Seadrill disclosed this morning that two of its three-year contracts for ultra-deepwater rigs with Petrobras in Brazil have failed. Seadrill had booked $1.1bn into its backlog associated with the contracts last quarter. That backlog, and the six rig years of work it represents, is now being written off as the contracts are no longer expected to be honored as signed.
While there has been a sprinkling of offshore rig contract terminations here and there since oil prices started falling, most have been for contracts well underway and most have been related to a single operator, Statoil, that has been right-sizing its portfolio for months. This is different given these contracts have not yet begun, the extended duration involved, and because the contracts belonged world’s biggest operator of deepwater rigs – Petrobras.
Specifically, Petrobras is no longer expected to honor the terms on its three-year contracts for the semisubmersibles West Taurus and West Eminence. These rigs are both 6th gen semis delivered in 2008/2009, and both had been working for Petrobras since their delivery (about 6 years).
Seadrill’s West Taurus
The Petrobras contracts cancelled were expected to begin in February 2015 and July 2015 in continuation with contracts currently in place for the two rigs. Dayrates on these contracts ranged from $460,000 – $500,000.
From a high over $600,000 per day, ultra-deepwater rig dayrates have plummetted into the $300,000s and there is speculation that a dayrate with a 2-handle will soon be agreed upon. That’s getting dangerously close to break-even levels, and there is still a long line of newbuilds delivering over the next few years.
There is some talk that issues with Petrobras’ partners in the blocks where the two Seadrill rigs were lined up to work led to today’s cancellations. Seadrill indicated it is working with Petrobras to try and come up with a solution that keeps the rigs employed, but at a minimum today’s news will result in lower dayrates, some additional downtime, and questions over the sanctity of offshore driller backlog in the downturn.
Seadrill’s West Eminence
This Adds More Rig Supply To An Already Oversupplied Market
With the deepwater rig market already struggling with oversupply, this puts two more highly qualified rigs on the market for 2015 – a year when there are very few open requirements for such rigs. With the contracts, the rigs would have been busy through 2018. Now Seadrill’s marketing team is scrambling to find near-term work for the rigs, a difficult task in this environment.
It raises questions regarding the other deepwater rigs Petrobras has contracted. And it could embolden other operators to either dump contracts or wait to sign new ones as dayrates will continue to fall as more rigs compete for the same jobs.
Other offshore drillers with deepwater rigs contracted to Petrobras include Transocean, Diamond Offshore, Ensco, Ocean Rig, and Noble Corp.