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Raymond James Energy Stat of the Week
by J. Marshall Adkins

Energy Stat: Newbuilds Making a Mess of the Jackup Market
July 28, 2014

In our Stat last week, Is Now the Time to Buy or Flush the Floaters?, we highlighted our thoughts on the impending floating drilling rig downturn. This week, we conduct a similar analysis of the global jackup rig fleet and attempt to quantify the magnitude and the duration of the upcoming down-cycle. Specifically, we consider how many jackups will need to be stacked, when they will be stacked, and how far dayrates for different jackup rig classes might fall over the next few years. So, why do we expect a downturn in the jackup rig market? Put simply, high-end jackup rig deliveries over the next few years should far outpace global

demand growth for additional jackup rigs. Currently, we estimate roughly an additional 140 new jackup rig deliveries to hit through the end of 2017. That represents almost a 10% average annual supply growth rate on a current base of about 435 jackup rigs. Unfortunately, we expect demand for additional jackups to grow less than 6% annually (or about 80 additional rigs). That means by the end of 2017 there would be about 100 homeless jackups that would need to be warm/cold stacked (see the red bars in the adjacent graph) up from the ~40 stacked jackups today. Put another way, nearly 20% of the jackup fleet could not be working by the end of 2017. Like the floaters, we expect that high-grading of the jackup fleet will weigh on dayrates and put pressure on the older end of the fleet.

This is a summary of a much more detailed commentary. Please contact your financial advisor for the full report.

There is no assurance any of the trends mentioned will continue in the future. Past performance is not indicative of future results. Investing involves risk and investors may incur a profit or a loss. Specific sector investing can be subject to different and greater risks than more diversified investments. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only form a small part of a diversified portfolio. Markets for commodities are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

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