Weekly Offshore Rig Review: Day Rate Outlook - Semisubs

This week worldwide offshore rig utilization held steady at 83%. Utilization has held near this level for the most of the last six weeks, after declining from above 84% in June and July.

In the last issue of the Weekly Offshore Rig Review, we examined the past and future day rate trends for the jackup market. This week, we will continue that analysis by looking at the semisubmersible market.

It is worth noting at the outset that semisub and jackup day rates and utilization have followed similar patterns over the last 10 years. However, there have been some noteworthy differences that we will be reviewing.

Semisub Day Rates - The Last Big Peak
As with jackup utilization and day rates, the 1997 period was an excellent time for the semisubmersible fleet as well. From May through December 1997, semisub utilization rose above 90%, with as many as 145 of 155 rigs under contract (93.5% util) when the market peaked in the fourth quarter. At the same time, semisub day rates also rose to new highs, averaging $178,000 ($225,700 in 2006 dollars) per day in December 1997.

With the start of 1998, the semisub and jackup markets began a rather steep decline in terms of day rates and utilization, although semisub utilization rates declined more slowly than jackups did. Utilization reached a low in August 1999 when only 71% of the semisub fleet was working. For the jackup fleet, early 2000 marked a turning point towards higher utilization, but semisub utilization continued to decline as low as 66% in March 2000.

A point that is particularly interesting about semisub day rates during this cycle is that when utilization peaked in 1997, day rates peaked in the same month. And when utilization bottomed out in early 2000, day rates were actually recovering slightly from an average of only $54,000 per day in mid-1999. After the low point of semisub utilization in March 2000, average day rates, which had risen more than 20% from their 1999 low, dropped off again and pushed even lower, reaching below $50,000 per day in August and October 2000. So, this cycle did not have the typical lag time between peaks and lows in utilization and day rates.

Semisub Day Rates - Coming Back for More
In 2001, as the offshore drilling sector began to recover, semisub utilization and day rates began to recover as well. From April 2001 to February 2002, semisub utilization pushed back up and held near 80% for that entire period, peaking at around 83% in October 2001. This was a more typical cycle in which day rate increases trailed the utilization increases and peaked near $114,000 ($129,000 in 2006 dollars) five months after utilization peaked.

Semisub Day Rates - Resting at the Bottom
In late 2002, the semisub market diverged most notably from the trends in the jackup market. Whereas jackups utilization dipped in late 2001 before recovering and holding steady for nearly two years, semisub utilization began a long decline. By the start of 2003, semisub utilization had fallen to just over 60%, and it held below 70% for 20 straight months before finally turning around and pushing back above 70% utilization in August 2004.

During this extended period of low utilization, semisub day rates took a long, slow decline. Having last peaked at $114,000 per day in March 2002, day rates meandered slowly down to about $90,000 per day in October 2004. That is a decline of $24,000 (21%) over 31 months, which is a turtle's pace compared with the $124,000 (70%) decline seen in 19 months of 1998-99. As is to be expected, the low point in this downward turn was reached about 7 months after utilization rates began their recovery.

Semisub Day Rates - Climbing Back Up
With the start of 2005, the semisub market began a very rapid revival. Utilization rose from 74% in January 2005 to about 87% for this September. During that same time, day rates have risen more than 80%, and are flirting with a new all-time high in real dollars (although they are still well below the inflation-adjusted high of $225,000 reached in late 1997).

Looking forward to the next two years, it is fairly clear the semisub day rates are going to continue to increase and reach never-before-seen levels. Utilization has been and will continue to be a key driver of day rates, and semisub utilization is still going strong. In fact, there are more semisubs currently contracted for work in December than are working right now. Additionally, more than 70% of the semisub fleet is locked into long term contracts that will keep the rigs working through the end of 2007. Even looking out two years from now, more than 50% of the semisub fleet is already contracted. It is difficult to say when semisub utilization will peak, but it certainly is not about to peak yet.

With that many rigs already contracted, the day rates for those contracts are going to be the primary determinant of future semisub day rates. And those contracts are lucrative. The average day rate associated with all semisub contracts for December 2007 is just over $270,000. Even further out, the average day rate for contracts in August 2008 is $305,000. So, for the next two years, it is entirely likely that semisub day rates will continue to rise, with very little chance of day rates falling below their current level any time during that period.

For More Information on the Offshore Rig Fleet:
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