Our drilling contracts are obtained either through direct negotiation with
clients or by submitting proposals in competition with other contractors. Our
contracts vary in their terms and rates depending on the nature of the operations
to be performed, the duration of the work, the amount and type of equipment
and services provided, the geographic areas involved, market conditions and
other variables.
The initial terms of our drilling contracts range from the length of time necessary
to drill one well to several years. Drilling contracts may contain renewal provisions,
which in time of weak market conditions are usually at the option of the client,
and in strong market conditions may be upon mutual agreement.
Generally, contracts for drilling services specify a basic rate of compensation
computed on a day rate basis. Contracts generally provide for a reduced day
rate payable when operations are interrupted by equipment failure and subsequent
repairs, field moves, adverse weather conditions or other factors beyond our
control. Some contracts also provide for revision of the specified day rates
in the event of material changes in the cost of certain items. Any period during
which a rig is not earning a full operating day rate because of the above conditions
or because the rig is idle and not on contract will have an adverse effect on
operating profits.
For mobilization or demobilization of rig moves outside of in-field relocations,
we may obtain from our clients either a lump sum or a day rate as mobilization
compensation for services performed and expenses incurred during the period
in transit. In a weaker market environment, such as we are currently experiencing,
we may not fully recover our relocation costs or receive any mobilization compensation
from our clients. We can give no assurance that we will receive full or partial
recovery of any future rig relocation costs, including mobilization costs out
of the shipyard for our two drillships currently in the DSME shipyard.
Operation of our drilling equipment is subject to the offshore drilling requirements
of petroleum exploration companies and agencies of local or foreign governments.
These requirements are, in turn, subject to changes in government policies,
global demand and prices for petroleum and petroleum products, proved reserves
and production in relation to such demand and the extent by which such demand
can be met from onshore sources. An over-supply of drilling rigs in any market
area can adversely affect our ability to employ our drilling rigs in these market
areas.
The current trend of some E&P companies seeking to terminate, renegotiate
or repudiate existing drilling contracts that began in 2014 has continued throughout
2016 as rig demand and market day rates decline further. Some of our contracts
are cancellable at the option of the client upon payment of a termination fee
which may not fully compensate us for the loss of the contract and may result
in a rig being idle for an extended period of time. In addition, some of our
clients could experience liquidity or solvency issues or could otherwise be
unable or unwilling to perform under a contract, which could ultimately lead
a client to enter bankruptcy or otherwise encourage a client to seek to terminate,
renegotiate, or repudiate a contract or delay payment. Further deterioration
in cash flow generation by E&P companies may accelerate these trends. If
our clients seek to terminate, repudiate, or renegotiate our significant contracts
and we are unable to negotiate favorable terms or secure new contracts on substantially
similar terms, or at all, our revenues and operating profit could be materially
reduced.
Contracts also customarily provide for either automatic termination or termination
at the option of the client in the event of total loss of the drilling rig,
if a rig is not timely delivered to the client, if a rig does not pass acceptance
testing within the period specified in the contract, if drilling operations
are suspended for extended periods of time, including excessive rig downtime
for repairs, or other specified conditions, including force majeure or failure
to meet minimum performance criteria. Early termination of a contract may result
in a rig being idle for an extended period of time.
The majority of our contracts are denominated in U.S. dollars, but occasionally
all or a portion of a contract is payable in local currency. To the extent there
is a local currency component in a contract, we attempt to match revenue in
the local currency to the operating costs paid in the local currency such as
local labor, shore base expenses, and local taxes, if any, in order to minimize
foreign currency fluctuation impact. Failure to obtain currency protection on
a contract may be detrimental to our cash flows and results of operations.
Client
Shell Offshore Inc. 31%
Kosmos Energy Ltd. 26%
Woodside Energy Ltd. 15%
Noble Energy Inc. 11%
