zman’s Energy Brain

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Rig Rates Coming Down?

Posted by zmann on October 3, 2006

From Abraxas 9/29/06: “Watson said a recent drop in natural gas prices may lead the company to delay certain drilling activities until rig rates are balanced with commodity prices.” Yes, I know it’s Abraxas and that should be enough said but this is the second comment in a week following CHK’s shut in comments and may bode for peaking action in onshore rig day rates if commodity prices remain weak much longer.

Also, Rig Zone is looking for topping or even slight declines in Jackup rates in 2007. Can semi-submersible rates be that far behind? Actually yes due to the length of contracts in place as well as the deeper, larger, oilier targets these rigs go after. However, starting to see some moderate eps reductions for the offshore contractors including RDC, PDE, NE, RIG, DO, ESV, and GSF. Think ESV, RDC, and PDE have biggest chance of catching downgrades by end of October (slight weakness in JU day rates, expected slight decline in rig utilization). I may be a little early here on the impact rates (which haven’t come down yet) but we try to look forward in this business and the stocks are certainly telling you something is amiss.

No eps movement seen out of the onshore analysts in recent history, but I’d bet that with a continuation of low gas prices, aside from a pop when we get some weather, you’ll start to hear more E&P guys pressuring the drillers on rates- especially in the US and Canada.

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