Seadrill boosts backlog with new deals but plans for recycling spree

Offshore drilling contractor Seadrill has added approximately $52 million to its backlog following the end of the third quarter of 2020. Seadrill is also looking to manage its rig count by recycling some of its rigs as it prepares for a prolonged period of low offshore activity and demand.

Seadrill said on Friday that the Sevan Louisiana semi-submersible rig has been awarded one firm, plus one optional, well contract with Walter Oil & Gas in the U.S. Gulf of Mexico.

According to the rig owner’s fleet status report, the day rate is set at $170,000. This has added about $17 million to its backlog over the firm term.

Furthermore, the West Neptune drillship has been awarded a one firm well contract with Kosmos Energy in U.S. Gulf of Mexico, adding $9 million to the backlog. The day rate is about $178,000.

The deal with Kosmos is set to expire in January 2021, after which the rig is scheduled to work for LLOG, also in the Gulf of Mexico. The day rate under this contract is $202,000.

In addition, Equinor has exercised additional wells on the West Hercules semi-submersible rig in Norway, adding $26m to the backlog.

On the other hand, Total has released the West Gemini drillship from its obligations under the contract in Angola. Seadrill is entitled to compensation in the form of a lump sum fee.

Stuart Jackson, Seadrill CEO, commented: “We continue to address the industry issue of too many rigs and too much debt. Managing our rig count is the necessary balance to bringing down our debt burden and we are progressing plans to safely recycle some of our rigs, subject to the approval of our lenders.

“We are engaged in constructive discussions with our financial stakeholders as we look to carry out a comprehensive restructuring of our balance sheet and our cash balance provides us with the necessary flexibility to manage this process”.

Seadrill added that, in line with its announcement at the start of the year to scrap up to 10 assets within the fleet, legacy units that no longer offer sufficient returns on investment will be marketed for sale or scrapped.

As part of this position, Seadrill has recently sold the West Epsilon rig to Well-Safe Solutions. The jack-up rig was long-term cold stacked before its sale.

“We do not believe that reactivation of cold-stacked assets in the current environment represents an appropriate use of cash nor return on investment”, Seadrill explained.

Seadrill’s total backlog at the end of September 2020 was approximately $2.1 billion. However, the company noted that the disruptive impacts of the oil price decline and COVID-19 could have an adverse effect on its ability to realize the backlog.

“Our customers may seek to terminate or renegotiate our contracts, which could result in lower day rates or less favourable economic terms”, Seadrill said.

As a result of low offshore activity due to the impact of the Covid-19 pandemic, Seadrill is priming itself for a prolonged period of low demand.

“We believe that the depressed levels of offshore activity will remain throughout 2020 and into late 2021. While we are starting to see some demand come back to market, albeit at a slower pace than initially expected, levels remain significantly below those in 2019. Uncertainty remains around the timing and speed of a global economic recovery and therefore the timing of any increase in oil demand”, the rig owner stated.

Seadrill further added: “Since the supply of rigs in the market still strongly outweighs demand there will continue to be a suppressive effect on utilization levels and day rates across all segments.

“We expect further reductions in day rates in the coming quarters as market participants prioritize utilization over pricing discipline due to the lack of contract coverage and near-term demand.

“However, we anticipate we will continue to see accelerated retirement of older, and long-term stacked assets”.