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Which Company’s Rig Mix Will Help It Outperform Peers?

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Rig types

Offshore (OIH) exploration and development wells are drilled with the use of rigs. Rigs come in varied sizes and characteristics. Jack-ups are normally used for drilling in shallow waters. Floaters, which are used in deep water and ultra-deep water, include semisubmersibles and drillships.

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Revenue breakdown

Seadrill (SDRL) and Ensco (ESV) get 71% and 62% of their total revenue, respectively, from the floater segment. Also, most of Diamond Offshore’s (DO) revenue (96%) comes from the floater segment. Within this segment, Diamond Offshore’s (DO) main focus is on ultra-deepwater. Unlike Diamond Offshore, Rowan Companies (RDC) mostly concentrates on the jack-up segment, and its floater segment constitutes only 31% of total revenue. Most of Rowan Companies’s (RDC) jack-up revenue comes from high specification jack-ups.

Which segment is performing better?

The offshore drilling (OIH) industry remains challenged, and almost all the companies in the industry have recorded negative revenue growth in 2Q15 compared to the prior quarter. The jack-up segment has been more severely affected. Generally, jack-up contracts are for a shorter duration than that of floaters. This hampers jack-up utilization when markets are not performing well, which is reflected in companies’ revenue. The combined 2Q15 jack-up revenue for the above mentioned four companies was 15% lower than in the previous quarter. The combined 2Q15 floater revenue was only 3.5% lower than in the first quarter.

We can gauge demand for these segments by looking at their utilization rates. A lower utilization rate signifies a higher mismatch between demand and supply. According to data published by Rigzone, as of September 11, 2015, the utilization rate for jack-ups fell to 59% from 62% last month. The semisubmersible utilization rate also fell to 64% from 67% last month, but it is still above the jack-up utilization rate. Drillships showed an improvement with a 71% utilization rate against 68% last month.

Based on these data, Rowan Companies (RDC) should be more negatively affected than other companies mentioned in this series. Diamond Offshore (DO), which mainly operates in ultra-deepwater, may see its revenue affected the least of the four companies.

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