(Bloomberg) — Freeport-McMoRan, Inc will pay Noble Corp. more than half a billion dollars to not use a pair of its drillships.
In the midst of the oil industry’s worst financial crisis, operations at Noble’s Sam Croft and Tom Madden drillships will cease “as soon as practicable,” London-based Noble said in a statement Tuesday. The company said last month it was in talks with Freeport on a potential restructuring of the contracts, which were set to expire next year.
Terminating the contracts is part of an effort by Freeport, the biggest publicly traded copper miner, to cut costs. The Phoenix-based company is also scaling back its energy business, seeking to sell some oil and natural gas assets and is cutting a quarter of the energy unit’s workforce.
Noble rose 4% to $9.63 at 12:36 p.m. in New York. Freeport climbed 2.8% to $10.81.
The oil industry finds itself in an unprecedented financial crisis after crude prices tumbled by about 60% from their mid-2014 peak. Explorers slashed more than $100 billion in global spending on land and in the water last year. Offshore spending is estimated to drop another 27% this year and 11% next year, according to estimates in February from Wells Fargo.
"For offshore drillers, recovery prospects still remain dim and the timing continues to push right," Andrew Cosgrove, an analyst at Bloomberg Intelligence, wrote Tuesday in a report. "Oil prices probably need to trade more to $60 a barrel to spark a sustainable rebound in offshore demand."
Rig contractors have suffered through the double blow of declining customer demand due to tumbling oil prices and a glut of vessels that continue to be built to meet orders made before the rout. Many rig owners have worked deals with their customers to keep the vessels working by lowering the daily lease price in exchange for extending contracts.
Freeport can make the $540 million payment through a combination of cash, stock and as much as $200 million in near-term Noble bonds. Noble can also receive further payments of $25 million and $50 million depending on oil prices over the next 12 months.
Noble also expects more than $100 million in cost savings by cutting the number of workers on the rigs and parking them long term.
The Noble rigs were each earning more than $600,000 a day, including revenue for moving the drillships that can work in water more than two miles (3.2 km) deep, according to their three-year leases.
Beyond offshore contracts that others in the oil sector are also tearing up early, leases on a further 77 rigs are expected to end this year, according to Bloomberg Intelligence.
Freeport invested heavily in the oil and gas sector in 2013 with the acquisition of McMoRan Exploration Co and Plains Exploration & Production Co, swelling its debt just ahead of the downturn in energy prices. The company has announced more than $4 billion in asset sales so far this year. Those deals, along with free cash flow greater than $4 billion between now and the end of 2018, should give it some breathing room, Christopher LaFemina, an analyst at Jefferies LLC, wrote Monday in a note to investors.