By David Carter Shinn, Bassoe Offshore
The merger between Ensco and Atwood Oceanics this week marks the first significant step in a much-needed industry consolidation process. And the numbers look good for both parties.
Ensco plc and Atwood Oceanics announced yesterday that Ensco will acquire Atwood in an all-stock transaction.
Atwood, one of the industry’s smaller, but top-tier, established contractors has a fleet of six floaters and five jack-ups. Ensco, who already was the world’s largest rig owner after Transocean’s divestiture of their jack-up fleet to Borr Drilling, has 20 floaters and 32 jack-ups.
Ensco notes in their announcement that, “the combination of Ensco and Atwood will strengthen our position as the leader in offshore drilling across a wide range of water depths around the world…[and] this acquisition significantly enhances our high-specification floater and jackup fleets, adding technologically advanced drillships and semi-submersibles, and refreshing our premium jack-up fleet to best position ourselves for the market recovery.”
We see this as a logical deal, as both companies are global, high quality rig owners with compatible rig fleets and operations. Atwood’s rigs add to Ensco’s fleet at a price that makes sense in today’s market.
By the numbers: transaction values in-line with the market
The transaction value assigned to Atwood falls within the generated value range for the company in our Rig Valuation Tool (RVT). As such, we think both parties found an optimal price point.
All but two of Atwood’s 11 rigs are delivered. They have two 7th gen drillships under construction at DSME (under deferred delivery agreements) which should be delivered in 2019–2020. Of their nine delivered rigs, five are on contract.
The RVT gives a value for the Atwood fleet of $1.84–2.04 billion for the transaction. As Atwood’s rigs are well specified and well maintained, we put them at the higher end of the individual RVT value ranges. For the drillships under construction, we assign values which correspond to the value of a new, but delivered rig of the same design which is in drilling condition.
At $10.72 per Atwood share, Ensco paid around $860 million for the company. Adding in Atwood’s long term debt of $1,298 billion plus $274 million in outstanding payments to DSME (for the newbuild drillships) and taking out $435 million in cash, we get to an indicative transaction value of $1.99 billion for Atwood which is at the higher end of the RVT valuation range for Atwood’s fleet.
Atwood achieved good pricing on their rigs for their shareholders (based on today’s low market) while Ensco found a consolidation opportunity at the right price.
More consolidation to come
So far this year, we’ve seen several transactions such as the rig acquisitions made by Borr Drilling, Northern Drilling, and Shelf. While these transactions support rig values, they don’t help with the most pressing problem in the rig market today: too many players.
Maersk Drilling said in May, “this view of reaching or approaching the bottom of the market has led to several M&A transactions for rigs during the first quarter, as companies including new entrants look to take advantage of distressed players and reduced asset prices, however, this does not help resolve the oversupply issues for the industry and only increases the number of competitors.”
That’s where consolidation comes in. And we’ll see more of it.
As the offshore rig industry will be forced to deal with lower rates and fewer contracts in the medium term, we see consolidation as an important strategy for rig owners to find more ways to become efficient.
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