Activity in the shallow-water Gulf of Mexico is at its lowest level since the start of the offshore drilling in the late 1940s, owing to persistently low oil prices, the CEO of the premiere company working in that arena said Thursday.

Today just five shallow-water jackup rigs are working in the US Gulf, two of which belong to Hercules Offshore, while a third Hercules rig is preparing to start work in the region during the next several weeks, John Rynd said during a quarterly earnings call.

"With no certainty on commodity prices and their own cash flows, customers are hard-pressed to move forward with drilling programs," Rynd said. "As such, many opportunities considered were deferred to later 2016 or 2017 or cancelled altogether."

Even so, discussions with customers suggest that some incremental demand may develop over the year, he said, adding marine acreage transactions could occur over the year that could spur "a bit" of activity.

Today, seven of Hercules' nine marketed US Gulf rigs are idle although ready for work. Dayrates for its two active jackup rigs are now $50,000 and $55,000 respectively.

Hercules also has nine marketed rigs internationally, of which four are working. These earn $64,000 to $135,000.

Two years ago, just before crude oil began its slide from over $100/b to around $40/b today, Hercules was earning dayrates of around $100,000 to $120,000 for most of its then-18 Gulf of Mexico jackup rigs. Its eight international rigs at the time earned in the $85,000 to low $200,000s.

In March 2015, early in the industry downturn, three of Hercules' nine US Gulf jackups were idle. Dayrates for its six working rigs ranged from $69,000 to $115,000. For its overseas rigs, Hercules' dayrates were $85,000 to $136,000.

'VERY THIN MARGINS'

One bright spot for Hercules is that its newbuild jackup, called the Highlander, will arrive in the UK North Sea in Q2 and shortly afterwards start work for Maersk Oil at a rate of $225,000/d. The term runs for five years.

In outlining what he calls a "challenging" 2016, Rynd said about 350 of the world's roughly 473 jackups, or 74%, are under contract. But over 60 of those contracts are slated to end by mid-year 2016.

If there is no follow-on work for those rigs, market utilization rates could fall to about 60% in Q3, approaching industry lows in the mid-1980s, Rynd warned.

And that number does not include the roughly 122 newbuild jackup rigs in the global order book that are still slated to be brought to the market in the next year or two. Around 80 of them are set to debut this year alone.

But "we suspect a good portion of new deliveries will be deferred or remain stacked in the yard," Rynd said.

Industry was supposed to deliver close to 70 jackup rigs in 2015, but only 15 made it out of the yard, he said. The deferrals have helped maintain dayrates even at relatively low existing levels, but still pose a long-term challenge to a recovery in the jackup market because excess supply will be a drag on dayrates.

New work, should it materialize, may only maintain low existing dayrates, Rynd said. "We believe dayrates for new tenders will have very thin margins if not already at breakeven" rates, he said.

In addition, Hercules earlier this year granted a 5% price concession to Saudi Aramco for three rigs -- two of them for full-year 2016 while the third rig will have a lower price from the start of 2016 until work is finished, likely in late April or May.

Rynd said the concession was granted to "protect our relationship with the largest global consumer of jackups, maintain term on existing contracts and position ourselves for an extension on Hercules 266," the rig that will finish up its contract shortly.

The driller is discussing a contract extension with Aramco, Rynd said, but he expects the new dayrate to be similar to current levels of $64,000/d, a little over half the $117,000/d rate two years ago.

--Starr Spencer, starr.spencer@platts.com
--Edited by Richard Rubin, richard.rubin@platts.com

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