Weekly Offshore Rig Review: Caution Construction


Worldwide offshore rig utilization moved down again this week, falling to 83.3% as a net total of four rigs came off contracts.

With the number of rigs that are currently under construction, the offshore drilling fleet is preparing to undergo some significant changes over the course of the next three years. The size of the jackup fleet is going to climb by 63 rigs, increasing 16% from its current 398 rigs. At the same time, the floating rig fleet is set to increase by 42 rigs, rising more than 20% from its current size of 204 semisubs and drillships.

The tables below present some aggregations about the rigs set to join the fleet, including when the rigs will be added, how much they are going to cost, and how many of those rigs are already contracted. The issue of how many newbuild rigs are already contracted is an interesting one because these new rigs entering the market without contracts will increase the supply of rigs available and inevitably drive down day rates.

In the case of the jackup newbuilds, only 13 of 63 new rigs already have contracts in place. Of the 23 jackups being delivered by the end of 2007, nine of them already have contracts in place. The other 14 jackups that will be joining the fleet during 2007 will be in search of contracts between now and then.

As can be seen from the table below, the majority of jackup rigs currently under construction are going to be delivered within the next two years. Among all the newbuild jackups, only about one in five of them have contracts already in place, with the majority of the contracts (69% - 9 of 13) being for rigs that will be completed before the end of 2007. Of the four jackup contracts in place for jackups to be delivered after 2007, all of them are with established drilling contractors (Diamond, Noble, Maersk) that own at least 20 offshore rigs.

As it stands right now, utilization among jackups is still very high, having remained in the mid to upper 80% range for the last two years. However, utilization rates have been on an overall downward trend for the last 14 months, with an uptick during the months from May to August of this year. As these new rigs join the fleet, utilization will almost certainly continue to be pushed downward throughout 2007. By 2008, those declines in utilization could begin to have a downward pull on jackup day rates. And when another 27 uncontracted rigs join the fleet in 2008, the jackup market will probably begin to see further declines in utilization and day rates.

Upcoming Jackup Deliveries
  Under Const Avg Const. Cost Num. Contracted Perc. Contracted
Q4 2006 3 rigs $115 million 3 100%
2006 3 rigs $115 million 3 100%
Q1 2007 7 rigs $123 million 4 57%
Q2 2007 4 rigs $118 million 0 0%
Q3 2007 3 rigs $134 million 2 67%
Q4 2007 6 rigs $121 million 0 0%
2007 20 rigs $123 million 6 30%
Q1 2008 10 rigs $141 million 2 20%
Q2 2008 8 rigs $141 million 1 13%
Q3 2008 2 rigs $147 million 0 0%
Q4 2008 10 rigs $158 million 0 0%
2008 30 rigs $147 million 3 10%
Q1 2009 3 rigs $178 million 1 33%
Q2 2009 4 rigs $149 million 0 0%
Q3 2009 1 rigs $155 million 0 0%
Q4 2009 2 rigs $168 million 0 0%
2009 10 rigs $162 million 1 10%
Total 63 rigs $140 million 13 21%

Floating Rigs
In the case of floating rigs, which includes semisubs and drillships for the sake of this discussion, the picture is somewhat brighter than with the jackup newbuilds. Of the 42 rigs set to be delivered, 23 of them (55%) already have contracts in place for when they leave the shipyards.

Overall Utilization for drillships and semisubs is somewhat lower than for jackups, ranging from the upper 70% to mid 80% over the last two years. However, this includes many first, second, and third generation semisubs and drillships that have much lower utilization rates than the higher specification rigs. All but two of the new floating rigs joining the fleet over the next three years will be capable of drilling in 5,000'+ water depths, and 30 of them will be rated for 10,000' or greater. As such, it is more appropriate to examine utilization among the 4,000'+ floating rigs in order to gauge the current level of demand within this segment. Utilization among these rigs has been among the strongest of any subsegment within the fleet, holding above or very close to 90% for the last year. And utilization rates for these deepwater rigs are still on the rise.

The new semisubs and drillships joining the fleet should serve to reduce some of the strong upward pressure on day rates, although not until 2008 when they begin to leave the shipyards. Among rigs set to be completed during 2008, 11 of 17 (65%) do not have contracts yet. In fact 2008 is the only year in which there are more non-contracted newbuild floaters than contracted ones set to be completed. The majority of the floaters that do not have contracts (11 of the 19 non-contracted rigs) will be completed that year. So, 2008 will likely be the year in which some utilization and day rate softening will occur.

Upcoming Semisub and Drillship Deliveries
  Under Const Avg Const. Cost Num. Contracted Perc. Contracted
Q4 2007 2 rigs $575 million 2 100%
2007 2 rigs $575 million 2 100%
Q1 2008 4 rigs $420 million 1 25%
Q2 2008 3 rigs $438 million 3 100%
Q3 2008 2 rigs $537 million 0 0%
Q4 2008 8 rigs $454 million 2 25%
2008 17 rigs $453 million 6 35%
Q1 2009 6 rigs $432 million 3 50%
Q2 2009 6 rigs $522 million 5 83%
Q3 2009 3 rigs $500 million 3 100%
Q4 2009 6 rigs $429 million 3 50%
2009 21 rigs $466 million 14 67%
Q1 2010 2 rigs $453 million 1 50%
2010 2 rigs $453 million 1 50%
Total 42 rigs $443 million 23 55%

Established vs. Startup Contractors
Another interesting trend to note is that the biggest players are playing a very small role in the current rig construction boom. Of the top ten drilling contractors in terms of fleet size, their combined fleets (401 rigs) account for 67% of the total jackup, semisub, and drillship fleets (602 rigs). However, they are only building a combined total of 19 rigs, which accounts for just 18% of the 105 jackups, semis, and drillships currently under construction. Among those top 10 offshore drilling contractors, Pride, Nabors, and Todco are sitting the building boom out entirely.

In fact, among the jackup newbuilds the majority of the rigs under construction (60% - 38 of 63 rigs) are being built by startup contractors, which for the purposes of this discussion are companies that have managed rigs for fewer than three years. On the other hand, the majority of the floating rigs being built (71% - 30 of 42 rigs) are being built by established contractors, companies that have managed at least one rig for three or more years.

Among these contractors, Premium Drilling is making the largest change in its fleet. The company currently manages four jackups, but it has another twelve jackups being delivered over the next several years. That's a 300% increase in its fleet size, which is the largest percentage increase. In terms of the actual number of newbuilds, Premium is tied with SeaDrill for the most new rigs currently being built, both of which are building twelve rigs. However, while Premium is focusing solely on jackups, SeaDrill is instead building eight floating rigs and only four jackups to supplement its current fleet of eight rigs.

Established vs. Startup Contractors
  Jackups   Floaters
  Under Const. Num. Contracted % Contracted   Under Const. Num. Contracted % Contracted
Startup Contractors 38 rigs 4 rigs 11%   12 rigs 4 rigs 42%
Established Contractors 25 rigs 9 rigs 36%   30 rigs 19 rigs 67%
Total 63 rigs 13 rigs 21%   42 rigs 23 rigs 55%

In general, the more established drilling contractors have focused on building floating rigs, and most of those rigs have had contracts lined up since they started construction. This segment currently has very high demand, and is experiencing rising utilization rates. So, the addition of rigs in this market should help to alleviate some pent up demand among operators.

On the other hand, a whole group of startup contractors and speculators has also entered the jackup market, where few large contractors have been spending much money. This segment of the fleet has also seen relatively high utilization, but this is currently declining. With 50 jackups entering the market in 2007 and 2008 alone, utilization and day rates could begin to experience a significant decline over the course of the next two years.

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