Rig Contracts Increasingly at Risk

For those not following the trend of offshore drilling rig contracts getting canned, let's get you quickly up to speed:

• Callon Petroleum left Diamond Offshore (NYSE: DO  ) high and dry in the deepwater.
• Oilexco went belly up, leaving Transocean (NYSE: RIG  ) with some bad debt expenses and a bad taste in its mouth.
• A private Filipino shop also burned Transocean, failing to post escrow on the C. Kirk Rhein, Jr.

After taking a hard look at the big names behind the backlogs of Transocean and Noble (NYSE: NE  ) , none of these events got me too panicked. Still, the evidence keeps mounting that drilling contracts are less secure than I'd once thought, with two more cancellations catching my eye lately.

First was a note in Transocean's latest fleet update, which informed us that the GSF Key Singapore's current customer, an Egyptian concern co-owned by Eni (NYSE: E  ) , has canceled its contract. Transocean is disputing the termination, but it's cold-stacking this jackup rig in the meantime. That means it won't be crewed or marketed for the indefinite future.

Perhaps more unsettling was yesterday's cancellation of a drillship contract by Indian conglomerate Reliance Industries. With a market cap in excess of $35 billion, Reliance is one of Asia's heavy hitters in oil and gas. Reliance recently announced that it intends to buy out both its refining subsidiary and Chevron's (NYSE: CVX  ) interest in the new, giant Jamnagar refinery, leaving Reliance as the world's No. 6 refiner. This is the sort of integrated oil major I had previously assumed would make good on its commitments.

While I don't expect folks like ExxonMobil (NYSE: XOM  ) to quickly follow suit, I'm forced to conclude that my quality-of-backlog thesis is at least slightly impaired. So yeah, I'm scared, and I'd refrain from adding to positions in even top-quality contractors like Noble and Ensco (NYSE: ESV  ) for now.