On April 8, 2011, SeaDrill Ltd (NYSE:SDRL) entered into a five-year contract with Pemex. This five year contract calls for the brand-new West Pegasus ultra-deepwater rig to begin operations in Mexico in the third quarter of 2011. The contract calls for a fixed dayrate for the first two years of operations, then annually adjusted to the market rate for the remaining three terms of the contract. You can read the official announcement from SeaDrill about this contract on their webpage.
The contract value is $850 million, assuming a constant dayrate throughout all five years of the contract. That works out to a dayrate of approximately $465,750. That is roughly comparable to the dayrates of SeaDrill’s already existing rigs of the same type. If the market rate is higher than this after the first two years then the dayrate will increase accordingly.
As my previous fleet analysis shows, ultra-deepwater drilling rigs command the highest dayrates by a rather large margin. West Pegasus itself is one of these ultra-deepwater rigs that just finished construction in the first quarter. While the contract itself is not as high as most of the other ultra-deepwater rigs, it still is going to add more than $465,000 to SeaDrill’s revenue every single day. That is revenue that the company did not have prior to the contract with Pemex.
The company will no longer be incurring the carrying costs for West Pegasus, either. As the rig was under construction, SeaDrill had to incur the costs of building that rig without realizing any revenue for their expense. Now that it is under contract, the company will begin drawing revenue that can make its way down to the bottom line. This should ultimately benefit shareholders.
This contract also has the effect of diversifying SeaDrill’s revenue sources. As my fleet analysis reveals, SeaDrill had no active contracts with Pemex. This is, in fact, the first contract that SeaDrill has ever had with Pemex. This gives the company an opportunity to improve their customer relationships and possibly open up some new business opportunities for the company. Alf C Thorkildsen, CEO of SeaDrill Management AS, said as much:
This is SeaDrill’s first assignment for Pemex, and it presents an exciting opportunity to develop a strong relationship with one of the largest national oil companies in the world, as well as strengthening our position in the Gulf of Mexico.
This could thus potentially lead to other contracts with Pemex. After all, a satisfied customer is more likely to be a returning customer.
Long-time readers will likely realize that I have cited SeaDrill’s lack of exposure to the Gulf of Mexico as a positive thing in past articles. I still believe that is true, despite West Pegasus being deployed to the Gulf of Mexico. This rig will be drilling in Mexican sovereign waters, not in the part that belongs to the United States. My conviction still holds true – SeaDrill still has minimal exposure to the U.S. Gulf of Mexico.
Disclosure: I am long SDRL.