Exodus of deepwater rigs from GOM is underway

The exodus of deepwater rigs from the Gulf of Mexico as a result of the Obama administration moratorium on deepwater drilling is underway.

Diamond Offshore Drilling, Inc. (NYSE:DO) yesterday announced that it has entered into a term contract ending June 30, 2011, plus option, with Burullus Gas Company S.A.E. that will immediately mobilize the Ocean Endeavor from the Gulf Of Mexico (GOM) to Egypt.

Diamond Offshore President and CEO, Larry Dickerson, noted, "With new contracting severely restricted in the GOM as a result of the uncertainties surrounding the offshore drilling moratorium, we are actively seeking international opportunities to keep our rigs fully employed. This new contract for the Endeavor will help us preserve backlog, and will allow the previous operator of the rig to satisfy its contractual obligations which extended until June 30, 2011. We greatly regret the loss of U.S. jobs that will result from this rig relocation."

The new contract, combined with a $31 million early termination fee paid by the previous operator of the rig, is expected to generate combined maximum total revenue of approximately $100 million.

"This is the first floater unit leaving the GoM on the back of the moratorium on drilling in the region," commented Dahlman Rose in an offshore drilling update. "The unit had been earning $295,000/day from Devon since mid-2007 and was due to roll-off contract in mid-2011. Devon cancelled the contract and is paying a $31million termination fee to Diamond. Diamond has fixed the unit in Egypt with Burullus at $203,000/day; however, taking into account the termination fee, the implied dayrate for Diamond is closer to $285,000/day. This implied dayrate is weaker than we had expected, and it appears Burullus is taking advantage of a re-positioning rig by paying a lower rate. While the deepwater market has been under pressure in recent months, we had expected this unit to achieve a rate around $350,000/day."

The Ocean Endeavour is a semisubmersible nominally capable of drilling in 10,000 ft water depths. It is one of several rigs on which Diamond Offshore customers have sought to exercise force majeur clauses in their contracts.

Diamond Offshore gave the details of the rigs and contracts in question in an 8K filing with the SEC last week.