Marine's Exxon Contract Hits a Rough Patch

Although Esso warned Marine it might cancel its contract over a deadline, the oil company could just be seeking a discount.
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The possibility of

Marine Drilling

(MRL)

losing its most lucrative drilling contract just moved a step closer to reality.

Esso Exploration

, a division of

Exxon

(XON) - Get Report

, warned Marine in a letter Wednesday that it may terminate its $300 million contract for the

Marine 700

rig if it's not delivered by July 15, according to a Marine press release Thursday. The rig is in the final stages of construction at

Friede Goldman's

(FGI)

Pascagoula, Miss., shipyard.

Exxon may simply want to cancel the contract so it can land another rig at a lower rental rate, according to five analysts and industry observers. Esso contracted the Marine 700 in January 1998 -- shortly after the drilling market peaked -- for a five-year contract at a rate of $165,000 per day. Rates for similar rigs now range from $65,000 to $160,000 per day, according to

Offshore Data Services

, a Houston publisher that tracks worldwide rig markets. So Esso could save $118 million compared with its current contract if it secures a rental rate of $100,000 per day.

"It's clear to me that Exxon is maneuvering to get out of the contract," says Tom Marsh, an analyst and editor at Offshore Data.

Officials at Exxon and Marine couldn't be reached for comment.

"There's a lot of money at stake," says Matthew Conlan, an analyst at

Prudential Securities

in Houston who follows Marine. "It appears that might be one of the reasons for the letter."

About two weeks ago, Conlan reduced next year's earnings estimates for Marine to reflect the possibility of the Marine 700 working at a greatly reduced day rate. He now estimates Marine will earn 75 cents a share in 2000 rather than the $1.05 he estimated with the higher rental rate on the rig. He has an accumulate rating on the stock, and Prudential hasn't performed underwriting for Marine. The

First Call

consensus estimate for Marine for next year is 54 cents.

Several other drilling contractors already have run into similar difficulties.

Rowan

(RDC)

filed a suit against

BP Amoco

(BPA)

after it

canceled its drilling contract for Rowan's

Gorilla V

rig in January.

Shares of Marine were hit today on the news, even as the rest of the sector got a strong bounce from bullish sector calls by

Goldman Sachs

,

Warburg Dillon Read

and

Morgan Stanley Dean Witter

. Thursday Marine closed down 1 1/8, or 8.3%, at 12 3/8.

In Esso's letter, the company said it's concerned over the considerable amount of work yet to be done on the rig and has begun a search for an alternative. Yet Jan Rask, president and chief executive of Marine, is "firmly convinced" the rig will be completed on time, says Robert Trace, an analyst at

Southcoast Capital

. He rates Marine a strong buy; Southcoast has not performed underwriting for Marine.

In its press release, Marine said, "The company continues to believe it will be able to meet the delivery deadline and the required quality standards of the contract, although ... there is some risk that the company will not meet the July 15 contract deadline."

Exxon had previously pressured Marine to lower its rental rate, but Marine declined, Trace says. Now, "Exxon is playing hardball with Marine in a public arena."

There are plenty of deep-water rigs coming on the market. By Aug. 1, there will five rigs with a capability to drill in 5,000 feet of water, says Marsh at Offshore Data. Of the five, three are owned by

Diamond Offshore

(DO) - Get Report

, one by

R&B Falcon

(FLC) - Get Report

and one by

Transocean

(RIG) - Get Report

.

At year end, there may be up to two dozen floating rigs (of all water-depth capabilities) looking for work, Marsh says, which means competition among deep-water drilling contractors will intensify. And that's just the thing a major oil company likes to see when it dangles multiyear, multimillion-dollar projects.

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