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David Krapf, Editor-in-Chief Happy Mardi Gras in the U.S. Gulf


February 12, 2013

It’s Mardi Gras Day here in New Orleans, and for companies that operate in the U.S. Gulf, it is indeed a great Fat Tuesday. Why? The news in the Gulf continues to improve.

Today, Houston-based Hercules Offshore, which owns the largest shallow-water jackup rig drilling fleet in the U.S. Gulf, reported fourth-quarter income of $4.3 million, or 3 cents a share, compared with a loss of $21.5 million, or 16 cents a share, for the fourth quarter 2011. Sounds good, but the big news was what John T. Rynd, president and CEO, said in the earnings release: “Market fundamentals in the U.S. Gulf of Mexico strengthened throughout 2012, to levels that, in many respects, are the best they have been in the long history of drilling in the region. This momentum continues through to today.”

Rynd added that discussions with customers are already focusing on 2014 demand. As a result, with jackup rig availability tight and increased demand from customers, Hercules has begun its first rig reactivation. The Hercules 209, a 200'-class jackup, is being reactivated, with startup scheduled for next quarter. Right now, the economics for rig reactivation are attractive, and more unstackings may come. “We are optimistic regarding our growth prospects based on current market dynamics in the U.S. Gulf of Mexico,” Rynd said.

Twenty-nine of Hercules’ 37 jackup rigs are in the U.S. Gulf, and 19 of them are currently being marketed. The other eight are in international markets. Since late 2011, the marketed jackup utilization rate has averaged over 90 percent, according to Hercules. Day rates have also risen and Hercules' current rig backlog is at record levels. The average length of term contracts are now between six months and a year compared to three months or less a year or so ago.

As we have reported, a big driver on the shelf has been liquids (or condensate). It accounts for a growing percentage of U.S. Gulf shelf production. According to Hercules, liquids made up about 27 percent of shelf volume from 2000-2006. From 2007 to 2011, it was 33 percent and could now be as high as 40 percent. Almost 80 percent of Hercules’ drilling contracts are related to liquids-rich activity.

As Rynd said, the outlook is bright. The merger and acquisition market for shelf holdings has been strong and has helped increase drilling demand. This should continue.

 

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