The Jack-Up Market Stumbles In 2009

The jack-up rig market was weak in 2009, as rig count spent most of the year in a steep decline thanks to the fall in oil and gas exploration and development spending. The rig count initially followed the path of crude prices lower, but decoupled mid year, and kept declining despite the doubling of crude oil prices off the bottom. It has only recently stabilized.. (To learn more about oil and gas terminology, see Understanding Oil Industry Terminology.) IN PICTURES: 10 Retirement-Wrecking Moves

Although use of jack-up rigs fell everywhere, it was the tale of two cities in the jackup market, with utilization in the Gulf of Mexico ending the year at only about 30%, compared to world-wide jack-up utilization of 73%.

Declines aside, there was a good side to the decline in the rig count, as operators saw expenses fall. Rowan Companies, Inc. (NYSE:RDC) owns a fleet of 22 jack-up rigs, and has 13 under contract as of December 2009. The company said that daily rig operating costs fell 12-15% from 2008 to 2009.

The year 2009 also saw the first drop in earnings for the jack-up companies this cycle. Ensco International (NYSE:ESV) owns 42 jack-up rigs, and saw its earnings grow for the last five years, reaching $8.11 per share in 2008. Current analyst estimates have the company earning $5.39 per share in 2009, and $4.18 per share in 2010.

Another issue plaguing the jack-up market in 2009 was the issue of demand for jack-ups from Petróleos Mexicanos (PEMEX), a Mexican-state-owned oil company. Late in 2009, it was reported that PEMEX may consider letting many of its rig contracts expire as they roll over.

Noble Corp (NYSE:NE) is particularly exposed to PEMEX, with 10 rigs leased to the NOC in 2009 and 2010.

This reduction in activity from PEMEX spilled over into the oil service area in the onshore area, where Halliburton (NYSE:HAL) reduced its guidance by 2 cents for the fourth quarter of 2009 due to a drop in activity.

During 2009, some companies decided to get out of the jack-up area altogether. Pride International, Inc. (NYSE:PDE) completed the spin-off of its jack-up rig fleet in August 2009 into a new company called Seahawk Drilling, Inc. (Nasdaq:HAWK). Pride International will now attempt to focus exclusively on the deep water market.

The Bottom Line
The jack-up rig market hit a few speed bumps in 2009, as utilization and day rates plunged due to the drop in capital spending by its customers. However, if the long-term bullish thesis on energy holds, the assets these companies own will be indispensable in finding oil and gas in the future.

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