Tickers in this Article: ESV, PDE, RIG, NE, DO, PBR, HERO
Mergers and acquisitions seem to pick up when a market is just turning, so Monday's deal between Ensco (NYSE:ESV) and Pride (NYSE:PDE) may be a good sign that the offshore drilling market is about to enter another cyclical upswing. By the same token, it could just be a sign that Ensco realizes that its tough to get fair treatment from major integrated energy companies as a smaller company and that scale can produce some inherent advantages.

IN PICTURES: 9 Simple Investing Ratios You Need To Know

The Terms of the Deal
With the deal announced Monday, Ensco will acquire Pride with a combination of cash and stock worth $41.60 per share. In addition to $15.60 in cash, Ensco will hand over 0.4778 shares of stock to complete the deal. That represents a 21% premium for Pride shareholders and a pretty healthy multiple for Pride relative to industry norms.

What the New Ensco will Look Like
When the deal is complete, Ensco will control 74 rigs, with 21 that function in deepwater and ultra-deepwater. That will make Ensco the second-largest deepwater player, second to Transocean (NYSE:RIG). Ensco will also have 47 jackups in the fleet, with 27 good for drilling in depths in excess of 300 feet.

It is not all about the number of rigs, though. While companies like Diamond Offshore (NYSE:DO), Noble (NYSE:NE) and Transocean may have been historically more focused on deepwater assets, the new Ensco will have a newer fleet. Newer matters - newer rigs are often more powerful and more technologically advanced, and can allow drillers to do more in less time and complete complex jobs that older rigs may not be able to handle. That, in turn, often spells better dayrates.

The new Ensco will also be an exceptionally geographically well-diversified company, with operations in virtually all of the major drilling regions. At the same time, the company does have pretty extensive exposure to Petrobras (NYSE:PBR), with eight of the 74 units committed to this Brazilian giant. That's a good news / bad news story - it is never great news to be that reliant on a single customer, but Petrobras may be the one oil company that a drilling company would want to be over-exposed to, with its huge resource base off the coast of Brazil.

The Outlook for Offshore
While jackup rates really have not turned up yet, new-build activity has definitely perked up, with even Diamond commissioning new units. The question, as always, is how these new units will impact pricing in the deepwater market. It seems that major offshore explorers are less inclined to lock up rigs for long-term commitments, presumably banking on a good supply of attractively-priced rigs to be there in the next couple of years. Time will tell who wins that bet. (For more, see A Primer On Offshore Drilling.)

By the same token, it will be interesting to see whether any other companies feel pushed to look at M&A after this deal. Transcoean probably does not need to do anything, but companies like Diamond and Noble might start thinking about deals, and Hercules (Nasdaq:HERO) and Seahawk (Nasdaq:HAWK) might hear a knock on the door before long.

The Bottom Line
Ensco seems to be a more compelling company. At the same time, there is a lot of appeal to companies like National Oilwell Varco (NYSE:NOV) and Cameron (NYSE:CAM) that win almost either way. NOV is a leading supplier of rig equipment, so newbuild activity is a major positive for them; with Cameron, there's a more competitive aspect (they have to beat others out for equipment like blowout preventers), but still an overall theme of increased offshore activity being good for business. (For more, see Offshore Drilling Will Change And That Is Good For Cameron.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center