Analysis: 2010 Jackup Market Outlook

Auld Lang Syne 09

As 2009 draws to a close and 2010 approaches, we are taking a look at the year behind us in the rig market and providing thoughts and forecasts for the offshore and onshore rig market in the year ahead. This is the second installment in a series of articles which will review 2009 and preview 2010 for the jackup, floater and land rig markets.

With oil prices recently stabilizing in the $70-$80 range and some E&P spending budgets likely to modestly rise from 2009 levels next year, most offshore rig markets around the globe appear likely to either experience stabilization or stage some sort of recovery in 2010. As discussed in further detail below, we forecast the worldwide jackup rig count to increase next year. However, the jackup fleet faces its share of challenges over the next twelve months, and the 2010 stabilization/recovery period will likely be unsynchronized as some rig types and regional markets fare better than others. In the sections below, we preview what 2010 has in store for the jackup rig market.

Context for the 2010 Jackup Market

Compared to a year ago, the jackup market is much changed. As the table below shows, going into 2010 there are nearly 3 times as many ready stacked and cold stacked units as there were at the beginning of 2008 and 2009. Global jackup utilization currently hovers around 70%, well below levels in early 2008 and early 2009. In fact, global jackup utilization has only been this low during four periods in the last 20 years. A cursory glance reveals that given the health of the jackup market as 2009 draws to a close, 2010 will begin in a challenging setting.

GRAPH: Going Into The New Year

Although the statistics above highlight a tough environment going into 2010, recent jackup market indicators have been somewhat positive and stability has emerged as rig count and dayrate declines have flattened out (see discussion in our recent article titled 2009 Jackup Market Review). While stability has emerged, the biggest hurdle to overcome before any material leading edge dayrate recovery can occur is the overhang of jackup supply facing the market in 2010. As has been the case in prior cycles, absorption of idle capacity and expansion of backlog will likely be required before material dayrate recovery can begin.

Outside of the U.S. GOM, there are approximately 52 marketable units currently uncontracted, including ready stacked units and units enroute or in the shipyard for relatively short term work. A further 26 competitive, uncontracted newbuild jackups are scheduled for delivery through the end of 2010. In addition, close to 140 jackup contracts are set to expire throughout 2010. The graph below starts with the number of uncontracted marketable units today and accumulates uncontracted newbuild deliveries and jackup contract rollovers for the international fleet jackup fleet over the next year. We have excluded the U.S. GOM from this analysis due to spot nature of the market and minimal newbuilds targeting the region. Importantly, this analysis does not assume any new contracts. Other potential mitigating factors not accounted for in this analysis include delays or cancellations of newbuild deliveries, attrition of current supply, and further cold stacking of idle jackups.

GRAPH: 2010 International Jackup Availability

Regions facing the biggest supply challenges include Southeast Asia and the Middle East. Together, two regions alone account for over 60% of the international jackup contract rollovers through 2010 and are also likely target areas for many of the uncontracted newbuilds delivering next year.

Reviewing a mosaic of datapoints on jackup tendering activity, inquiries and recent contract awards, it is clear that jackup demand and bidding activity levels have increased in recent months - a trend likely to continue into 2010. In recent public commentary, drilling contractors have discussed increased visibility on rising jackup demand, and most expect to receive additional inquiries and requirements for jackups in the coming months. Furthermore, many E&P companies are expected to modestly increase their capital expenditure budgets from 2009 levels in 2010. Despite the supply challenges, which are likely to prolong a recovery on the dayrate front, we believe the rig count is headed higher next year (see 2010 RigOutlook section below).

One potential trend to monitor in 2010 is talk of the inclusion of age limits on some recent jackup tenders and an increased focus by operators on high spec and newly built units in recent jackup requirements. With the overhang in supply, operators have the luxury of being somewhat picky when it comes to incremental rig requirements. Contractors with high concentrations of higher spec or recently delivered jackups (like Rowan and Scorpion) have recently disclosed that some tender documents released in 2H2009 have stricter age limits. While it would be an exaggeration to say that older or lower spec jackups will be completely marginalized as a result of this potential trend, it is likely that these units could face more dayrate pressure than higher spec, newer units. Amidst fierce competition for work, owners of higher spec units have the option to step down and compete for contracts with lower spec rigs, potentially forcing some lower spec rigs to keep dayrates repressed in order to stay active. A potential mitigating factor to note here that newly built rig owners, especially unestabilished rig owners building rigs on a speculative basis, have higher dayrate hurdles due to financing costs in order to earn acceptable margins.

Currently, the average age of uncontracted ready stacked jackups and cold stacked jackups are 24 and 29 years old, respectively, compared to 22 years old for contracted jackups. Furthermore, utilization for jackups delivered in 2008 and 2009 stands at 79% today, above the global jackup fleet average around 70%. With more deliveries on the way over the next couple of years, it is to be expected that market share for high spec jackups delivered within the last 5-10 years will continue to grow. That said, we would be quick to note that age isn't everything when it comes to a rig's desirability. A contractor's track record, operator needs and relationships, the specific rig's maintenance and performance records and other factors are all taken into account. In the table below, we break down the jackup fleets of some of the larger jackup contractors by age and spec.

GRAPH: Jackup Contractor Age and Spec Profiles

2010 RigOutlook for the Jackup Fleet

Although the jackup market faces some significant challenges next year, we believe that the jackup rig count is poised to post gains next year as demand recovers. According to proprietary forecasts prepared by our RigOutlook modeling team, worldwide jackup demand is expected to bottom slightly below current levels in 1Q2010. Our team's predictive model, which has proven to be highly accurate (approximately 1% margin of error for 3Q09 predictions), forecasts the rig count to exit 2010 at almost 340 rigs, or approximately 7% higher than current levels. Meanwhile, although leading edge dayrates have stabilized as discussed in our 2009 Jackup Market Review, average dayrates earned by jackups in most regions are likely to continue to decline as the backlog of contracts signed near the peak of the cycle burns off.

GRAPH: Historical and Projected Worldwide Jackup Rig Count

Drawn from the most recent edition of the RigOutlook Jackup Rig Demand report, the charts below provide our expectations for contracted jackup rig counts for 2010 for several key regional jackup markets. Interestingly, the rig count in the Arabian Sea is expected to increase over the next year while the rig count in Southeast Asia is forecast to stabilize after recent declines. Meanwhile, the rig count in the North Sea is forecasted to hold steady over the next year. While not shown in the charts below, the average earned jackup dayrate in the regions shown below is forecast to decline between 5-10% in 2010 as contracts with higher dayrates signed near the peak of the cycle roll over.

When reviewing these graphs, please note that the blue line shows the actual number of rigs contracted. For dates in the past, the red line indicates the demand that was modeled using the RigOutlook mathematical model. For our 2010 forecast, the black line indicates a "bullish case" level of demand that might result in the event of oil shortages or supply interruptions that could drive demand above expectations. The green line presents a "bearish case" level of demand that could result if the economic recovery falls short of expectations. The orange line indicates the level of demand that we expect to see over the next year.

GRAPH: Historical and Projected Arabian Sea Jackup Demand


GRAPH: Historical and Projected Southeast Asia Jackup Demand