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Gold/Mining/Energy : Strictly: Drilling and oil-field services -- Ignore unavailable to you. Want to Upgrade?

To: Czechsinthemail who wrote (14049)	3/7/1998 7:01:00 AM
From: Big Dog	Read Replies (3) \| Respond to of 95453

Baird, one "problem" with having a high capacity rig is that it costs more (for the drilling contractor to buy). In order to justify a higher cost, the drilling contractor must charge a higher day rate...right? What if the rig does not consistently get work that requires that higher capacity? The oil company that doesn't utilize the extra capacity (be it water depth, harsh environment, third mud pump, etc etc.) is not going to pay for it. The result is a higher cost rig working at a day rate that does not reward the higher capacity (and cost) of the rig. To follow the analogy using cars -- The taxi driver with the Chevrolet provides basic transportation for $20 an hour. The Taxi driver with the Mercedes provides bells and whistles along with his transportation for $35 an hour. Since the Mercedes initially cost more than the Chevy, the Mercedes driver must fully utilize his car on jobs that are willing to pay for more than simple transportation. If he only works his Mercedes for those needing the extra benefits 70% of the time and must compete with the Chevy 30% of the time, then he has over paid for his asset (the Mercedes) as compared to the Chevy driver. Back to rigs, the margins are not higher on the new mega rigs as compared to others when capital costs are considered (and the risk of working the rig at a lower capacity for which the oil company is not willing to pay). With that said, if you can get a contract that will basically pay for your rig in 5 years, then it doesn't matter. It's a free rig and the margins ARE greater on the high end work which your rig is capable of doing. So for you long term thinkers -- think how much money these drillers with the new mega rigs will be making after the end of the long contracts when the rig is almost totally paid for. That is when they will REALLY start making money.