Analyzing Seadrill’s Contract Termination
A Look at Contract Terminations for Rowan Companies, Seadrill
Contract termination
On May 23, 2016, Seadrill (SDRL) received a notice of termination from its current operator related to the contract of the West Hercules. The West Hercules, which is an ultra-deepwater harsh environment semisubmersible, was working for Statoil in Canada.
According to the terms of the contract, Seadrill will receive a lump sum payment of ~$61 million plus its day rate and reimbursement costs associated with the rig’s demobilization.
Analyzing the contract termination
The West Hercules was working at a day rate of $445,000. Its initial contract period was until January 2017, which means that ~237 days were remaining on the contract.
If the contract had continued, Seadrill could have earned ~$105 million. Seadrill Partners (SDLP) recently received a termination notice from ExxonMobil.
Backlog
The outlook for offshore drilling (XLE) remains bleak, and the ability of these companies to secure new contracts in this downturn could be extremely difficult. Contract terminations bring more pressure to their existing backlogs.
Seadrill (SDRL) has yet to release its 1Q16 earnings, and its total backlog at the end of 2015 was $5.1 billion. Its backlog to the trailing 12-month (or TTM) revenue ratio is 118%, which is the lowest among its peers.
All other offshore drillers have released their first quarter earnings. Their backlog-to-TTM revenue ratios are as follows:
Diamond Offshore (DO): 251%
Ensco (ESV): 140%
Noble (NE): 200%
In the final part of this series, we’ll look at Rowan Companies’ recent contract termination.
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