Pacific Drilling ordered to pay $320 million to Samsung over drillship order cancellation

South Korea’s offshore rig builder Samsung Heavy has won an arbitration case against Pacific Drilling related to termination of a construction contract for the drillship Pacific Zonda. As a result, Pacific has been ordered to pay $320 million to Samsung. 

To remind, Pacific Drilling ordered the Pacific Zonda drillship from Samsung in 2013. However, in October 2015, Pacific canceled the order, stating that the builder failed to deliver the vessel in time. Samsung then took the case to the tribunal.

Pacific Drilling said on Wednesday that an award had been issued in the arbitration proceedings between the company’s subsidiaries, Pacific Drilling VIII Limited (PDVIII) and Pacific Drilling Services, Inc. (PDSI), and Samsung Heavy Industries (SHI) related to the contract for the construction and sale of the Pacific Zonda drillship.

An arbitration tribunal in London, England awarded SHI approximately $320 million with respect to its claims against PDVIII and PDSI. The award does not include approximately $100 million in interest and costs sought by SHI, on which the tribunal reserved making a decision to a later date.

As previously disclosed, in connection with Pacific’s now concluded Chapter 11 proceedings, PDVIII and PDSI filed a separate plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York, which was confirmed on January 30, 2019.

Once the tribunal’s award becomes final and unappealable, the company expects the Zonda debtors, which have approximately $4.5 million in cash and no other material assets, will be liquidated in accordance with the terms of the Zonda plan.

The company does not expect the tribunal’s decision to have any material adverse effect on its operations or to cause any default under any of its material contracts including under the indentures for its outstanding notes. As a result of the tribunal’s decision, the company expects to recognize a loss of approximately $225 million during the fourth quarter of 2019, primarily related to the elimination of the Zonda receivable on the balance sheet.

According to Pacific, PDVIII and PDSI are currently considering whether to seek permission to appeal and are exploring all available legal remedies. Under the rules governing the arbitration proceedings, PDVIII and PDSI have no automatic right to appeal and the grounds on which the High Court in London may grant permission to appeal are limited. PDVIII and PDSI must seek permission to appeal no later than 28 days from the date of the award, or by February 12, 2020.

Pacific Drilling CEO, Bernie Wolford, commented, “The company is surprised and disappointed by the tribunal’s decision. However, this outcome will not impact our commitment and ability to continue to deliver to our customers the highest level of deepwater drilling services in our industry.”