What's happening: Shares of offshore oil and gas driller Seadrill, Ltd. (NYSE:SDRL) are up about 8.5% as of this writing, a little off from the nearly 10% jump earlier in trading today.
Why it's happening: Seadrill announced this morning that it had canceled the construction contract for West Mira, a high-specification ultra-deepwater semi-submersible drilling rig that was scheduled to be delivered in December of this year. The company had already paid $168 million in installments toward the ship's cost, but says it will be able to recoup those funds, plus interest.
It may seem like nothing but good news based on the terrible shape of offshore drilling and the sheer number of newbuilds Seadrill has coming on line over the next year, but this is really a double-edged-sword announcement, since the West Mira was under contract, while there are another two semi-submersibles scheduled for 2015 delivery, without work lined up.
The hope is that Husky Energy -- the oil company that contracted for the West Mira -- will accept one of the other semi-submersibles coming on line this year. But Husky is in the driver's seat of these negotiations now, and there is a risk that it may walk away in the current environment, leaving Seadrill with zero new cash flow and still two new drillships coming on line this year without work lined up.
With that said, the worst-case scenario is Seadrill being in basically the same shape as before the cancellation, with the upside that it can work something out with Husky on one of the other newbuilds. Frankly, anything to reduce the company's exposure to newbuilds over the next year -- considering that offshore drilling isn't expected to improve anytime soon -- is probably the best path for the company to take right now. Even after this cancellation, Seadrill is on the hook for close to $4 billion in remaining newbuild payments on 14 ships.
With 10 of those scheduled to be delivered by the end of next year, Seadrill still has work to do to.
Jason Hall owns shares of Seadrill. The Motley Fool recommends Seadrill. 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.
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