Good times, bad times
  from: Offshore Engineer
  by: Jennifer Pallanich
  Wednesday, April 09, 2008

Mergers and acquisitions are frequent occurrences in a struggling economy and can be a surprise in a booming one. US editor Jennifer Pallanich looks at the motives behind the merger that has dominated talk in the offshore drilling circle in recent weeks.

If all goes according to plan, Transocean and GlobalSantaFe will become one by the end of the year, known to the world simply as Transocean.

A merger of this size during a drilling heyday may seem unusual. Judson Bailey, senior research analyst at Jefferies & Company, says the merger is logical given the underleveraged balance sheets, low debts, available cash, huge backlogs, and the new supply of drilling vessels expected to enter the market in the next four years.

The oil companies see their equity value as being undervalued, Raymond James & Associates analyst Collin Gerry says, and many have bought back their shares because they think the stock is undervalued.

‘We typically see consolidation in the bottom of cycle and not at the top.’ he says. Gerry says it’s quite possible that this type of consolidation is because ‘there’s a disconnect between how the stock market is valuing these companies and how these companies see themselves. The industry is seeing this as a really strong market, and the stock market is seeing this as typical energy cyclicality.’

The industry may not have seen the last of consolidation, even in boom times. Bailey predicts the industry and shareholders alike will pressure other drilling companies to consolidate. ‘To compete in the coming world where you have this huge competitor in Transocean and this new supply coming in, they may need to get bigger to maintain their position in the market,’ he says.

Gerry agrees, saying some jackup companies want more exposure to the deepwater side, and some companies have deepwater assets and want to be able to compete with the newly formed Transocean. He anticipates further moves will either be a la the Transocean/ GlobalSantaFe merger or via private transactions in which companies acquire individual rigs built on speculation. Even Transocean isn’t turning its nose up at the idea of picking up some of the newbuilds.

‘Sure, it will be interesting to pick up a few of these newbuilds that are coming into the world, but those are onesies and twosies and I don’t think it can compare to what we’re doing here,’ Transocean CEO Robert Long said during a recent conference call discussing the merger.

In all, more merger or acquisition activity is possible, believe leading industry commentators. ‘You could see a bit more pressure on other companies to consolidate,’ Bailey says, to compete with such a large driller. While these companies would have to decide how large they’d want to grow, he says, any merger activity will likely include some international flavor as well. At the heart of any transaction, though, is the benefit to the companies involved.

According to Long, the merger will open ‘unparalleled opportunities’ for the two companies and for their customers, employees and shareholders. ‘This transaction will help us continue to keep pace as the industry rapidly adds capacity, re-establish our position in jackups, add important new relationships with significant customers, bring three new deepwater semisubmersibles to complement our growing fleet of deepwater drillships, and assure us of a leading presence in almost every major offshore drilling province in the world,’ he declared. ‘We will also benefit from economies of scale leading to cost reduction, a much larger pool of extremely well qualified and experienced people, and by far the largest and most capable technical organization in the contract drilling business.’

Analysts expect the merger to lead to more disciplined – or rational – pricing in the offshore drilling market, although it will probably take some time for that to show up given the long lead times in the offshore industry.

Some companies, Gerry says, hope for more consolidation because less competition typically yields more rational pricing in the market. He says rationality in bidding will benefit the industry as a whole, even if there is some resistance to the consolidation from the E&P companies.

‘It’s the timeless struggle between the E&P companies and the service companies’ in which a service company charges a price that the E&P;company may think is too high, Gerry says. ‘It’s clearly a consequence. Good or bad, who knows. You have less competition chasing bids, so you’re probably going to see better pricing for the offshore industry as a whole.’

Bailey says it makes sense for the drillers to pursue the same type of purchasing power size buys that the E&P companies have garnered through consolidating over the years.

Even if smaller companies merge and gain purchasing power in this strong market, ‘where they’ll recognize the benefit is when the market is not that strong,’ he says.

Analysts have speculated on Seadrill, Diamond Offshore Drilling, Noble Corp, Ensco International and Pride International being among possible components of other offshore M&A activity. Noble is reportedly actively looking at assets.

The Transocean/GlobalSantaFe deal has been quite a while in the making, Long admitted. ‘We have been very interested in consolidation for a long time and we have participated in consolidation in the past,’ he explained. ‘So, you clearly know our view on consolidation.We have looked at a lot of different avenues and I will tell you that for a long time, we have viewed a combination of GlobalSantaFe as being one of the most attractive things that we could do in this industry. Strategically for us, it solves a problem that we have been wrestling with for a while in terms of how are we going to maintain our footprint with jackups. Because of our investment philosophy and not committing capital on speculation, it is very difficult to add new capacity in the jackup business. So, we knew that ultimately we are going to have to exit the business or acquire a significant fleet through a combination like this.’

By the numbers

Under the deal announced in late July, GlobalSantaFe and Transocean will merge to create a $53 billion global drilling company with 146 rigs at its disposal.

The combined company will retain headquarters in Houston, with chairman Robert Rose, CEO Robert Long, and president and COO Jon Marshall at the helm. Rose is currently GlobalSantaFe’s chairman, Long is Transocean’s CEO and Marshall is GlobalSantaFe’s president and CEO.

‘What we ultimately create has the potential to be much greater than the sum of our parts.We believe this is a well timed transaction that is an ideal fit for both companies,’ Marshall said during the conference call discussing the merger, adding the merged company’s ability to dedicate more resources to new technology development will enable the company to focus on improving operational efficiency and reducing cost for customers. ‘In the same vein, this transaction creates more career growth opportunities for our people, which is so important in this period of intense competition for talent.’

The two largest offshore drillers say their combined current revenue backlog of $33 billion, together with the greater financial strength of the combined company, will enable a $15 billion recapitalization. The deal is still subject to regulatory approval.

‘There are no concerns about our ability to refinance that bridge and close this deal,’ Transocean’s senior VP and CFO Greg Cauthen said during Transocean’s 2Q 2007 earnings conference call.

According to Transocean, both companies share a common business philosophy and culture. Transocean expects the deal to save between $100 million and $150 million per year in synergies by 2010. The deal does not figure in the recently settled deals licensing Pride and Noble Corp to use Transocean’s offshore dual activity drilling patents.

‘We’ve signed them up so recently,’ said Cauthen, that the drilling company hasn’t ‘recalculated that it should be a couple of million dollars a quarter. But that is assuming no GlobalSantaFe merger because . . . if that merger occurs, we’re going to lose that revenue stream.’

In an industry where backlog is the word of the day, the combined Transocean has advance orders of $33 billion. Noble Corp and Diamond Offshore Drilling both reportedly have nearly $10 billion in backlogs.

Transocean says it sees a strong international market for jackups, especially with strong demand in most established shelf areas and growth in India and the Middle East. General consensus reaches across the industry that the shallower water drilling boom will extend at least through 2008. Some rigs are booked into the next decade, suggesting the offshore drilling party will last well beyond 2009. Transocean expects deepwater rigs to see high utilization rates through 2010.

‘We will be positioned to better offer the full scope of drilling services to customers in all geographical areas as we focus on incident-free, efficient operations and further developing our talented workforce,’ Long said when the merger was announced.

Other M&A deals

Other recent deals worth mentioning include the June announcement of the synergistic merger of Cal Dive and Horizon, which combined complimentary services, and the Hercules Offshore acquisition of Todco, finalized in July and creating a fleet of 33 jackups, 27 barge rigs, 64 liftboats, three submersible rigs, nine land rigs and one platform rig.

At the end of July, the boards of directors of TGS-Nopec Geophysical and Wavefield Inseis agreed to a merger. The deal creates TGS Wavefield, and the boards say the resulting geophysical company will feature a fully integrated product. The merger is subject to customary closing conditions and is expected to be complete in November. OE

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