Freeport-McMoRan is paying Noble Corp. $540 million to stop the use of its drillships amidst the oil industry’s largest financial crisis and will halt operations “as soon as practicable.”
Freeport’s effort in terminating the contracts is to cut cost. It’s also cutting back a quarter of the units workforce energy business, and shifting to sell oil and gas assets. Noble increased by 4 percent while Freeport by 2.8 percent.
Explorers cut spending more than $100 billion on land and in the water due to the unpredictable financial crisis caused by a 60% loss from a mid-2014 peak. According to recent estimates, offshore spending is expected to plunge another 27% by the end of this year, followed by 11% next year.
Andrew Cosgrove, analyst at Bloomberg Intelligence wrote, “For offshore drillers, recovery prospect still remain dim, and the timing continues to push right. Oil prices probably need to trade more to $60 a barrel to spark a sustainable rebound and offshore demand.”
Many rig owners have had to become creative, suffering a double blow due to lack of demand because of oil prices. Some have made deals to keep production by lowering lease prices in exchange for longer contracts.
Noble can receive payment through a combination of different payment methods over the next 12 months depending on oil prices. Due to the production halt, Noble expects a significant savings in cost. Each of its rig’s daily earned $600,000. According to Bloomberg Intelligence, across the industry, other contracts are also terminating early.
Freeport’s investment just before the energy downturn added to its debt, announcing more than $4 billion in assets sales this year alone. Analyst Christopher LaFemina of Jeffries LLC said all of this activity should give them breathing room.
Article written by HEI contributor Marcela Abarca.