What: Shares of Atwood Oceanincs (NYSE:ATW) were down more than 11% at 2:45 p.m. ET on Friday. While the continued weakness in the price of oil didn't help matters, today's slump is largely being fueled by the company's decision to delay the delivery of its two new deepwater drillships.
So what: Atwood announced that it had reached an agreement with its shipbuilding company to delay the delivery of the Atwood Admiral and the Atwood Archer to Sept. 30, 2017 and June 30, 2018, respectively. This pushes the delivery of both vessels one year past the the deferral option dates in the original contracts. Furthermore, as a result of this new agreement, the company is paying $50 million for each drillship at the end of this year, but won't have to pay the nearly $400 million in milestone payments until the vessels are delivered.
One reason why the market is concerned with this arrangement is that Atwood announced last month that it had been chosen for exclusive negotiations for one of these two drillships by an undisclosed operator to begin work in Brazil in the third quarter of 2017. However, the new delivery dates seemed to imply that this potential contract might be off the table for the time being due to the renewed weakness in oil prices.
With the steep drop-off in oil and gas activity, offshore drillers are left with no choice but to not take delivery of new vessels if they can find a way to make this happen. That's why newbuild deferrals are becoming so common in the offshore industry with Seadrill (NYSE:SDRL), for example, announcing in August that it was deferring the delivery of seven of the eight jackup rigs it currently has under construction. In addition, Seadrill even canceled the delivery of one of its newbuild drillships because a clause in its contract allowed it to cancel if the ship was running past its due date. In this particular case, Seadrill chose to cancel the rig despite the fact that it already had a customer signed up under a five-year contract. However, with so many rigs out of work, it decided that it was worth the risk to see if it could find another rig for this customer than to keep paying to have another new one built.
Now what: Atwood Oceanics is making the right decision to defer the delivery of these ships. While it has to pay a small fee now, its ability to defer the milestone payments will help. That's cash the company can use to weather what's becoming a very bad storm in the offshore sector.
Matt DiLallo owns shares of Seadrill. The Motley Fool owns shares of and recommends Atwood Oceanics. 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.