What Rig Utilization Rate Shows for Offshore Drilling’s Future

The rig utilization rate has drastically fallen compared to its historical rates. The utilization rate is an important indicator to gauge demand and activity in the offshore drilling industry.

A rising utilization rate hints at positive performance for offshore drillers (XLE) such as Transocean (RIG), Rowan Companies (RDC), Diamond Offshore Drilling (DO), Noble (NE), Seadrill (SDRL), and Ensco (ESV).

The drillship utilization rate remained constant at 69% in July 2016 compared to the previous month. But it has fallen drastically from 77% at the start of the year and from 83% in July 2015. Similarly, the utilization rate for semisubmersibles is constant at 60% from the last month but has declined from 73% at the start of the year and 78% in July 2015.

There has also been a drastic fall in jack-up utilization, which was 61% in July 2016. That’s a decline from 69% at the start of the year and 72% in July 2015.

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

Higher utilization rates signify a lower mismatch between the supply and demand for rigs compared to a lower utilization rate. A higher utilization rate attracts a higher day rate, and vice versa.

The utilization rate has been pressured from the supply as well as the demand side. However, the supply side pressure is expected to ease a bit. Scrapping activity is expected to increase substantially. Also, newbuilds aren’t expected to enter the market at a fast pace since all companies are aggressively postponing their newbuild deliveries.