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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