February 8, 2016 / 8:10 PM / 5 years ago

Diamond Offshore-GE service tie-up may prompt other such deals

(Reuters) - Diamond Offshore Drilling Inc’s (DO.N) service agreement with General Electric Co (GE.N), which is expected to help lower idle time for rigs on hire, could prompt more such deals in an industry battered by sliding oil prices.

The logo of General Electric is pictured at the 26th World Gas Conference in Paris, France, June 2, 2015. REUTERS/Benoit Tessier

Reducing downtime is crucial for drillers struggling to lease out offshore rigs and cut costs as oil and gas producers scale back spending.

At the heart of the deal is a critical equipment known as a blowout preventer (BOP), the failure of which caused the deadly BP Plc (BP.L) well blowout in Gulf of Mexico in 2010.

BOPs are stacks of valves and pipes that sit atop deepwater wells to stop oil and gas from gushing upward in an accident. They have to be constantly tested, and even a small glitch can put a rig out of work for days.

GE’s oil and gas unit said on Monday it would buy back the BOPs it had sold to Diamond Offshore for four of its rigs for $210 million. GE will then rent them out to the driller and service them for a daily fee.

“If downtime occurs ... GE will not be paid and will therefore feel the financial impact, similar to the way the driller and the operator are affected today,” Diamond Offshore Chief Executive Marc Edwards said.

Diamond Offshore loses up to half a million dollars of revenue each day a rig is down, while the customer - an oil and gas producer - also loses as much money, Edwards said, calling downtime the industry’s “Achilles’ heel”.

Among companies that could adopt a similar model are offshore rig providers such as Noble Corp Plc (NE.N), which could tie up with oilfield equipment manufacturers such as National Oilwell Varco Inc (NOV.N) and Cameron International Corp CAM.N, analysts said.

“I can’t think of anyone who wouldn’t be interested in a similar agreement. All rig contractors need to find ways to reduce costs right now,” said Leslie Cook, a consultant at Quest Offshore Resources.

Evercore ISI analyst James West said the service model will create a much more visible stream of cash flow for equipment providers compared with the cash flow from selling equipment, “which is very cyclical and very lumpy.”

The agreement, the result of eight months of negotiations, will help Diamond Offshore boost liquidity and put its four rigs “front of the line in terms of desirability,” Diamond’s Edwards said.

Additional reporting by Amrutha Gayathri and Anet Josline Pinto in Bengaluru; Editing by Saumyadeb Chakrabarty

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