Good News, Bad News as Statoil Cancels Diamond Offshore Contract

There’s good news and bad news for offshore drillers today after Statoil (STO) canceled the contract on Diamond Offshore Drilling’s (DO) Ocean Vanguard rig. The bad news is that it’s another sign that demand for rigs is still not there. The good news is that while Diamond Offshore has gotten hammered, other drillers like Noble (NE), Transocean (RIG) and Seadrill (SDRL) have weathered the announcement better than many would have expected.

Reuters

Global Hunter’s Mark Brown and team explain what the cancellation could mean for Diamond Offshore:

We model the Ocean Vanguard having an annualized marginal EBITDA contribution of ~$89MM (EPS contribution of ~$0.49/share) based on a $454K/day rate and $192K/day opex assumption. The contract has approximately eight months remaining through February 2015, implying a ~$59MM EBITDA potential impact (~$0.33/share).

We expect that if the contract has been terminated that DO would receive an early termination payment or other compensation in accordance with the contract’s stipulations. We also expect that the rig would be eligible to work for another client (although likely at a significantly lower rate given current market conditions) and would thus be able to recoup some of the marginal impact. However, it is unclear the extent to which any additional maintenance or upgrade work may be required in the yard.

The Vanguard is a third-generation midwater semi built in 1982. The apparent Statoil decision would be consistent with our expectations of bifurcation in many offshore drilling regions as sixth- and seventh-generation capabilities are increasingly desired over standard-spec rigs.

As a result of the cancellation, shares of Diamond offshore Drilling have fallen 3.3% to $47.95 at 1:21 p.m., their biggest drop in nearly two months.

Statoil, however, did cite technical issues as the reason for the cancellation, so the issue seems specific to Diamond Offshore drilling and not its competitors. Perhaps that explains why Diamond Offshore’s competitors are holding up OK today. Transocean has dropped 0.5% to $41.90, while Seadrill is unchanged at $39.02 and Noble has gained 0.2% to $31.47.