It's no secret that drilling companies will see a number of rigs enter the market in the next few years. Still, these new rigs have yet to find customers. In such an environment, each new contract is scrutinized to get a sense of where the market is heading. That's why Seadrill's (NYSE:SDRL) recent contract with Total SA (NYSE:TOT) deserves attention.
Seadrill negotiates a strong dayrate
Seadrill has managed to secure a five-year contract with Total for its newbuild ultra-deepwater drillship West Jupiter. The contract term implies total revenue of approximately $1.1 billion. This means that the dayrate for West Jupiter is around $600,000.
At the same time, Seadrill stated it was unable to immediately find a job for West Tellus, whose contract with Chevron ends soon. West Tellus operated at a $635,000 dayrate. During the earnings call, Seadrill stated that this rig could be idle for up to a six-month period, highlighting the toughness of today's drilling market.
A five-year deal with such a dayrate is a success in current conditions, although the dayrate is by no means stellar. Still, now is not the time for Seadrill to relax, as drillships West Saturn and West Carina are also coming to market this year, and customers are yet to be found. Also, Seadrill will have to find jobs for four more drillships, whose delivery is planned in the second half of 2015.
Seadrill puts pressure on its competitors
Seadrill got a boost on the day of the deal announcement, which is perfectly understandable. Seadrill's ability to score deals for its newbuild rigs continues to be a source of cautious optimism. Yet, the company has a big pipeline of new rigs to deal with, and a lot will depend on the state of the drilling market in the second half of 2015.
These rigs will surely put pressure on Seadrill's competitors like Diamond Offshore Drilling (NYSE:DO) and Transocean (NYSE:RIG). Diamond offshore has yet to find a customer for its drillship Ocean Black Rhino, which should be delivered in the fourth quarter of 2014. This rig will be followed by Ocean Black Lion in the second quarter of 2015.
In the meantime, dayrates for most Diamond Offshore contracts did not exceed $500,000 per day and highlights from Transocean are also not very encouraging. Three recent contracts implied a decline in dayrates for Transocean's rigs. The pressure from newbuild rigs clearly weighs on older ones, even if they are young.
While Seadrill's contract is good for the company, it doesn't change the big picture for the industry. What's more, Seadrill's activity in building and marketing rigs puts pressure on its competitors. At the same time, one decent long-term contract is not a reason for rampant optimism.
Market conditions continue to be challenging for all drillers. One positive note is that Seadrill has the highest dividend yield, and its dividend looks sustainable, at least in the near term. With that in mind, Seadrill should outperform its peers this year.
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Vladimir Zernov has no position in any stocks mentioned. The Motley Fool recommends Seadrill and Total (ADR). The Motley Fool owns shares of Seadrill and Transocean. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.