Shelf Drilling books loss over rig impairments, takes action to cut costs

Offshore drilling contractor Shelf Drilling booked a loss of $185 million in the first quarter of 2020 due to rig impairment charges and is taking actions to reduce costs and preserve liquidity amid challenging market situation.

Shelf Drilling Tenacious; Source: Dubai Petroleum

These actions involve headcount reductions, compensation reductions at the executive and board level, and targeted savings across all other cost categories.

David Mullen, Chief Executive Officer, commented: “The COVID-19 pandemic has significantly affected global economic activity creating unprecedented uncertainties with near and medium-term oil and gas demand.

“Many operators are considering to either terminate, suspend or renegotiate contracts or delay planned activities, all of which will impact our future activity.

In response to this situation, we have taken actions to protect our employees, ensure continuity of our operations, reduce costs and preserve liquidity”.

It is worth reminding that Shelf Drilling received three early contract terminations in less than a month as oil and gas operators are looking to cut costs.

Namely, in March 2020, Shelf entered into a mutual agreement with Dubai Petroleum to amend the contract end date for the Shelf Drilling Tenacious from January 2022 to September 2020.

Less than a week later, Shelf Drilling received another early termination of a drilling contract. This time it was for the Trident XIV jack-up rig operating for ExxonMobil offshore Nigeria.

In early April, Shelf entered into a mutual agreement with a customer to shorten the contract for the Shelf Drilling Mentor rig.

Rig impairments

In the first quarter of 2020, Shelf Drilling booked a loss of $185 million, compared to a loss of $70.3 million in 4Q 2019.

The company performed impairment testing on all rigs in its fleet at the end of 1Q 2020.

As a result, a $188 million loss on impairment of long-lived assets was recorded in March 2020. Nineteen of the company’s rigs were impaired, of which four rigs are stacked and held for sale.

Shelf’s 1Q 2020 revenues were $181.4 million, a 13.5 per cent sequential increase compared to 4Q 2019.

The company’s contract backlog at the end of March was $1.9 billion across 32 contracted rigs.

The $21.6 million (13.5 per cent) sequential increase in revenue was largely due to the full quarter of operations of seven new contracts, which started during 4Q 2019 in India, Nigeria, Saudi Arabia, and Thailand.

Effective utilization increased to 92 per cent in 1Q 2020 from 80 per cent in 4Q 2019.