Weekly Offshore Rig Review: Utilization Correlation

For this week's rig review, we are going back to the basics: Oil prices and rig utilization. These key indicators together provide a broad, yet useful, guide to the activity in the offshore drilling industry. Yet of more interest to us in our examination is the relationship between these indicators. Of key consideration is the value of oil prices as a leading indicator for rig utilization and day rates.

This is the first in a two-part series, where we will be examining these relationships, starting with the correlation between oil prices and rig utilization covered below.

Oil Prices
We'll start by examining the history of NYMEX front-month crude prices since 1996, using that as a representative benchmark for crude prices in general. Over that nearly twelve-year period, crude prices have seen some large fluctuations, but in general they have trended upwards, particularly over the last six years, as can be seen clearly in the graph below.

Of particular importance in our examination today are the "inflection points" where the price of oil peaked or bottomed out. We will be looking at these points to compare between the highs and lows in oil prices and the peaks in utilization.

The first of these points within our range of interest is the peak that occurred in January 1997, when NYMEX crude prices reached an average of $25.18 for the month. This was a 34% increase over one year earlier, and it marked the high point for oil prices at that time. Subsequently, oil prices went on a downward trend that lasted almost two years until a new low point was reached in December 1998 when the NYMEX price averaged $11.31 for the month. That represented a 55% decline from the earlier peak and a 38% decline from one year earlier. After that, crude oil prices were back on the rise for nearly two years, with NYMEX crude peaking at an average of $34.26 (up 203% from the previous low) for the month of November 2000 before beginning a year-long decline to an average of $19.40 (a 43% decline from the peak) in December 2001. Since the start of 2002, oil prices have generally continued to move up.

Offshore Rig Utilization
A key question in this examination is how closely (if at all) is offshore rig utilization tied to crude oil prices. After looking at the data and comparing trends for oil prices and utilization, it is quite clear that changes in oil price do help to drive changes in utilization.

The graph below shows the combined utilization rate for the fleet of jackups, semisubmersibles, and drillships around the world. The ups and downs in utilization can clearly be seen to trail the high and low points in oil prices.

For instance, when oil prices peaked in 1997, rig utilization continued to move upward before peaking 11 months later. Again in November 2000, when oil prices peaked, rig utilization continued its upward trend for another six months before beginning to dip along with oil prices. From the opposite perspective, when oil prices bottomed out at $11 per barrel in December 1998, utilization had already been dropping, and it quickly reached its low just five months later.

Looking at utilization for specific rig types, it quickly becomes apparent that jackups are much more sensitive to oil price fluctuations than are semisubs and drillships. In the case of jackups, on average, it took less than 5 months after a peak or nadir in oil prices was reach before a corresponding high or low in jackup utilization resulted. However, in the case of floating rigs, it took more than 13 months for the same process to occur. The primary driver behind this difference is the nature of contracts awarded to the different types of rigs, with semisubs and drillships generally landing significantly longer contracts than jackups, which tend to insulate them from changes in the market.

In terms of key observations to be taken away from this analysis, we would like to highlight these points:

  • In general, changes in offshore rig utilization levels tend to trail changes in oil prices by six to twelve months.
  • The market reacts more severely to downturns in oil prices than upturns, with utilization levels dropping faster than they climb.
  • However, the market reacts more quickly to upturns in oil prices, with utilization levels typically beginning to climb just six to eight months after a low.
  • Rising oil prices will drive utilization up only to a certain point (the 85% to 90% range), after which further increases in oil price are unable to drive increases in utilization.

For More Information on the Offshore Rig Fleet:
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