uploads///Utilization

What Utilization Rates Mean for Offshore Drilling Investors

By

Mar. 25 2016, Updated 8:06 a.m. ET

Utilization rates

The utilization rates for rigs have drastically fallen compared to their historical rates. The utilization rate is an important indicator to gauge demand and activity in the offshore drilling industry. Utilization rates reflect the performance of offshore drillers (OIH) (IYE) like Transocean (RIG), Rowan Companies (RDC), Diamond Offshore Drilling (DO), Noble Corporation (NE), Seadrill (SDRL), Seadrill Partners (SDLP), Atwood Oceanics (ATW), and Ensco (ESV).

 

The utilization rate is calculated as the ratio of working rigs to the number of available rigs. The rig zone includes cold-stacked rigs in the total available rigs.

Higher utilization rates signify a smaller gap between supply and demand for rigs, and vice versa. Higher utilization rates attract a higher day rate, and vice versa.

Article continues below advertisement

Floating and jack-up rigs

The utilization rate for drillships fell to 73.3% in February 2016, compared to 73.9% in January and 76% in December 2015. This is significantly lower than the rate of 85.7% recorded in February 2015.

The utilization rate for semisubmersibles fell to 68% in February compared to 70% in January and 73% in December 2015. This is significantly lower than the utilization rate of 85% in February 2015.

Along with the floater segment, the jack-up segment has suffered from lower utilization rates. The jack-up utilization rate dropped to 60.7% in February 2016 as compared to 62.5% in January and 67.8% in December 2015.

Utilization rates not expected to improve

The contract activity in the offshore drilling space is at its lowest level since the 1980s. As we saw in the previous article, oil exploration and production companies have slashed their capital expenditures for the second consecutive year. With falling capital expenditures, Seadrill (SDRL) and many other offshore drilling companies expect the majority of rigs with contracts expiring in 2016 won’t be used in follow-up work.

In an interview on March 21, 2016, Transocean’s (RIG) CEO, Jeremy Thigpen, said he doesn’t expect an increase in rig leases until next year or sometime in 2018. Given the grim outlook, we might not see substantial improvement in utilization rates for quite some time.

Advertisement

More From Market Realist