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

To: Czechsinthemail who wrote (16772)	3/26/1998 10:29:00 PM
From: Big Dog	Read Replies (2) \| Respond to of 95453

What is looked at by drillers to "justify" newbuilding is the capital recovery factor. This is determined by taking the day rate, backing out the direct operating costs (about 40,000 on a big floater -- roughly) This gives you the postiive cash flow from the day rate. Let's say day rate is 200,000 less 40,000 equals 160,000 per day in cash flow. Then divide that number by the cost of the rig. 160,000 / 300,000,000. This equals 533 and is what is called the capital recovery factor. You are getting back $533 every day for each million dollars invested. This example gives you about a 19.4% return. If the day rate is lower, the capital recovery factor (thus the return) is lower. You can play with the numbers and see that it is actually the jackups which provide a more attractive capital recovery factor. Most drillers today seem to be happy with a $500 CRF -- although many will claim their number is closer to $700 on these new floaters. As drilling rates rise, the CRF will improve making it easier to justify building a new rig. Other variables to consider are the changes in prices to build rigs and the changes in the cost of direct operating expenses. I very few businesses do you see an asset that cost $300 million be paid for within 5-7 years. Think of the earnings power after that pay off period! These rigs will have a 30+ year life. Observers of this business don't fully grasp this concept, IMO. big