed during 2007 for work in December had 22% lower day rates than contracts that were already in place in January 2007. This trend will almost certainly continue and even increase this year given the increasing supply of rigs. So, if we assume that contracts signed this year for work in December will garner day rates 25% below the day rates currently in place and that utilization for December 2008 will stay on par with current levels (89%), we would expect to see day rates averaging about $137,000 for competitive jackups in December 2008. This would be just a 4% increase over the current average day rate. That would indicate a leveling-off of day rates, which have been climbing for the last 4 years and have nearly tripled in that time frame.
So, 2008 is likely to go down as a turning point for the worldwide competitive jackup fleet. Demand is slowing compared with previous years, and therefore utilization is likely to drop off slightly. In addition, with the largest influx of new rigs in over 20 years, the fleet will be growing significantly. These factors taken together will almost certainly bring a halt to the steady climb in day rates.
At the same time, 2008 will be one of the best years ever for the competitive jackup fleet from the perspective of the size of the fleet, quality and capabilities of the rigs, and overall earnings generated by these rigs. Taken by itself, 2008 will be a banner year, but when looking at the trends, there are definite signs of a slowdown. So, while one would certainly not say that this is a grey cloud with a silver lining, maybe this silver cloud has its grey lining.
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