Rig Utilization Rate

What Is Rig Utilization Rate?

The rig utilization rate describes the number of oil drilling rigs being used by a company as a percentage of a company's total fleet. A company's rig utilization rate often speaks volumes about both the company's prospects and the global economic landscape. Quite often during times of economic recession, rig utilization rates will be quite low due to a decreased demand for oil.

Understanding Rig Utilization Rate

Along with other metrics, the rig count and the utilization rate are reported in business and trade publications to describe the state of the industry. Rig utilization rates may be reported by type of rig (e.g., ultra-deepwater submersible, ultra-deepwater drillship) as well as by region (e.g., Gulf of Mexico, North Atlantic).

In most cases, the higher the rig utilization rate, the higher the revenues for a firm. This is because a high rate bridges the gap between investment, in constructing and operationalizing a rig, and utilization, which generally leads to profits. During periods of growth where the demand for oil is high, rig utilization rates often run at 90% or higher—sometimes to 100%.

Rig utilization rates are also affected by retirements of previous rigs. For example, an oil and gas company may retire old rigs or existing rigs to meet modern specifications. In such cases, its rig utilization rate and rig count will fall.

Activity in the oil and gas industry is measured not just by the rig utilization rate. Rigs are required to drill for oil and gas, so the raw number of rigs in the field—the rig count—is an important indicator as well. A high rig utilization rate may signal a need for more rigs in the field, assuming demand remains strong.

These metrics and many others are known as key performance indicators, and every industry has metrics of its own that indicate how a company or the industry as a whole is performing.

Example of Rig Utilization Rate

Oil company ABC has a rig utilization rate of 40% during a period of low demand. As demand increases, the company presses more of its rigs into operation and its utilization rate increases to 80%. During this time, oil prices also increase and ABC's stock price jumps as profits increase. After a year of high prices and supply, demand for oil craters and ABC is forced to curtail operations for its rigs and its rig utilization rate drops to 60%. The company decides to further retire old rigs and modernizes others in its fleet. Therefore, its rig utilization rate falls to 40% within two years. Its stock price falls during this time period from previous highs.