Foolish Fundamentals: Dayrates

With all the recent buzz about the energy sector, I thought I'd define a common piece of industry jargon: dayrates.

Dayrates convey the amount oil and gas companies are willing to pay drilling contractors for their services at any point in time. Take the full contracted amount, divide it by the number of operating days, and there's your dayrate. When rates are soaring, it's payday on Rig Street. So whether you're looking to invest in an onshore driller like Grey Wolf (AMEX: GW  ) or an offshore honcho like Transocean (NYSE: RIG  ) , it's critical to understand what moves dayrates.

Not surprisingly, rates rise when the demand for rigs outpaces supply. This partially explains why offshore dayrates are lowest in the Gulf of Mexico, which hosts a relative glut of jackup rigs. Of course, the drillers adjust their geographic deployment of rigs depending on where the going rates are highest.

But it's not simply about shuffling rigs around. When you see an area like offshore Brazil running at 100% utilization, as it is today, you know there's got to be another limiting factor. There are two, actually, but they go hand in hand: the technical limitations of older rigs, and the long lead time in constructing new ones.

A lot of drilling is moving into ultra-deepwater regions, where only the most recently built "floaters" can handle the drilling depth. These units currently set you back a cool half-billion dollars each, so it shouldn't surprise anyone that GlobalSantaFe (NYSE: GSF  ) and Diamond Offshore (NYSE: DO  ) don't have extra ones just floating around. Facing high levels of exploration demand, they do order new rigs, but it can take several years to get those new builds delivered. We're sitting smack in that interim period between initial high demand and the supply coming online to satisfy it. Gonzo profits tend to be earned therein.

A driller can follow one of two strategies in times of volatile dayrates -- in other words, just about all the time, since rates can swing faster than a third-grader hopped up on Pixy Stix. Management can either attempt to lock in present rates by attempting to sign long-term contracts, or they can sign short "spot" contracts and hold out for better rates in future years. Generally, long-term lock-ins are the prudent thing to do in a period of elevated rates, which is why you can expect to see contracts lengthen in periods of strong pricing.

For more on drillers:

Speaking of drills, Fool contributor Toby Shute is overdue for a dental checkup. He doesn't own shares in any company mentioned. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (46)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 527181, ~/Articles/ArticleHandler.aspx, 12/20/2014 6:56:19 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement