Jackup operators hope for a recovery with legs

Russell McCulley
Tuesday, December 15, 2009

The recent building boom in jackups will peak in 2010, with more than two dozen new rigs, many without contracts, scheduled to enter a market still trying to dig out from under a global recession. But hopes abound that the market will be able to absorb the newbuilds without day rates taking too big a hit, Russell McCulley reports.

In a conference call with analysts following the release of the company’s 3Q 2009 results, Noble Corporation chairman, president and CEO David Williams neatly summed up what seems to be the prevalent thinking in the jackup industry.

‘Now we’re not exactly sure where we are in recovery,’ Williams said, ‘but the market is starting to feel better again.’

‘The demand side appears to have some legs that folks are getting a little excited about.’ Rick Carr, Deloitte

That mix of caution and optimism was a recurring theme as 2009 drew to a close. And for jackup operators, the past year couldn’t end soon enough. Calling 3Q 2009 ‘our most challenging quarter to date,’ Hercules Offshore CEO and president John Rynd, announcing that company’s $37 million loss in the quarter, said the results reflected the ‘weakest market conditions we’ve seen domestically in years, and the lowest activity levels since the onset of the industry.’ While the bleak picture was brightened somewhat by a stronger international market, he said, 2010 looks to be another challenging year. ‘Our optimism there is measured,’ Rynd noted, with a number of newbuilds hitting the market next year without contracts. ‘In addition to the ±80 jackups currently idle in the international markets, this will push out any recovery of utilization or day rates into 2011.’

Worldwide, there has been a modest uptick in utilization rates over the past few months, leading many observers to believe that the market may have bottomed out in the third quarter. According to ODS-Petrodata, global utilization rates for jackups stood at nearly 68% of available supply in October 2009, or an average of about 306 rigs working out of a total 452. That was considerably lower than the same month in 2008, when utilization hovered at around 85%, but a very slight improvement over the late summer 2009’s figures.

A similar uptick occurred in the US Gulf of Mexico, which benefitted from recovering natural gas prices and a quiet hurricane season. But the numbers look grim nonetheless, with utilization climbing to just 28% of the available fleet from a low in July of 23%. In October 2008, by contrast, utilization stood at 71% after rebounding from the double punch of hurricanes Gustav and Ike.

Good numbers in the first half of 2008 – high utilization and day rates plus strong oil and gas prices – encouraged a boom in newbuilds, and the wave of new jackups will peak in 2010, when ODS-Petrodata says 29 units will hit the market, compared to just eight in 2009. In 2011, if plans hold, another 15 new jackups will enter the market followed by nine more in 2012. In all, the company says, 66 new jackups were under construction from 2009 onward, and 56 of those would be arriving for service without drilling contracts. Many of the units under construction belong to national oil companies and should not necessarily be considered uncontracted; on the other hand, they could still be counted as additions to the fleet that could take work that would otherwise have gone to a rig in the competitive market.

‘It’s my sense that E&P operators have gotten a taste of newer, high-spec equipment, and they don’t want the retread stuff or old assets that might break down.’ John Keller, Stephens

Rynd predicted that, although a number of the newbuild orders slated for 2011 ‘will get cancelled or significantly delayed,’ the industry will still face ‘a fair amount of capacity to work through prior to any significant rate improvement.’

The recession and credit crunch were hardly kinder to other major jackup operators, although most express confidence that the worst is over. At $117,000, Diamond Offshore drilling’s average day rates in 3Q 2009 were actually up $5000 from a year earlier. But utilization had declined to 65% from 89% in 2008. Ensco International reported a 3Q utilization rate of 61% for the company’s jackup segment, down from 97% in 2008, and an $8000 decline in average day rates to $148,000. President and CEO Dan Rabun pointed out that the company recently had signed contracts for several premium jackups, and forecast that ‘jackup utilization is projected to rise, which will help to lessen the impact of declining day rates’.

Noble ended the quarter on a somewhat positive note as the last of three newbuild jackups, the Noble Scott Marks, began a twoyear contract with Venture Production in the North Sea at $213,000 a day. And Rowan Companies, which has six jackups currently under construction, announced that it had resumed construction of two EXL-class rigs that were put on hold when the credit market contracted. The jackups are part of a four-rig package the company ordered from Keppel in 2007. Rowan CEO Matt Ralls, announcing quarterly results, expressed hope that the worst was over. While excess rig supply could continue to exert downward pressure on day rates, he said, ‘we believe global demand for jackups . . . bottomed during the third quarter.’

Rick Carr, a principal at Deloitte Consulting, agreed. ‘The demand side appears to have some legs that folks are getting a little excited about,’ Carr told OE. With the economy showing signs of stabilization and the credit markets loosening for some, jackup operators are feeling somewhat optimistic. ‘The numbers at the moment don’t look fantastic, but I think the general consensus is they will get better,’ he said. ‘Utilization will stabilize, and prices will follow that.’

Those rates have some ground to make up. ‘On average, since 1984, the average utilization rate is around 80%. And there’s kind of a pivotal point of 85% that they need to be in order to command the right rates, based on the investments [drilling companies] have. Given that we’re about 70% internationally, that’s driven rates down considerably. On average, rates are down about 50% from last year on an international basis’ – and even lower in the Gulf of Mexico and West Africa, he said.

Hand wringing

Carr acknowledged that there’s some hand-wringing in the industry about the number of newbuilds coming online in 2010 and beyond. ‘I think the general consensus is that probably the end of this year, early next year, utilization rates will bottom out in the high 60s-low 70s [percentile] and [day rates] will probably stay down for the course of the next year,’ he said. ‘From a profitability standpoint, obviously that’s not a great thing for those drillers. The thought is it will start to swing back, and some of the newbuilds will be offset by some of the demand that we’re starting to see now.’

Some cold stacked rigs could remain in port indefinitely as newer rigs come on the market. ‘Depending on whose reports you look at, 60-70% of the existing fleet is over 25 years old,’ he said. ‘A lot of these newbuilds that are coming on are a lot more advanced in terms of technology and able to command a little bit better rates.’

John Keller, a Houston energy analyst with Arkansasbased financial services firm Stephens Inc, said much of the cold stacked inventory is made up of mat-supported rigs that are of limited use in many international markets. ‘That affects what’s being built today,’ he said. ‘Nobody is announcing new matsupported jackups; there’s enough inventory to cover that market.’ Returning cold stacked rigs to service requires a considerable investment to get them back in working condition and replace parts that may have been pilfered for more marketable rigs. And it’s getting harder for older jackups to compete.

‘It’s my sense that E&P operators have gotten a taste of newer, high-spec equipment, and they don’t want the retread stuff or old assets that might break down,’ Keller said. ‘They want newer rigs. That’s not a blanket statement across the board, but I think there’s an appetite for those newer assets.’

Perhaps more critical for the owners of newbuild jackups coming online in the next few years, Keller said, is the price of oil. ‘I think that if you have oil in a 70-plus dollar environment, then you have sufficient demand to put all the newbuilds to work. Now you may displace some existing rigs because of that newbuild phenomenon. But I think you’re actually going to have sufficient demand to keep day rates where they are.’

Keller said the fact that most newbuilds have yet to pick up contracts is not in itself cause for alarm. ‘But it depends on how rational the builders are when they bring these rigs to market,’ he said. ‘If they start really cutting rates just to get the rigs working, the first domino to fall could set a negative tone. The fear – and I can’t say it’s totally unwarranted – is that these new rigs are going to put pressure on day rates. But I don’t necessarily fall into that category.’ OE

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