Pulling the Rig Out From Under Rowan

Since the deepwater got dinged by Callon Petroleum (NYSE: CPE  ) late last year, we've been keeping a sharp eye on further offshore drilling contract cancellations. So far, further deterioration hasn't been too evident.

Sure, Oilexco went bust, proving that oil and solvency don't always mix. But that event reinforced my belief in the binding power of the contracts that ill-fated explorer had signed with Transocean (NYSE: RIG  ) and Diamond Offshore (NYSE: DO  ) .

Soon afterward, a Filipino firm failed to front the cash in another Transocean transaction, leading the offshore titan to shred the contract. But a look at some backlog breakdowns explains why Transocean's not trembling and Noble's (NYSE: NE  ) not panicking: The lion's share of future commitments are linked to industry leaders like Chevron (NYSE: CVX  ) and Petrobras (NYSE: PBR  ) .

The situation in the shallow water is a bit more slippery, however. Small-bit players are slashing capital spending like suddenly sober sailors. Rig builders like Rowan Companies (NYSE: RDC  ) are getting left in the lurch.

Yes, Rowan's a contract driller -- and a fine one at that -- but its subsidiary LeTourneau Technologies also manufactures jack-up rigs. The company has now reported a flurry of cancellations and suspensions of various newbuilds, either planned or already under construction.

There are just way too many new jack-ups scheduled to hit the water this year and next -- which is a year or two too late. Noble puts the total for uncontracted newbuilds in 2009 at 25, which could seriously crater the daily asking rate for drilling services.

The only upside to this spate of scrapped rig newbuilds is the eased overhang of an overstuffed order book. Having delayed its plan to sell off LeTourneau, Rowan is going to feel the negative effects of these developments much more than the potential positive ones.