A plethora of stocks in the offshore drilling sector rose sharply on Tuesday after Hercules Offshore Inc. HERO said Saudi Aramco – the state-owned national oil company of Saudi Arabia – has withdrawn its previously issued notice of termination for Hercules 261, one of the three jackup rigs working in the Persian Gulf.
Moreover, all terms and conditions of the contract will remain effective for the remaining tenure of the five-year period that runs through Nov 2019.
Wall Street Cheers Hercules News
The rescinding of the termination notice by Saudi Aramco came as welcome news to Houston-based Hercules that has been struggling lately with depressed industry fundamentals.
As oil prices remain depressed, the top energy companies have cut spending (particularly on the costly drilling projects) on the back of lower profit margins. This, in turn, has meant less work for the beleaguered drillers (like Hercules) as offshore exploration for new oil and gas projects has almost come to a standstill.
To deal with the downturn, Hercules, in particular, had to sell off several rigs and cut 40% of its staff.
In this backdrop, the piece of good news for one of the world’s leading provider of drilling services lifted a host of other offshore contracting peers. While Hercules Offshore closed yesterday’s regular session up 6.2%, shares of Rowan Companies plc RDC, Noble Corp. plc NE, Ensco plc ESV, Diamond Offshore Drilling Inc. DO, Seadrill Ltd. SDRL, Transocean Ltd. RIG, gained 5.2%, 4.8%, 4.5%, 4.2%, 4.2% and 3.8%, respectively.
It's Not All Rosy
On the flip side, however, analysts seem to be worried over the harsh reduction in dayrates – the payment paid to a rig owner for a day’s work.
Per the agreement, dayrates for Hercules 261, plus those for Hercules 262 and Hercules 266 that are also under contract with Saudi Aramco, would be cut to $67,000 apiece. The revised prices – in line with prevailing dayrates for similar rigs in the region – are significantly lower than the original rates, which were between $117,000 and $136,000.
To Conclude
Despite investor optimism over the Hercules news, nothing really seems to have changed fundamentally regarding the current state of offshore drillers, who are still facing a bleak industry outlook. With the deadly combination of low crude prices, cutbacks on rig contracting and downward trend in dayrates/utilizations showing no signs of abating, there could be more punishing times ahead.
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