Chevron Corporation (CVX) has entered into a long-term contract with Pacific Drilling S.A. (PACD).
Per the deal, Chevron’s affiliate Chevron U.S.A. has contracted Pacific Drilling’s ultra-deepwater drillship — Pacific Sharav — for a period of five years. The drillship will be used in the waters of Gulf of Mexico.
Pacific Sharav is capable of operating up to 12,000 feet in water and can drill wells at a depth of up to 40,000 feet. Samsung Heavy Industries in Korea will deliver the drillship in the fourth quarter of 2013, after the construction is complete as per the modifications requested by the client.
The contract is estimated to generate approximately $1.1 billion in revenue for Pacific Drilling, bringing the total contract backlog to about $3.2 billion, as of June 22.
Pacific Sharav will be the third Pacific Drilling drillship contracted by Chevron, after the Pacific Bora that has been operating on a three-year contract for offshore Nigeria, since August 2011. Another rig, Pacific Santa Ana, has been working in the U.S. Gulf region, since May, this year.
San Ramon, California-based Chevron is engaged in oil and gas exploration and production, refining and marketing of petroleum products, manufacturing of chemicals, and other energy-related businesses.
We maintain our long-term Neutral recommendation on Chevron shares. The company currently retains a Zacks #3 Rank (short-term Hold rating).
We believe that Chevron is one of the largest integrated energy companies in the world and has an impressive business model. Its current oil and gas development project pipeline is among the best in the industry, boasting of large, multi-year projects.
Additionally, Chevron possesses one of the healthiest balance sheets among peers, which helps it to capitalize on investment opportunities with the option to make strategic acquisitions.
However, due to its integrated nature, Chevron is particularly susceptible to the downside risk from any weakness in the global economy. We are also concerned about business risks associated with operations in oversea areas, delays and cost overruns in various projects and the company’s high level of capital spending, which may result in reduced returns going forward.
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