Seadrill Ltd (NYSE:SDRL) has been hit by a contract cancellation. The company said that its client called Pemex had decided to terminate the West Pegasus contract. The move comes only a few months after the parties entered a contract extension agreement that saw Seadrill lower day rates for the rig contract that has now been affected.
Seadrill was looking for revenue of about $266 million from the West Pegasus contract after taking out about $20 million in the form of day rate discounts. However, Pemex has decided to cancel the contract before Seadrill can realize the benefits it was targeting.
Seadrill intends to seek legal redress in the matter of the West Pegasus contract cancellation. The company said that it will be trying to get compensation for the expenses it will incur from demobilizing the rig. On top of that, the company intends to get compensation for the day rate discounts it allowed Pemex.
However, Seadrill didn’t provide an estimate of how much it will be seeking in compensation.
What the West Pegasus contract termination might signal
The termination of West Pegasus contract might signal continued trouble in the energy industry. Depressed oil prices have forced many drillers to cut short drilling projects that were underway or delay projects that they had intended to roll out. That explains why Seadrill hinted in a press release that it is bracing itself for further contract termination notices from its clients.
Pressure on balance sheet
However, given Seadrill’s position, further rig contract cancellations could spell doom for the company’s balance sheet. Consider that the company has almost $3.2 billion in debt that will be due over the next year. That tells you that contract terminations will deny the company the funds it needs to meet its debt obligations.
Seadrill is set to release its 2Q2016 results on August 25 and investors will be closely watching to see what the company says about its future.