The shares of offshore gas and oil driller Seadrill Ltd (NYSE:SDRL) gained yesterday after the company reported that it canceled the construction deal for West Mira. It is a high-specification semi-submersible ultra-deepwater drilling rig that was planned to be delivered by the end of this year. The company had paid $168 million in parts toward the ship’s cost. However, the company added that it will recoup those payment and interest. The order was placed in 2Q2012.
The announcement appears like good news based on the dismal market of offshore drilling and the number of new builds company has lined up over the next year. It can also be stated as a double-edged-sword notice, as the West Mira construction was under contract. There are two more semi-submersibles planned for delivery in 2015, without work lined up.
The expectations are that the oil company Husky Energy that contracted for the project will accept another semi-submersibles coming this year. However, Husky has an upper hand of these negotiations and there is a bigger risk that the oil company may walk away in the existing environment, leaving Seadrill with no new cash flow.
The future ahead
With that accounted, the worst-case scenario for Seadrill will be to remain in the same state as it was before the cancellation. It can ok out things with Husky on another new builds. Anything to lower the company’s exposure to new builds in 2016 accounting that offshore drilling is not projected to improve anytime soon is likely the best course for the company to follow now. Even after the recent canceled contract, Seadrill is to $4 billion in rest of the new build payments on fourteen ships.
Also, out of the total fourteen, ten have to be delivered in this year itself, which suggests Seadrill Ltd (NYSE:SDRL) has adequate work to complete to in 2015.