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Rig Contracts Getting Shredded

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The deepwater drillers first got dinged when Callon Petroleum scrapped a Gulf of Mexico development project, leaving a Diamond Offshore (NYSE: DO  ) rig high and dry. I encouraged Fools not to jump to conclusions about other deepwater drilling activities, since Callon's a pretty small fish in these waters.

A few weeks later, we mourned a death in the oil patch, when Oilexco hurtled toward bankruptcy. The firm's undoing was largely due to two long-term, pricey rig commitments that it was unable to fund. This event could have been viewed as another warning sign for the contract drillers, but I've actually interpreted this development as a pretty positive sign.

The firm's decision to file for creditor protection, a real measure of last resort, indicates to me that Oilexco found it impossible to break its contracts with Transocean (NYSE: RIG  ) and Diamond Offshore. A lot of the drillers' value is in their multibillion-dollar backlogs, so the contracts' staying power in the face of a customer's insolvency speaks pretty well for the solidity of the rest of the backlog.

But what if the bodies continue to pile up?

That brings me to Transocean's fleet status update, filed yesterday, which tells us that another client has come up short. This time it's Burgundy Global Exploration, a privately held Filipino concern. Just last month, the firm signed up to take on the C. Kirk Rhein, Jr., most recently hired out to Sasol (NYSE: SSL  ) at a $362,000 dayrate, for more than half a million dollars a day. While this falls short of the record-setting rate agreed to by Eni (NYSE: E  ) this summer, and later matched by ExxonMobil (NYSE: XOM  ) , the Rhein is a more modest midwater vessel.

Whereas Transocean still considers the Oilexco contract valid, Burgundy Global's failure to post escrow has led the drilling giant to outright cancel the agreement.

If Transocean had more no-name companies like this on its roster, I would be deeply concerned. Fortunately, the rest of the deepwater contracts are by and large committed to industry behemoths. If you're holding shares of Pride International (NYSE: PDE  ) , Noble (NYSE: NE  ) , or one of the other handful of drillers, I would suggest giving the client roster a good, hard look. If you don't see marquee names, I would think about eyeing the exits.

Sasol is both a Global Gains and an Income Investor selection. Drill into any of our Foolish newsletters free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. The Motley Fool's disclosure policy goes deep.

Read/Post Comments (3) | Recommend This Article (20)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 14, 2009, at 12:26 AM, geddyneil wrote:

    Thanks, as an investor in RIG, I appreciate the useful information.

  • Report this Comment On January 15, 2009, at 1:36 PM, rgelbert wrote:

    I am always interested in a 'Fool's view of things. It always sheds a lot more light on why an investment may or may not be worthwhile. Thank you for providing your insights!

    Robin Gelbert

  • Report this Comment On February 11, 2009, at 3:49 AM, suzylucy wrote:

    FORTUNE's Investor's Guide 2009 (published 12/22/08) mentioned DO as one of "Ten Promising Stocks of 2009".

    In the article it stated this info about DO (based on 12/1/08 stock data:

    Price $66

    P.E Ratio 6

    Yield 12.0% (yep...12%. I'll admit, that got my attention too!)

    However I notice when I pull up the CAPS info on this stock as of today's date (2/10/09) the dividend yield is stated as being less than 1%.

    Can anyone explain this one to me? Thanks in advance for your insight.

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10/21/2016 4:03 PM
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