Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of Diamond Offshore (NYSE:DO) dropped as much as 10% during the trading sessions today when the offshore driller disclosed in its 10-K that Petroleos Mexicanos (PEMEX) and Petroleo Brasilerio (Petrobras (NYSE:PBR)) were canceling contracts for five of Diamond's rigs and that Dana Petroleum was considering terminating a contract as well.
So what: In this depressed rig market, it is crucial for drillers to keep existing rigs under contract. So losing these contracts will obviously be a strain on the company. Possibly the only consolation is that four of the five rigs that had contracts canceled were aging rigs (more than 35 years old) and were likely candidates for scrapping sooner than later. More than anything, this development made clear Diamond has one of the oldest fleet of rigs in the offshore drilling space.This means it is probably at greater risk of losing contracts than are some competitors because these less-advanced rigs are not capable of exploring and developing the deeper offshore locations that hold so much promise for the future of oil and gas production.
Now what: As long as oil prices are low, newbuild rigs are under construction at shipyards, and older rigs remain on the market, there will be an oversupply of rigs. The oldest rigs out there -- like many of those in Diamond's fleet -- are the most likely to be scrapped. Don't be surprised if this is not the last announcement of a producer canceling a contract for older rigs this year.