Seadrill Ltd (NYSE:SDRL) has decided to delay receiving newbuilds until next year. Deferring the arrival of newbuilds is a tactical measure to avoid incurring capital expenses associated with the deliveries of newbuilds. Seadrill has been trying to keep its costs down at a time when oil companies have cut spending in response to weak oil prices.
Besides holding off receiving of newbuilds, Seadrill has also been slashing its workforce to whittle down costs and stay afloat. The company said at its 3Q16 earnings call that it had dropped 23% of its headcount since the end of 2015. That measure together with other efficiency drives helped Seadrill to narrow its net loss in the last quarter to $657 million from $1.9 billion in the comparable period a year earlier.
However, the depressed oil prices that have caused oil companies to trim spending on drilling activities took a hit on Seadrill’s topline. The company’s revenue of $743 million 3Q16 decreased from $985 million a year earlier.
“[…] we expect the market to gradually improve as costs have been reset across the value chain and more drilling activity will be needed to avoid accelerated production declines,” said Seadrill CEO Per Wullf.
The topline hit came as a result of lower day rates and the fact more rigs were idle because of soft demand. That explains why the company has decided to delay taking new rigs to avoid adding capacity when contracts opportunities are limited.
Seadrill peers also delay newbuilds
But Seadrill is not alone in delaying taking of newbuilds. Peers such as Diamond Offshore Drilling Inc (NYSE:DO), Ensco PLC (NYSE:ESV), Atwood Oceanics, Inc. (NYSE:ATW), Transocean LTD (NYSE:RIG) and Noble Corporation Ordinary Shares (UK) (NYSE:NE) have also negotiated with shipbuilders to defer deliveries of their newbuilds. Though SDRL says it can only begin to take newbuilds starting next year, it still expects 2017 to be another slow year for drillers. However, oil prices could rebound quickly if OPEC members meeting this week agree and commit to output cap. Indeed, oil prices are already up over 7% today on rumors of a successful outcome of the meeting.
Seadrill stock declined 3.9% to close at $2.45. The stock is down more than 27% YTD and down more than 60% over the last one year.
