Attractive prospects at current oil and gas prices and a shortage of rig equipment are catapulting dayrates for offshore as well as onshore rigs. "Jackups in the Gulf of Mexico have begun to sign meaningfully higher rates, well beyond our original expectations," reports Angeline M. Sedita, senior vice president of oil-service equity research at Lehman Brothers. She expected, with eight rigs destroyed in recent hurricanes, up to 30% higher dayrates in the Gulf; instead, several new contracts are for 60% higher rates, she reports. The big winners of higher dayrates will be Todco (NYSE: THE), Ensco International (NYSE: ESV) and Rowan Cos. (NYSE: RDC), and, to a lesser degree, GlobalSantaFe Corp. (NYSE: GSF), Diamond Offshore Drilling (NYSE: DO), Pride International (NYSE: PDE) and Noble Corp. (NYSE: NE), she says. Transition-zone driller Todco's THE 150 recently was signed to a one-month contract with Arena Resources; THE 152 was signed to two one-well contracts with Royal Production; and THE 250 was hired on a one-month contract by McMoRan Exploration. All of the new-contract dayrates were in the low-$80,000s, Sedita reports, up from between $50,000 and the mid-$60,000s. Sedita rates THE shares Overweight. "We view these [new] rates as noteworthy, particularly as the rates are not for long-legged or high-specification rigs." Meanwhile, offshore driller Ensco has secured a one-year contract for a Gulf jackup at $140,000 per day, up from $85,000, to begin work for Anadarko Corp. in January, she adds. As for on- and offshore driller Rowan, it recently signed three 116-C Gulf jackups at $130,000 per day. And the Gorilla VI jackup was hired by El Paso Corp. for three deep-shelf Gulf gas wells at $170,000 per day. The Bob Keller was hired on a one-year contract at $165,000 per day for the first six months and $170,000 thereafter. "Despite the total loss of four jackups from recent hurricane activity in the Gulf of Mexico, impressive dayrate increases will likely totally offset Rowan's lost earnings," Sedita says. Rowan reports a growing manufacturing backlog. Its land business remains robust and it is building eight new land rigs for $12.5 million each. Sedita has a price target of $41 on the stock. Higher rates are being reported internationally as well. Most major offshore markets are either currently undersupplied or headed that way, Sedita says. In the Gulf, leading-edge rates are at $170,000 for a high-spec rig while North Sea dayrates are more than $200,000. Smaller rigs are also reaping hearty benefits. GlobalSantaFe's High Island IV recently won a $120,000 rate, up from $75,000. "We believed the smaller rigs could roll up as much as $25,000 per day; however, a gain of $45,000 is well beyond our expectations. We believe we will see rigs which are currently at $85,000 per day win new contracts at $130,000 to $150,000." Offshore driller Transocean Inc. (NYSE: RIG) has snagged two new three-year contracts for its high-specification drillships Discover Spirit and Deepwater Millennium for total revenues of about $985 million. "The new dayrate for the Discover Spirit of $475,000 per day represents an all-time high for an offshore drilling rig," says Calyon Securities (USA) analyst Mark Urness. "The rate for the Millennium of $425,000 per day is also very impressive...." Urness has a $75 price target and Buy rating on RIG shares. Onshore driller Helmerich & Payne Inc. has signed three-year term contracts with three producers for 16 new FlexRigs. Construction costs are expected to average about $10 million each for 11 FlexRig4s and $14.2 million each for five FlexRig3s. Altogether, the company has 41 new rigs under way to work under contracts for a total of 11 producers. "We believe there is the potential for H&P to announce another 35 contracts during the next year," says Sterne, Agee & Leach analyst Robert Ford. He has a price target of $87 and a Buy rating on HP shares. Transition-zone and international-onshore driller Parker Drilling (NYSE: PKD) is also on the road to stronger revenues, Sedita says. "Earnings are firmly in the black and appear to be growing. Additionally, the Gulf of Mexico barge(-drilling) business is picking up momentum and should follow the jackup dayrates higher. Parker is finally seeing better utilization in its international segments and we expect that it will continue to improve in 2006." Dayrates rose for all Parker barge segments in the Gulf. Deep drilling dayrates rose from $29,900 in the second quarter to $34,200 in early November. Intermediate- and workover-rig dayrates increased $1,200 and $1,300, respectively. Parker management is considering upgrading or unstacking drilling barges and building a super-deep barge in 2006 for $40 million, Sedita adds. Internationally, utilization is at 83% for Parker. In Mexico, all seven of its land rigs are now under contract to Halliburton Co. and will begin rolling over during 2006. One barge rig remains under contract to Pemex. According to an October 17 Reed Hycalog survey of U.S. drilling rigs, there were 2,026 rigs available in 2005, an increase of 2% from last year. "We found that increase surprisingly small, given the jump in new rig construction," says Parks, Paton, Hoepfl & Brown analyst G. Allen Brooks. "What is not surprising however, is that the fleet utilization for 2005 was 95% compared with an estimated 84% in 2004." Sedita expects improved dayrates could affect 2006 earnings by between 10% and 40%.