Following in the footsteps of its peers, Royal Dutch Shell plcRDS.A recently opted out of an agreement with Noble Corporation plc NE related to its Noble Discoverer drillship, ahead of scheduled time.
Notably, the deal termination announcement came on the same day when offshore drilling giant Transocean Ltd. RIG declared the contract termination of its drillship Discoverer Americas by Statoil ASA STO .
Shell had entered into a three-year agreement for the Noble Discoverer drillship on Feb 2014. The drillship's dayrate was fixed at $368,000 per day for Shell's Arctic drilling program that wrapped up in September this year. Investors should know that Shell has agreed to pay Noble Corporation 90% of the drillship's operating dayrate for the residual time period.
Shell's decision to quit Arctic operations is the primary reason behind the sudden contract termination although the company had previously announced that its revised Arctic drilling plan has six prospective wells. As the company has been incurring high operating expenses and facing considerable regulatory hurdles concerning environmental issues, sustaining operations in the region is not feasible, especially with the extended slump in oil price.
Shell is an integrated energy firm with a strong and diversified portfolio of development projects that offer attractive long-term opportunities. Predictably, the decline in oil price has affected Shell's earnings and cash flow, particularly at its upstream unit. Furthermore, lost reserves/production from the group's asset sales in Nigeria and heightened risk related to the company's remaining operations in the country cannot be ignored either.
As a result, the company currently carries a Zacks Rank #5 (Strong Sell), implying that it will significantly underperform the broader U.S. equity market over the next one to three months.