Seadrill pauses rigs orders. Cuts dividend

Seadrill will refrain from ordering new offshore rigs in the near future due to the challenging market conditions for offshore drilling contractors. The company also announced it would put dividend distributions on ice.

The company, one of the world’s largest offshore drilling contractors, which currently has 16 offshore drilling rigs under construction, said it would wait to see a clearer direction in the offshore rig market.

According Seadrill, the  ultra-deepwater rigs market has become increasingly challenging, with falling dayrates.

The company said that, due to the fact that 25% of those rigs will become available, that is, without an assignment, in 2015, some rig owners with older units are willing to work at or close to cash flow breakeven dayrates.

Seadrill said it will have only 9% of its floater fleet available in 2015, meaning it will not suffer much from the falling dayrates in the near term.

“It appears that short-term exploration plans are under the greatest pressure and may be pushed back if the lease expiration rights are not breached. “

Pressure on short-term exploration

“If oil companies adjust their budgets based on the current macro environment, tendering activity may remain at the current low levels or even decline further. On the positive side, major oil companies are still proceding with planned development projects and independent oil companies are coming to the market to take advantage of current dayrate levels.

“It appears that short-term exploration plans are under the greatest pressure and may be pushed back if the lease expiration rights are not breached. “

Typically, at this point in the year, we would have expected to understand what near term demand looks like and the fact that we do not may be an indication that projects have encountered further budgeting delays,” the company said.

Seadrill highlighted the fact that since its last quarterly report in August, the Brent spot price has dropped by 23%, or US$24 per barrel, saying that during this period short to medium term visibility for offshore drilling contractors will be reduced.

However, the company was optimistic for the market’s long term outlook:

“…the Company believes the long term fundamentals of our industry remain intact, driven by the fact that the days of easy, low cost oil are over and reserves required to meet long term demand growth are still to be found in the deep and ultradeepwater regions. As mentioned by a number of major oil companies, these reserves are well positioned on the cost of supply curve and can be expected to be produced even at today’ s oil prices.”

Delivery delays, falling oil price

Furthermore, Seadrill said that due to the high volume of deliveries taking place during 2014 and bottlenecks with equipment suppliers and subcontractors, it is likely several shipyards will not be able to meet contractual delivery dates.

It appears likely, Seadrill said, that some of the ultra-deepwater drillships scheduled for delivery in the second half of 2015 will be delayed. Of the sixteen rigs under construction for Seadrill, five are drillships, three semi-submersibles, and eight jack-up rigs.

Dividend cut

In its third quarter 2014 report, the company informed it would suspend dividend distributions for the time being and focusing on debt reduction.

“By pausing the dividend, Seadrill’s capital position will improve by approximately US$2 billion per year, and a significant portion of these funds will be available to be deployed to strengthen the balance sheet and to invest in value creating opportunities, including both industrial growth avenues and more pure financial transactions,” Seadrill said.

John Fredriksen, Chairman of Seadrill said, “The decision to suspend the dividend has been a difficult decision for the Board. However, taking into consideration the significant deterioration in the broader offshore drilling and financing markets over the past quarter, the Board believes this is the right course of action for the Company. I am confident that Seadrill will emerge from this downturn even stronger and that we will resume our distributions in the future.”

Net income for the quarter was $190 million, down from $315 million in the same period of 2013.