Up to 30 Gulf of Mexico (GOM) jack-up rigs will have been moved to international waters between late 2005 and early 2007 — a 25% capacity reduction in the GOM fleet in just over a year’s time — which will require domestic producers to pay more and obtain fixed contracts to tap into their reserves, Raymond James energy analysts noted in the latest “Stat of the Week.”

Analysts J. Marshall Adkins and Darren Horowitz estimate 24 GOM jack-up assets are scheduled to be moved to the Middle East, West Africa, Southeast Asia, the North Sea or the Indian Ocean by early 2007 since the hurricanes devastated the GOM last year, and “we anticipate this trend to continue, likely drawing an additional four-to-six jackups to international waters over the next several months.”

This “substantial supply deficit” may drive one of the most meaningful GOM jack-up day rate “step changes” ever experienced, when post-hurricane season domestic operators’ demand for deeper shelf wells “reemerges with intent on monetizing and growing their reserve bases.” The analysts estimate a 15-20% fleet wide average spot-market day rate price hike over the next few quarters, with the biggest hikes reflected in rigs operating on “premium assets, whose Gulf of Mexico supply is the most constrained,” and for suppliers of both cold-stacked and upgraded capacity.

Adkins and Horowitz said they “anticipate a pronounced rebound in Gulf of Mexico jack-up day rates (15-20% on average above current levels)” into fiscal year 2007, “as demand for deeper shelf wells (some for deep gas prospects) reemerges and is exacerbated by the extremely robust international jack-up rig migration trend widening the current Gulf of Mexico supply deficit.” Operators, said the analysts, “are poised to experience a deficit of capable assets,” and will be “forced to pay up to secure jackups with which to monetize their shallower-water reserve base.”

Raymond James estimates that of 102 total GOM jack-ups, 67 are operating (removing cold/warm stacked units, units in the shipyard, out of service units and units under construction). “As noted, this represents one of the lowest absolute levels of effective demand experienced within the world’s largest jack-up market, and is certainly a wide disparity from the effective demand levels in the 160-170 range experienced during the 2000/01 time frame. Given the historical status of the Gulf of Mexico as the swing supplier of jack-up capacity (both working and stacked), it is no surprise growing international demand (fueled by increasing cash flows being deployed through the drill bit to replace/grow operator reserves) focused on the supply rich Gulf of Mexico market.”

International demand, mostly from operators (both national and public oil/gas companies), “has translated into fixtures being awarded at a substantial premium (both in terms of day rates and duration) versus the Gulf of Mexico.” Contracts for rigs overseas are currently for four-year durations at an average day rate of about $190,000, versus current GOM day rates, “which have dipped into the $130,000 to $150,000 range for a unit of this capability given the hurricane-related 3Q softness.”

The international contracts, noted the analysts, are offering drilling contractors “an increased geographic footprint, improved revenue and earnings visibility, as well as negating Gulf of Mexico hurricane-related risk and associated insurance premiums. Thus, international operators will continue to lure rigs out of the Gulf of Mexico with such attractive fixtures until domestic operators (some of which will begin focusing on monetizing deeper shelf prospects following hurricane season) close the disparity between foreign rate/term premiums.”

Adkins and Horowitz said they do not expect the GOM to become a “multi-year fixed-term jackup market overnight, but it is not unreasonable to anticipate the growing Gulf of Mexico supply deficit to materialize into one-year type fixed contracts (for more capable jack-up assets) with improved pricing.”

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