On August 22, Seadrill (SDRL) reported that it received a contract termination notice for its contract with Pemex Exploration Servicios (PEMEX) on the rig West Pegasus. The contract termination highlights the dreadful situation in the offshore drilling market.
Contract terminations haven’t been a surprise in the offshore drilling market. Offshore drilling’s customers—exploration and production companies—have seen their earnings fall due to lower oil prices. Debt also piled up for these companies. In order to save money, many companies are opting to terminate existing contracts. Pemex had cash flow shortfalls for the past three years. This year, the gap is expected to double to a record $22 billion, according to data and estimates compiled by Bloomberg. Recently, other than Pemex, Marathon Oil and ConocoPhillips terminated the deepwater drillship with Maersk Drilling.
With contract termination news hitting the Market, all offshore drilling stocks are bound to post a negative return. Seadrill’s stock price fell to $2.62 on August 22, 2016. It posted a -4% return compared to its stock price on the previous day. The following are stock returns for other offshore drillers (IYE):
In the next part, we’ll take a closer look at the details of the contract termination. We’ll also discuss Seadrill’s position in this downturn.