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How the Current Slowdown Impacts Offshore Rig Day Rates

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Oct. 9 2015, Updated 3:06 p.m. ET

Day rates

When compared to the fall in utilization rates, day rates are less severely impacted. Rigs receive a day rate, which is a rental charge for each day the rig is under contract.

Day rates are an indicator of market conditions and where revenues are heading for offshore drilling (XLE) companies like Transocean (RIG), Rowan Companies (RDC), Diamond Offshore (DO), Noble Corp (NE), Seadrill (SDRL), Ensco (ESV), Pacific Drillers (PACD), and Atwood Oceanics (ATW).

Along with demand and supply dynamics, day rates are affected by a variety of factors, including rig specifications, regional differences, water depth, and the jobs undertaken.

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Day rates: Jack-ups and floaters

Drillships experienced the maximum fall of 25% in day rates compared to same period last year. The average day rate of drillships in September 2015 was $361,861, compared to $359,587 in the previous month and $370,631 in September 2014. Semisubmersibles and jack-ups experienced a minimal decrease of 1% in their day rates. The average semisubmersible day rate has fallen to $366,684 in September 2015 from $367,474 recorded in September 2014.

Similarly, the jack-up day rate recorded in same period last year was $122,499, which decreased to $121,963. Although there is a small decline in the average day rate, the day rates for jack-ups operating in water depths of 200 feet and deeper decreased up to 30%.

Generally, the floater market is more volatile than the jack-up market. The floater market is characterized by a smaller number of contracts and a greater influence of individual rig specifications on day rates. Utilization rates going forward are expected to further deteriorate, which should have a negative impact on day rates in the coming quarters.

Plus, companies have experienced many contract negotiations, where the predetermined day rates have been reduced in the second quarter. As exploration and production companies have cut down their capital expenditures, we could expect more such contract negotiations, which are expected to hamper the day rates these companies receive.

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