Global Marine's Score index gauge of MODU newbuilding

Worldwide Score by rig type [15853 bytes]

Since 1994, rig contractors have benefited from knowing the "Score," an index created by Global Marine Inc. to give companies a percentage indicator of day rates in relation to the capital costs necessary to build new mobile offshore drilling units (MODUs).

"We wanted to come up with something that told us where we were," said David A. Herasimchuk, vice-president of market development, citing the reason for the birth of Score.

A Score can be computed for all types of offshore units working anywhere in the world, but Scores for jack ups and semisubmersibles are in most frequent use.

To compute the monthly Score, Global takes the estimated capital costs required to build a new drilling unit and multiplies that times a 0.0007 capital recovery factor (or $700/day/$1 million invested) to yield roughly a 15% internal rate of return (IRR). The calculation is aggressive because it assumes a 100% rig utilization rate for 5 years to produce about a 5-year payback. Then rig operating costs are factored in.

Is the calculation valid in today's environment? According to Herasimchuk, assumptions in Score can, indeed, vary by the risk profiles of specific contractors-and their acceptance or lack of acceptance of the minimum IRR used in Score. Numerous financial and operational factors can be involved, such as individual contractor positioning, interest rates, new construction costs, conversion and upgrade costs, and the like.

But Global Marine believes the 15% IRR hurdle is an accurate gauge because "our customers have a hurdle rate easily of 18-20% on their projects," noted Global Marine Drilling Co. Pres. and Chief Operating Officer Gary L. Kott.

Kott provided the following illustrative example, using a calculation for a general service Gulf of Mexico-type jack up rated to drill to 25,000 ft in 300 ft of water:

New unit cost to build: $80 million
Minimum IRR required:$80 million x 0.0007 = $56,000/day
Plus theater of operation cost:$15,000/day = $71,000
Unit's average day rate:$41,000/day (current average) divided by $71,000
Score: About 58%

With a Score of 100%, maximum market rates would have been reached, and contractors would have some comfort in ordering a new rig without a contract secured beforehand.

Such a Score might allow contractors to place the rig order and base their action on the likelihood of securing a contract at some point during construction.

If the Score were about 70-80%, however, contractors might be prone to order a new rig-if they had a contract in hand.

But if the Score were about 50-60%, as is the case presently with a worldwide Score of 57-60%, new rig construction is highly unlikely. The alternative: reinvesting capital to upgrade existing MODUs to meet present or anticipated demand in one or more specific markets.

With a Score of less than 40%, losses can result and rig investments are generally focused on required work to keep MODUs in satisfactory operating conditions.

This is the first of a two-part special report on the tightening squeeze on worldwide offshore rig supply/demand.

Next week: A look at the North Sea.