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SeaDrill's West Hercules Rig Receives Termination Notice

Hamilton, Bermuda-based offshore drilling firm SeaDrill Limited SDRL confirmed that the contract for its semi-submersible drilling rig, West Hercules to Norwegian oil major Statoil ASA STO has been terminated ahead of schedule. Notably, Statoil had initially entered into a contract with North Atlantic Drilling Ltd. NADL – SeaDrill’s majority owned subsidiary – to charter West Hercules for drilling in Norway.

Per the terms of the contract, SeaDrill will receive a hefty compensation of approximately $61 million from Statoil. The company will also get dayrate and reimbursement of costs associated with disbandment of the rig from the latter.

Despite the current improvement in crude prices, the commodity has been trading at substantially low levels for a considerable length of time. Given the lackluster pricing scenario, upstream companies are increasingly reducing investments in exploration and production operations as they are not been able to sell the commodities at attractive prices. So, they are hiring fewer rigs for drilling activities, in turn, leading to early drillship contract termination. Hence, SeaDrill, like its peers, is witnessing early termination of its drilling contracts.

Recently, Seadrill Partners LLC’s SDLP – a wholly owned subsidiary of the company – received a notice of termination for West Capella drillship contract from Exxon Mobil Corp. The company is likely to be compensated with almost $125 million, along with other direct costs, for the premature termination of the drillship contract.

London-based SeaDrill has one of the youngest drilling fleets among all the offshore drilling contractors. The company’s technologically advanced drillships are capable of operating in challenging environments. The company has a fleet of 879 units – 121 drillships, 185 semi-submersible rigs, 536 jack-up rigs, and 37 tender rigs. Seadrill, however, continues to suffer from high debt levels, a number of obligations for new vessels, and a shrinking backlog of contracted business.

The company is expected to release first-quarter 2016 results on May 26. It beat the Zacks Consensus Estimate in the last quarter as well as the last four quarters with a positive average surprise is 8.97%.

SeaDrill currently carries a Zacks Rank #3 (Hold), which implies that the stock will perform in line with the broader U.S. equity market over the next one to three months.

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