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The world’s largest oil producer canceled an offshore contract with Hercules Offshore

Saudi Aramco, the world’s largest oil producer, cancelled a contract with Hercules Offshore (ticker: HERO) last week, according to HERO. The termination of the contract for Hercules Offshore’s Hercules 261 is effective March 27, 2015. Initially, the contract was set to expire in late 2019.

Hercules 261 is a Marathon Letourneau Class 82-SDC with a designed water depth of 250 feet and a drilling depth rating of 20,000 feet.

In the company’s release, Hercules said that it is still in the process of negotiating the continuation of the Hercules 261 contract and is in discussions with Saudi Aramco about possible rate reductions on the Hercules 262 and Hercules 266.

In 2013, Hercules said it had received five-year contract extensions from Saudi Aramco on Hercules 261 and 262, reports The Wall Street Journal. At that time, the extensions included an approximate 50% increase in pricing that was planned to go into effect in late 2014.

Cutting costs

Ending its contract with HERO is only one of the ways Saudi Arabia’s state run oil producer is looking to cut costs since oil prices plummeted last year. Saudi Aramco is doing everything from asking contractors to lower their oil field services costs to negotiating discounts on the company’s phone and power bills, reports The Wall Street Journal. Aramco is also considering cutting future spending on E&P by as much as 25%, to $30 billion a year from $40 billion, industry sources said.

In December, the company met with companies including Baker Hughes (ticker: BHI), Halliburton (ticker: HAL) and Schlumberger (ticker: SLB) to ask the companies for discounts of up to 20% on certain services, according to people familiar with the matter. The companies do about $6 billion a year in business with Aramco combined.

“Like everyone else, we’re using the downturn as an opportunity to sharpen our fiscal discipline,” Aramco CEO Khalid Al Falih said in public remarks during the World Economic Forum in Davos in January. “We’re cutting on a few things that we could cut, but we’re as committed as ever to our long-term strategy.”

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Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.