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Shares of offshore drilling entity Seadrill Ltd (NYSE:SDRL) jumped after the company announced that it terminated the construction contract deal for the drillship West Mira. The construction arrangement for the sixth-gen ultra-deepwater tough environment semi-submersible was finalized in second-quarter 2012.

This drilling unit was anticipated to be completed by the end of 2014. But Hyundai Heavy Industries Co. Ltd. was not able to supply the unit within the defined time. As a result, Seadrill exercised its right to revoke the order.

The significance

Seadrill had already finalized a five-year contract with Husky Oil Operations Limited for drillship West Mira. The setback in delivery prompted Seadrill agree for a lower day rate from Husky Oil. Now, with the cancellation of order, the company is in talks with Husky Oil for alternatives to fulfill the contract requirements.

At this moment it is important to understand why cancellation of this drillship contract delighted investors. The reason likely is the cash reserves, which remains the top priority, particularly in the tough times that the power and energy division is facing. As per the contract, Seadrill will be eligible to get the refund amount of $168 million paid as pre-delivery installments to Hyundai Heavy Industries. Additionally, the company will also get accrued interest.

The market

With crude oil prices having fallen more than 60% in past one year and upstream companies having to reduce capital spending, drilling firms like Seadrill have been facing trouble. Preserving cash and having financial strength have become the major concerns for majority of the energy sector companies. It appears like Seadrill Ltd (NYSE:SDRL) has canceled delivery of rigs to preserve funds.

However, one must remember the fact that rig was nearly ready and scheduled for delivery in coming next month, with a contract in the offing. A contract support is a luxury in the existing tough times for new builds.

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Steve Kanaval: Portfolio Manager/Writer/ Market Analyst Steve began his career in the Trading Pits in Chicago making markets at the Chicago Mercantile Exchange (NYSE:CME) the Chicago Board of Trade and the CBOE in the early 80’s. He ran the Morgan Stanley Derivative Prop Trading for the firm specializing in Index Arbitrage. He continued his career as a Trader/Portfolio Manager for multiple Hedge Funds during the Internet Boom of the 90’s managing large portfolios. Steve is known as an expert in MicroCap Technology Stocks and the emerging Digital Currency markets as a Portfolio Manager for his Family Office. Steve has managed portfolio’s in volatile asset classes for 3 decades as a commodity trader, hedge fund manager and digital currency trader and miner. Steve publishes his views on the asset classes in a public forum and has published more than 10,000 articles simplifying these complex and volatile assets for readers. His work is published on multiple sites including Bloomberg, Equities.com, Hacked.com, CryptoCurrencyNews as a paid contributor. His work includes research, journalism and archived video on important market volatility related to stocks, digital currency and other volatile misunderstood asset classes. He offers a humorous, unique insight and the related back stories and drivers for readers interested in volatility and emerging market assets. Full disclosure Steve is long 25 digital currencies and sits on the board of multiple public companies involved in digital currencies, and owns shares in these companies from time to time.

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