Weekly Offshore Rig Review: New Contract Contraction

Worldwide offshore rig utilization declined below the 83% mark this week, the first time it has been below 83% since it reached that level in February. A net total of 1 rig came off contract this week, so utilization would have held slightly above 83%. However, the overall size of the rig fleet increased this week as Premium Drilling took delivery of two new jackups, the Deep Driller 1 & 2. Both rigs are undergoing inspections before starting contracts in the next several weeks.

Over the course of the last year and half, the offshore rig fleet has experienced tremendous gains in revenue being generated via day rates. Since the start of 2005, average day rates for semisubs and drillships as a group have risen 54%. At the same time, day rates for jackups have grown an astounding 83%.

As in any market, price is very much driven by supply and demand, and since the start of 2005, worldwide demand for offshore rigs has reached its highest levels in years. Jackups saw utilization rates around 90% in Q3 2005, and floater utilization has held near 85% since December. That represents the highest utilization rates seen since 1998.

Another fact of market economics is that high prices tend to reduce demand. With offshore rig day rates reaching new highs, is rig demand going to be impacted? We'll take a look at trends in rig contract awards to see where things may be heading.

Jackups Landing Contracts
Over the course of 2005, RigLogix tracked a total of 766 jackup contracts being awarded, which averages out to nearly 63 contracts being awarded each month of 2005. Thus far in 2006, a total of 242 jackup contracts have been awarded, which amounts to a rate of 48 contracts per month. Extended out for the rest of the year, the current rate would yield a total of 580 jackup contracts being awarded for 2006, which amounts to about 25% fewer contracts being awarded this year compared to last year.

While a 25% reduction in jackup contracts for the year would seem to indicate a significant decline in demand, part of the difference is due to the length of contracts. For the first half of 2005, jackup rig contracts being awarded averaged 161 days in length. By the second half of 2005, that number had grown to 197 days. And thus far this year, new jackup contracts being signed have averaged 250 days in length.

Another factor in the reduced number of jackup contracts being signed this year is the growing lead time before rigs that are already committed are available to start new contracts. Throughout 2005, the average number of days from when a contract was awarded until it began was 136 days. So far for 2006, that number has risen nearly 20% to 161 days of lead time.

In order to illustrate the trend in jackup rig contract awards, the graph below shows a sample of rig contracts awarded on a month-by-month basis over the last 17 months. The contracts shown in the graph constitute about half of the contracts tracked in RigLogix. This sample was selected because more details are available for these contracts, and they provide the same overall trends as an analysis of all jackup rig contracts over the same time period.

graph of jackup contract awards

From the graph above, it is clear that on a month-by-month basis, the number of contracts being awarded to jackups held fairly steady throughout 2005, with an expected peak during the northern summer months. January 2006 also saw a significant number of jackup contract awards, but those numbers declined steadily for the next 3 months before reaching a low in April. Contract awards have recovered in May, but it remains to be seen whether that is just the start of temporary summer upswing or a longer term trend.

Floater Contract Awards
Semisubmersibles and drillships have experienced a similar trend in contract awards since the start of 2005, although the number of contract awards was much greater earlier in 2005 and the trend towards fewer contracts being awarded began in the second half of 2005 instead of in 2006.

In the first half of 2005, RigLogix tracked a total of 240 contracts being awarded to floaters, an average of 40 contract awards per month. That number of contract awards is lower than the number of jackup contracts awarded during the same time period, but as a percentage of the fleet size, it works out to about a 25% higher rate of awards. New contracts dropped off noticeably in the second half, however, when 184 contracts were awarded at a rate of about 30 per month. And 2006 has been slower still, with only 99 contract awards thus far this year, about 20 per month.

The graph below illustrates the trends in contract awards for floaters since the start of 2005. As with the jackup graph above, this represents a sample of more detailed contracts within RigLogix, but it accurately portrays the overall trends for all semisub and drillship contract awards.

graph of floater contract awards

As with the jackup fleet, a portion of the reduction in contract awards is due to the fact that floaters are being contracted for longer periods of time further out in advance of their new contract start dates. For floaters, average contract length was 295 days for contracts awarded in the first half of 2005, which is about 10% shorter than the average of 327 days for 2006-to-date. Meanwhile, the contract fixture to start date differential has increased significantly. In the first half of 2005, floater contracts were being signed an average 259 days before starting. So far this year, that lead time has grown to 448 days, a more than 70% increase.

Both jackups and floaters are seeing increasing contract lengths and more time from when contracts are signed until they are executed. This means that for the short term, a majority of the rigs in the fleet are already committed to contracts that will keep them working for much of 2006, and well beyond in many cases. But the decreasing number of new contracts being signed seems to indicate that high utilization and day rates are driving medium-to-long-term rig demand down.

For More Information on the Offshore Rig Fleet:
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