Oil Service and Equipment
Understanding Force Majeure in Drilling Contracts
2 June 2010 - 17 pages
citigroupgeo.com
First page:
We Calculate Contract Value at Risk for RIG, NE, and DO — On May 30 the
Minerals Management Service announced a six-month moratorium on deepwater
drilling in the Gulf of Mexico, an action that appears to have created a force
majeure situation with respect to deepwater rig contracts. In this report we
estimate “at risk” contract backlog for Diamond Offshore, Noble Corp., and
Transocean. With respect to total company backlog as of 6/1/10, the “at-risk”
percentages are 10% for DO, 10% for NE, and 7% for RIG.
Standby Rates Apply in Force Majeure Situations — Under force majeure, rigs that
suspend drilling operations and are placed on “standby” status are entitled to
receive a standby day rate for a specified period that varies from contract to
contract. Some contracts require the customer to pay the rate for a few weeks or
months whereas others require standby payments to continue for the life of the
contract. The standby day rate is normally 85% to 100% of the working day rate.
Creative Solutions Are More Likely than Contract Terminations or Litigation —
While the legalities of drilling rig contracts for the deepwater Gulf of Mexico are
important, the offshore drilling contractors and their oil company customers
already are having discussions aimed at finding creative solutions that will allow
both sides to cope with the unexpected moratorium on deepwater drilling that has
been imposed by the federal government. All participants in the offshore drilling
industry are working hard to minimize the disruption caused by the suspension of
drilling in the deep Gulf of Mexico.
Offshore Drilling Stocks Are Battered By Uncertainties — We believe that the stock
market may have overestimated the disruptive impact of the federal government’s
decision to halt drilling in the Gulf of Mexico for the next six months. We have
seen major selloffs in the stocks of deepwater drilling contractors. The battered
stock list also includes companies exposed to the shallow water market even
though the MMS excluded shallow Gulf of Mexico waters from the drilling ban.
RIG, DO and NE Are Our Top Picks — Our top picks in the fire sale in offshore
drilling stocks are Transocean, Diamond Offshore, and Noble Corp. (all rated Buy-
High Risk). In this report we examine their “at risk” backlogs and conclude that
on a global basis their potential loss of revenue and profits is modest. |
