After recording strong gains in the week, the stock price of Seadrill Ltd (NYSE:SDRL) has started Friday’ trading session in deep red. As of writing this article, SDRL is trading 6% lower around $7. Shares of offshore drilling firm moved up on the chart after the company reported cancellation of the construction agreement for the drillship West Mira. The mentioned deal for the sixth-generation tough environment semi-submersible was made in the second-quarter of 2012.
This project was expected to be completed by December 2014, failing which Seadrill can cancel the contact. Hyundai Heavy Industries Co. Ltd. was unsuccessful in supplying the unit within the specified time limit following which the company revoked the order.
The implications
Seadrill entered into a five-year deal with Husky Oil Operations Limited for West Mira. The delay in delivery of unit prompted Seadrill to accept a lower day rate from the Husky Oil. However, with the order cancellation, the company is discussing alternatives to achieve the contract requirements.
Here, it is vital to understand the reason behind the investors’ delight after cancellation of drillship contract. Most likely, the answer is cash reserves, which is of top priority for the power and energy segment. This division is already under pressure due to declining commodity prices. As per the agreement, Seadrill Ltd (NYSE:SDRL) will get the complete refund of $168 million compensated as pre-delivery installments to Hyundai. Also, the company will be eligible to get accrued interest.
The touch times
With oil prices having plunged sharply in past one year and big companies having to minimize capital spending, the drilling entities like Seadrill are caught in trouble. Preserving cash reserves and increasing financial strength have become the top priorities of the companies operational in energy sector. This compels the industry participants to think that company has terminated contract so as to preserve funds in tough market conditions.
