Lehman Bros.: Jack up day rates remain static in GOM

Sam Fletcher
Senior Writer

HOUSTON, Jan. 17 -- Despite the continued mobilization abroad of jack up rigs, day rates for those remaining units in the US Gulf of Mexico will stick at current lower levels vs. a recovery to the higher rental rates of early 2006, said Angeline M. Sedita with Lehman Bros. Inc., New York.

Lehman Bros. analysts blame the recent drop in US natural gas prices for declining demand for jack up rigs in the gulf. However, analysts in the Houston office of Raymond James & Associates Inc. reported Jan. 17, "Natural gas futures have risen slightly since the beginning of the year based on the cold weather sweeping across much of the US." The February natural gas contract increased by 3.7¢ to $6.64/MMbtu Jan. 16 on the New York Mercantile Exchange. On the US spot market, gas at Henry Hub, La., shot up by 77¢ to $6.77/MMbtu.

If natural gas prices were at prior levels of $7-9/MMbtu, the mobilization of jack ups out of the gulf would have resulted in a surge in day rates for those remaining. "But with natural gas price levels in the $6-7/Mcf range and general cautiousness by many of the very small E&P companies, coupled with smaller and smaller prospects in the shallowest of waters, we believe that rates are likely to stay at or around today's levels," said Sedita

As a result, Lehman Bros. said Jan. 16 it was reducing by 5-12% its estimates of earnings per share for the jack up rig drilling contractors followed by its investment analysts. "Companies are already down 10-20% from their December highs (and down 15-35% from early 2006). We believe that the stocks reflect much, but not all, of this anticipated near-term gas-related weakness," it reported.

However, Lehman analysts said, "Our long-term outlook remains unchanged, and we believe the broader energy cycle will continue, with a focus on the deepwater and international markets."

With lower rates expected for most jack ups except for high-specification rigs, Sedita said, "Even standard class 300-ft IC jack ups have experienced rate pressure, which we expect to continue." Still, she said, "We are not expecting day rates to go to new lows, but to stay at today's levels, which are 20-35% off their early 2006 highs."

Sedita noted, "Today's day rates are still over 300% higher than the trough day rates seen in 2002, and gross rig margins are still a very impressive 55-70% at today's day rates. Thus by any historical standard, jack up day rates in the gulf are well beyond any prior peak levels, but we simply don't see rates recovering to earlier year highs given today's gas prices."

She said, "All of the shallow-water drilling contractors are earning far more than they ever would have believed possible on these older, lower specification jack ups.... Further rig mobilizations will provide some help to the market, and we would anticipate 3-5 more rigs leaving the region."

Most offshore drilling contractors anticipated this decline in activity and have already reduced their jack up exposure in the gulf. "Many of the companies have aggressively mobilized jack ups abroad, thus the exposure of most of the contract drillers is far lower than it would have been only a year ago, with some companies having no exposure to the Gulf of Mexico or only a few remaining jack up rigs," Sedita said.

Meanwhile, the international jack up market and the deepwater markets remain robust. "Rig demand remains above rig supply, and recent contract signings have been at day rates, which are higher than our expectations," said Sedita. "We do have concerns about the international jack up market mid-to-late 2008, but view the market as tight in 2007."

The weakness in the US jack up market is not likely to spread to international markets, Sedita said. "Unlike prior cycles where US day rates have led the way, this cycle has instead been driven by the robust international markets as rigs moved abroad. Across the international markets, jack up utilization remains high, backlog intact, and rate roll-overs higher. Recent contract signings at a material rate increase in Mexico have also added to our confidence," she said. "However, ultimately we believe new jack up construction will saturate the international jack up market by mid-to-late 2008 and could pressure rates, but not yet."

Sedita reported "modest upside potential" for floater day rates. "Recent contract awards have been meaningfully higher than our estimates, and customer bidding activity on available rigs has been strong. Even speculative newbuilds from lesser-known drilling contractors are signing long-term contracts at peak day rates," she said. "Customer demand is driven by long-term drilling projects and oil price thresholds of $25-35/bbl. "Not only are the major oil companies active participants, but also the national oil companies and independents, which have both become a growing presence," she added.

Recent world-class discoveries, including Jack field in the US gulf, add confidence in the long-term attraction of deep waters, Sedita said. "Additionally, Mexico's Petroleos Mexicanos has also expressed a growing interest in the deepwater markets and could need as many as 7-9 deepwater rigs. New construction is entering the market in 2008-10; however, we believe demand will outpace supply additions and that the market will remain tight until 2010-11," said Sedita.

Contact Sam Fletcher at samf@ogjonline.com.

Related Articles

Statoil reduces capital budget by $2 billion following 4Q losses

02/06/2015 Statoil ASA has reduced its organic capital expenditure to $18 billion in 2015 from $20 billion in 2014. The move comes on the heels of a fourth qu...

Union strike ongoing at US refineries as negotiations continue

02/06/2015 A strike by union workers at nine US refining and petrochemical production plants remains under way as the United Steelworkers Union (USW) continue...

NCOC lets $1.8-billion pipeline contract for Kashagan field

02/06/2015 North Caspian Operating Co. (NCOC) has let a $1.8-billion engineering and construction contract to ERSAI Caspian Contractor LLC, a subsidiary of Sa...

Oil-price collapse may aggravate producing nations’ other problems

02/05/2015 The recent global crude-oil price plunge could be aggravating underlying problems in Mexico, Colombia, and other Western Hemisphere producing natio...

Petrobras CEO, five other senior executives resign

02/04/2015 Maria das Gracas Foster, chief executive officer of Petroleo Brasileiro SA (Petrobras) since 2012, has resigned along with five other senior execut...

Chevron unit farms into Mauritania offshore blocks

02/04/2015 Chevron Mauritania Exploration Ltd., a wholly owned subsidiary of Chevron Corp., has agreed to acquire 30% nonoperated working interest in Blocks C...

Saetre named Statoil president, CEO


Eldar Saetre has been named president and chief executive officer of Statoil, succeeding Helge Lund, who resigned in October.

BG’s 2015 budget ‘significantly lower than 2014’

02/03/2015 BG Group plans capital expenditures on a cash basis of $6-7 billion in 2015, a range it says is “significantly lower than 2014” due to “a lower oil...

BP trims capital budget by $4-6 billion

02/03/2015 BP PLC plans an organic capital expenditure of $20 billion in 2015, down from the previous guidance $24-26 billion. Total organic capital expenditu...
White Papers

Pipeline Integrity: Best Practices to Prevent, Detect, and Mitigate Commodity Releases

Commodity releases can have catastrophic consequences, so ensuring pipeline integrity is crucial for p...
Sponsored by

AVEVA’s Digital Asset Approach - Defining a new era of collaboration in capital projects and asset operations

There is constant, intensive change in the capital projects and asset life cycle management. New chall...
Sponsored by

Transforming the Oil and Gas Industry with EPPM

With budgets in the billions, timelines spanning years, and life cycles extending over decades, oil an...
Sponsored by

Asset Decommissioning in Oil & Gas: Transforming Business

Asset intensive organizations like Oil and Gas have their own industry specific challenges when it com...
Sponsored by

Squeezing the Green: How to Cut Petroleum Downstream Costs and Optimize Processing Efficiencies with Enterprise Project Portfolio Management Solutions

As the downstream petroleum industry grapples with change in every sector and at every level, includin...
Sponsored by

7 Steps to Improve Oil & Gas Asset Decommissioning

Global competition and volatile markets are creating a challenging business climate for project based ...
Sponsored by

The impact of aging infrastructure in process manufacturing industries

Process manufacturing companies in the oil and gas, utilities, chemicals and natural resource industri...
Sponsored by

What is System Level Thermo-Fluid Analysis?

This paper will explain some of the fundamentals of System Level Thermo-Fluid Analysis and demonstrate...
Available Webcasts

The Alternative Fuel Movement: Four Need-to-Know Excise Tax Complexities

When Thu, Jun 4, 2015

Discussion on how to approach, and ultimately embrace, the alternative fuel market by pulling back the veil on excise tax complexities. Taxes may be an aggravating part of daily operations, but their accuracy is crucial in your path towards business success.


On Demand

Prevention, Detection and Mitigation of pipeline leaks in the modern world

Thu, Apr 30, 2015

Preventing, detecting and mitigating leaks or commodity releases from pipelines are a top priority for all pipeline companies. This presentation will look at various aspects related to preventing, detecting and mitigating pipeline commodity releases from a generic and conceptual point of view, while at the same time look at the variety of offerings available from Schneider Electric to meet some of the requirements associated with pipeline integrity management. 


Global LNG: Adjusting to New Realities

Fri, Mar 20, 2015

Oil & Gas Journal’s March 20, 2015, webcast will look at how global LNG trade will be affected over the next 12-24 months by falling crude oil prices and changing patterns and pressures of demand. Will US LNG production play a role in balancing markets? Or will it add to a growing global oversupply of LNG for markets remote from easier natural gas supply? Will new buyers with marginal credit, smaller requirements, or great need for flexibility begin to look attractive to suppliers? How will high-cost, mega-projects in Australia respond to new construction cost trends?


US Midstream at a Crossroads

Fri, Mar 6, 2015

Oil & Gas Journal’s Mar. 6, 2015, webcast will focus on US midstream companies at an inflection point in their development in response to more than 6 years shale oil and gas production growth. Major infrastructure—gas plants, gathering systems, and takeaway pipelines—have been built. Major fractionation hubs have expanded. Given the radically changed pricing environment since mid-2014, where do processors go from here? What is the fate of large projects caught in mid-development? How to producers and processors cooperate to ensure a sustainable and profitable future? This event will serve to set the discussion table for the annual GPA Convention in San Antonio, Apr. 13-16, 2015.

This event is sponsored by Leidos Engineering.


Emerson Micro Motion Videos

Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!


Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected