From Sea to Shining Sea? : an econometric inquiry into the offshore mobile rig market

Abstract

The mobile offshore development unit (MODU) market is unique in that the majority of the rig fleet is owned by independent rig management firms and leased to oil and gas companies for exploration and production. Managing a firm’s fleet is a complex profit maximization process by which managers decide what rigs to keep active in search of contracts, temporarily idle or cold stack, reactivate from cold stacking, upgrade, or sell. Despite the substantial financial implications of these decisions, empirical research on the MODU market has been limited. We therefore take advantage of a substantially larger dataset and utilize existing models as a starting point to describe both the idling and rig day rates for active rigs. For idling behavior, the decision to cold stack is presented using a real option framework. The contract day rate model is described using a multiple linear regression. The purpose of this paper is to re-examine existing models and to suggest additional factors driving both idling behavior and rig day rates. In general, these decisions are seen as being driven by a rigs utility via observable and unobservable heterogeneity, market conditions, as well as a firms’ size. In particular, lagged factor prices and rig utility proxies such as rig moves across geographic regions are the best determinants of rig idling options while most rig characteristics are otherwise mixed. After controlling for regional and time effects, the main determinants of day rates are utilization rates and rig moves across regions. Factor prices, on the other hand, have no significant effect on rig rates. Through a better understanding of idling and contract day rate dynamics, our research is relevant to rig owning and operating firms as well as the financial institutions that support them.