Although most investor attention is focused on the North American land rig count, due to its large absolute number and impact on the energy cycle, the Gulf of Mexico offshore rigs are also an important part of the sector. Unfortunately, this area of the market is also weak, with low utilization.

IN PICTURES: 9 Ways To Use A Tax Refund

Underutilized Jackup Rigs
The latest weekly report on the Gulf of Mexico rig count shows the number of rigs working at a low number. ODS-Petrodata surveys the industry and in the period ending April 24, 2009, there were 69 rigs working in the Gulf of Mexico, out of a total fleet of 115, for a utilization of 60%. Among jackup rigs, the utilization was an even lower 46.6%.

Jackup rigs are designed to drill in shallow water of up to 550 feet. A jackup rig is typically composed of a hull and three legs. The rig is towed to the drilling site, the legs are extended into the seabed and then the hull is elevated, or "jacked up", above the water level. (Learn more in Oil And Gas Industry Primer.)

This drilling reduction is reflected in results from the rig companies with offshore fleets. Ensco International (NYSE:ESV) said during its conference call that second-quarter operating days would be down 7% "due to the softening jackup market." The company cited three reasons for the fall in demand: lower natural gas prices, cuts in capital expenditures by customers and the upcoming hurricane season.

The company also noted that costs in the Gulf of Mexico would be increasing, partly due to an increase in insurance rates for its policy that is renewing in July, 2009.

Falling Demand
Noble Corp. (NYSE:NE) also saw weakness in demand in the Gulf of Mexico, although it reported increased interest from PEMEX in Mexico, which has added seven jackups in the last six months, and is expected to come to market soon with another four to six rigs.

Rowan Companies (NYSE:RDC) doesn't release earnings until May 7, but the weak jackup market is reflected in the company's fleet status report released in mid April. The report shows suspended construction on two new rigs, and two existing rigs are still available. Twelve other rigs have contracts that are up for renewal in 2009. The company does get higher day rates for its rigs compared to the industry, due to its specifications and newness relative to other operators. The company's utilization was also at 99% in the fourth quarter of 2008.

Gulf Exodus
Some rig companies are getting out of the Gulf of Mexico entirely. Pride International (NYSE:PDE) is in the process of spinning out its mat-supported jackup fleet of 20 rigs.

Hercules Offshore (Nasdaq:HERO) is attempting to sell six jackup rigs that the company calls "retired"; the rigs are missing major components. The company has a total of 31 jackup rigs currently in its fleet.

The Bottom Line
While nowhere near as weak as the land rig market, the offshore rig market, particularly the jackup rig market, in the gulf of Mexico suffers from low utilization and won't recover until energy companies are convinced that the economy is bottoming and commodity prices are set to head back up. (Learn more in A Guide To Investing In Oil Markets.)

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Savings

    The Worst Financial Problems Ultra-High-Net-Worth-Individuals (UHNWIs) Face

    Understand how the problems of ultra-high-net-worth individuals (UHNWIs) are different from ordinary problems, and identify the unique financial challenges they face.
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do interest rates increase during a recession?

    Interest rates rarely increase during a recession. Actually, the opposite tends to happen; as the economy contracts, interest ... Read Full Answer >>
  3. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  4. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  5. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  6. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>

You May Also Like

Trading Center