Source: Platts RigData Day Rate Report | May 2017
A powerful surge in day rates for the preferred Class D (1,500-1,999 hp) rig nationwide propelled the US average day rate to a gain of +1.07% in May, a strong rebound from the weakening in growth rate seen in April, according to Platts RigData’s Day Rate Report.
In all but one of the seven drilling markets that the Day Rate Report focuses on, big gains among Class D rigs were the driver for regional increases. They ranged from +1.4% to +3.8%, and even where they didn’t provide the biggest gain in a region, Appalachia, they contributed in a hefty way (+1.9%).
Looking at it another way, there has been a dramatic reversal in the past year with the practices of drillers offering discounts vs. asking for premiums for their rigs.
During the boom, demand for new rigs—especially the preferred Class D rigs, considered ideal for developing the shales and other unconventional plays that dominate drilling today—spurred cost inflation to the point where long-term contracts proliferated as a means to tamp down spiraling costs. With the bust, more than 1,000 rigs were sidelined, and the active rig count collapsed to a record low. Included were many top-tier Class D rigs that had been the driver in day rate inflation. The collapse reversed contract preferences, and since then a more competitive spot market has arisen to dominate contracting. A year ago, even Class D AC power rigs—the most prized of all rig types in today’s environment—were offering discounts against spot rates to operators in order to secure the steady work of a term contract.
But today, overall, Class D AC rigs are seeking premiums if operators want to lock down a term contract. For the most part, other Class D rig types aren’t landing discounts or premiums against spot rates. But clearly operators are more focused on specifically the rig type that works for them for a specific job, and that tends to be an AC rig with 1,500 hp, walking system, and 7,500 psi mud system.
The upshot: Overwhelming demand for this type of rig has swung the entire market for Class D rigs from a status of net discount to one of net premium.
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