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Offshore Rigs Rise despite Weak Crude Oil Prices

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Jul. 15 2015, Updated 1:06 p.m. ET

Offshore rig count rises

In the week ending July 10, 2015, the US offshore rig count rose by two to 31, compared to the previous week. Offshore rig counts have averaged 29 over the past two months. The offshore rig count is nearly 53% off its four-year high of 66 in August 2014. In the 12 months to July 10, the offshore rig count fell by 25, or 45%.

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Offshore rigs are different

Offshore wells are more expensive than onshore wells, but they have much longer production lives. Offshore projects also have long lead times. Falling crude oil prices don’t affect planned offshore projects in the short term.

The Louisiana section of the Gulf of Mexico accounts for almost all of the US offshore drilling. According to the EIA (U.S. Energy Information Administration), 13 projects are expected to start in the Gulf of Mexico in the next two years, eight in 2015, and five in 2016.

Rig utilization

According to the industry news organization Rigzone, the utilization of jack-up rigs stood at 59% on July 10, 2015. In comparison, utilization was ~77% a year ago. Offshore rig counts indicate how busy rig operators like Transocean (RIG) and Ensco (ESV) are at any given time. Offshore rig count determines the activity levels of subsea OFS (oilfield service) equipment and technology providers like Cameron International (CAM) and FMC Technologies (FTI). The rig count also helps foresee revenue trends for offshore rig equipment manufacturers like Oil States International (OIS). Ensco accounts for 3.4% of the VanEck Vectors Oil Services ETF (OIH).

Jack-up rigs are mobile offshore drilling units that perform drilling and workover operations to lift energy. Rigzone estimates that the use of jack-up rigs will likely fall below 50% in 2015 due to lower crude oil prices.

Trends in the offshore rig count also indicate offshore energy activity by upstream and integrated energy companies. ExxonMobil (XOM) and Royal Dutch Shell (RDS.A) have offshore operations.

Steady production, led by a stable rig count in the Gulf of Mexico, will also help midstream MLPs (master limited partnerships) like Energy Products Partners (EPD), Shell Midstream Partners (SHLX), and MarkWest Energy Partners (MWE), that operate in the Gulf of Mexico region.

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