BP Amoco Terminates Rig Contract with Rowan

Offshore driller Rowan Cos. (RDC Quote) and newly minted oil behemoth BP Amoco (BPA Quote) are feuding over a Gorilla.

Wednesday, Rowan said BP Amoco terminated its contract with Rowan for the just-delivered Gorilla V harsh-weather jackup rig. The oil company says Rowan breached its contract, originally signed in late 1997, by delivering the giant rig with faulty equipment and three months late.

Rowan countered, saying the equipment was in working condition and was delivered within an acceptable window. The driller says it has filed suit against BP Amoco for breach of contract and punitive damages.

But Rowan shares were hit on news of the termination. They fell 10%, or 1 1/16, to 9 7/16. BP Amoco closed at 89 1/8, down 1/8.

The Gorilla cancellation is a big blow to Rowan's earnings this year. The one-year contract was valued at $67 million, or $183,600 per day. Based on that, Rowan may have already lost $3.7 million this month, which would hurt its first-quarter earnings, at the very least. And in today's market, it will be virtually impossible for Rowan to contract the rig at a daily rental rate anywhere near what BP Amoco was to pay. Current rates for similar rigs are $82,000 to $160,000 per day, according to Houston publisher Offshore Data Services.

Rowan, which spent $200 million building the Gorilla, also has two more rigs just like it under construction.

BP Amoco's termination is the latest in a string of rig contract cancellations, highlighting tensions between oil companies and service providers as oil prices remain depressed and companies scramble to cut costs.

Also Wednesday, Ensco (ESV Quote) said several barge-drilling contracts with Petroleos de Venezuela, Venezuela's national oil company, were terminated early. Ensco said it will receive $13.5 million as a termination fee. Ensco traded down 1/2 to 10 3/4.

On Monday, Santa Fe International (SDC Quote) announced the cancellation of a Middle Eastern rig contract, for which it received a $2.8 million termination fee from a unit of Occidental Petroleum (OXY Quote), the operator. And in December, Mobil (MOB Quote) canceled a North Sea drilling contract with Falcon Drilling (FLC Quote) for alleged performance breaches.

"Oil companies have a lot more rig time [contracted] than they need," says Tom Marsh, an editor at Offshore Data. So they're looking for any way they can find to get out of contracts.

BP Amoco stresses that it didn't terminate the contract for the Gorilla V because it would have ended up paying above-market day rates. Instead, when the rig arrived in Rotterdam in mid-December, it was clear that much of its equipment, including basic safety systems, hadn't been tested, says Jamie Jardine, a spokesman for BP Amoco in Aberdeen, Scotland.

"Because these basic systems have yet to be tested, we were left with no alternative but to terminate the contract," Jardine says.

Au contraire, says Rowan spokesman Bill Provine, who maintains that the systems had been tested. "We weren't going to spend all that money to bring the rig across the ocean without testing it," he says.

BP Amoco now will meet with its partners in the field, Amerada Hess (AHC Quote) and Enterprise Oil (ETP Quote), to discuss options, Jardine says.

There are 77 rigs of all types working in the North Sea and northwestern European markets -- where the Rowan rig was to work -- out of a total of 89 rigs available. Eighty-one rigs are contracted. But between now and July 1, 25 rigs end their contracts, says Marsh at Offshore Data. That will leave 52 working rigs in the area -- a utilization rate of 62%, a death knell for day rates.

Rowan has already started marketing the rig, Provine says.