DEFINITION of 'Dayrate Volatility'

Dayrate volatility is the amount of fluctuation of contracted prices for oil and gas drilling over a period of time. Exploration and production (E&P) companies hire third party rigs for drilling. Dayrate is equivalent to a flat fee divided by the number of days in service. Volatility in the dayrate is largely determined by supply and demand for oil and gas, as well as the supply of worldwide drilling rigs.

BREAKING DOWN 'Dayrate Volatility'

The most basic revenue measure for an oil and gas rig company is the dayrate. These drilling rigs operate on land ("onshore") and in oceans ("offshore"). The amount of price fluctuation in the dayrate depends on supply and demand forces. For example, when supply of global oil is tight and demand is strong, dayrates will likely rise, especially if rig availability is low. If new discoveries of oil or gas combines with slack demand, E&P firms will decrease production, idling some drilling rigs and thus causing a decline in dayrates. When a number of factors are at play at once - say, conflict in the Middle East, hurricanes in the Gulf of Mexico, pipeline disruptions in the continental U.S., increased natural gas supply in Russia - dayrates for the different types of drilling rigs (jack-up rigs, drillships, semisubmersible rigs, etc.) can be volatile month-to-month or over quarters. Dayrates also vary from region to region.

As an illustration, the average worldwide dayrate for semisubmersible rigs trended downward from over $500K in July 2013 to under $300K in July 2016. During that three-year period, the average dayrate showed periods of volatility, dropping from approximately $450K in August 2014 to $320K in September and then spiking up to $380K in October. Due to a global oil glut in late 2015, the average dayrate of around $350K in September 2015 plunged to around $175K in October.

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