LATE MAY BROUGHT the news that offshore drillers Ensco plc and Atwood Oceanics Inc. agreed to merge in an all-stock transaction. Atwood shareholders will receive 1.60 shares of Ensco for each share of Atwood common stock for a total value of $10.72 per Atwood share based on Ensco's closing share price of $6.70 on May 26, 2017. This represents a premium of approximately 33% to Atwood's closing price on the same date. Upon closing, Ensco and Atwood shareholders will own approximately 69% and 31%, respectively, of the outstanding shares of Ensco plc.
When said and done, Ensco will gain six ultra-deepwater floaters and five high-specification jackups. The combined company, with an estimated enterprise value of $6.9 billion and a combined backlog of $3.7 billion, will have a fleet of 63 rigs, comprised of ultra-deepwater drillships, deep- and mid-water semisubmersibles, and shallow-water jackups, along with a customer base of 27 national oil companies, supermajors, and independents with contracts covering six continents. Within the combined fleet of 26 floating rigs (semisubmersibles and drillships) are 21 ultra-deepwater drilling rigs, capable of drilling in water depths of 7,500' or greater, with an average age of five years. The jackup fleet will be the largest in the world, composed of 37 rigs, including 27 premium units.
The acquisition sets up an impressive blended fleet, and may be the start of consolidation in the industry segment.
"The lower for longer thesis is reshaping how E&P companies think about offshore exploration projects in frontier locations. The high capital costs of these projects, along with the long cycle development and return models, make them challenging for E&P companies to pursue, particularly in light of shorter return cycles for onshore shale development," said Archie Fallon, a partner in King & Spalding's Houston office. I asked Fallon about the M&A landscape for the offshore drilling set. "The offshore drilling services companies face intense competition for a shrinking number of projects, and we are starting to see the wave of joint ventures and strategic alliances that started after prices dropped evolve into sector consolidation," he said.
Pointing to Borr Drilling's acquisition of Transocean's jackup fleet and Shelf Drilling's purchase of three Seadrill jackups, Rystad Energy acknowledged assets changing hands in the space, but detailed that the Ensco/Atwood merger "marks the first merger between two well-respected offshore drilling contractors." In its analysis following the news, Rystad's senior offshore rig analyst, Liz Tysall, commented: "Consolidation has been long overdue and the Ensco-Atwood merger is the first step towards a less fragmented industry."
Similar sentiment was noted by Evercore ISI analysts after the deal was announced. Likening the resulting combined company to "an offshore drilling bellwether that rivals the likes of Transocean in terms of fleet size," the analysts, too, said the deal is another step forward for offshore consolidation.
"We believe this transaction may kick start a much needed M&A cycle in the offshore drilling group. For several quarters now we have voiced the notion that improvement in the beleaguered offshore drilling sub sector is predicated on two key catalysts - continued rig attrition and further M&A/consolidation." The agreement between the two companies "is a major step forward for a sector that is just beginning to see stabilization in terms of contracting and dayrates," the analysts continued.
Taking a look at the financials, Ensco anticipates expense savings of $65 million to be realized in full year 2019 and beyond, and 2018 cost synergies are projected to be more than $45 million. According to VesselsValue offshore analyst Rob Day, prior to the acquisition, Ensco's fleet was valued at $3.8 billion. The company is taking over Atwood's $1.10 billion Mobile Offshore Drilling Units (MODU), plus newbuild ultra deepwater drillships-the Atwood Admiral ordered in 2012 for $635 million and the Atwood Archer ordered in 2013 for $635 million. The market valuation and intelligence firm sees Ensco as the third largest MODU owner by value behind Sete Brasil and Transocean.
Whether or not the deal means the market has bottomed is unclear. VesselsValue, citing the $29 million loss documented in Atwood's recent quarterly report, said the "likely scenario here is that this is a big owner taking advantage of a cash strapped smaller owner." That said, the firm noted benefits to both companies. "Ensco has acquired a competitor's fleet at reduced cost, while Atwood can take advantage of their strengthened position in the market and all the annual savings that brings."
While Ensco's acquisition of Atwood is the first merger among offshore drillers, we can likely agree that expense savings is key and as the oil and gas industry continues to manage the downturn, the offshore segment is likely to battle longer than others, resulting in a shift that may take on many forms.