Transocean moves to buy Ocean Rig for $2.7 billion

Transocean and Ocean Rig have entered into a definitive merger agreement under which Transocean will acquire Ocean Rig in a cash and stock transaction valued at approximately $2.7 billion, inclusive of Ocean Rig’s net debt.

Leiv Eiriksson; Image source: Lundin

The transaction consideration is comprised of 1.6128 newly issued shares of Transocean plus $12.75 in cash for each share of Ocean Rig’s common stock, for a total implied value of $32.28 per Ocean Rig share, based on the closing price on August 31, 2018.

Transocean said on Tuesday that this represents a 20.4% premium to Ocean Rig’s ten-day volume weighted average share price. The transaction has been unanimously approved by the board of directors of each company.

Transocean also said it intends to fund the cash portion of the transaction consideration through a combination of cash on hand and fully committed financing provided by Citi. The merger is not subject to any financing condition.

Upon completion of the merger, Transocean’s and Ocean Rig’s shareholders will own approximately 79% and approximately 21%, respectively, of the combined company.

Ocean Rig’s fleet

Ocean Rig’s fleet is comprised of nine high-specification ultra-deepwater drillships and two harsh environment semi-submersibles, Eirik Raude and Leiv Eiriksson.

Additionally, its fleet includes two high-specification ultra-deepwater drillships currently under construction at Samsung Heavy Industries with favorable shipyard financing terms. These two newbuilds are expected to be delivered in the third quarter of 2019 and the third quarter of 2020, respectively.

“The proposed acquisition of Ocean Rig provides us with a unique opportunity to continue enhancing our fleet of ultra-deepwater and harsh environment floaters, without compromising our liquidity or overall balance sheet flexibility,” said Transocean’s President and Chief Executive Officer, Jeremy Thigpen.

“The combination of constructive and stable oil prices over the last several quarters, streamlined offshore project costs, and undeniable reserve replacement challenges has driven a material increase in offshore contracting activity. As such, adding Ocean Rig’s premium assets to our industry-leading fleet provides us with an increased number of the modern and highly efficient ultra-deepwater drillships preferred by our customers, and better positions us to capitalize on what, we believe, is an imminent recovery in the ultra-deepwater market.”

Thigpen continued, “This combination with Ocean Rig further strengthens our relationships with strategic customers, while expanding our presence in the key markets of Brazil, West Africa and Norway. It also enables us to reduce our cost per active rig, as we believe that we can efficiently merge the Ocean Rig operations into our existing structure with limited incremental shore-based expense. Further, we are confident that we can realize meaningful synergies through our OEM agreements, our overall approach to maintenance and our fleet-wide insurance coverage, among other opportunities.”

Combined fleet of 57 floaters 

Thigpen concluded, “Including the five rigs under construction, and considering the two additional rigs that we have recently decided to recycle, Transocean’s pro forma fleet will be comprised of 57 floaters, including many of the most technically capable ultra-deepwater floaters, and harsh environment semi-submersibles in the industry.

“With this unparalleled fleet, the offshore drilling industry’s largest and most profitable backlog totaling $12.5 billion, and approximately $3.7 billion in liquidity, we are well-equipped for the market recovery.”

Pankaj Khanna, President and Chief Executive Officer of Ocean Rig UDW Inc. commented: “This strategic combination of Ocean Rig and Transocean creates a world-class fleet perfectly positioned for the market recovery while reducing fragmentation that currently exists in offshore drilling. By adding our high-specification floaters to Transocean’s industry-leading fleet, the combined company will have the offshore industry’s largest and most technically capable fleet of ultra-deepwater and harsh environment floaters. Upon consummation, this transaction will be of significant benefit to the stakeholders of both companies.”

No changes to Transocean’s board of directors, executive management team, or corporate structure are anticipated as a result of the acquisition. The company will remain headquartered in Steinhausen, Switzerland, with significant operating presence in Houston, Texas, Aberdeen, Scotland and Stavanger, Norway.

The transaction, which is expected to be completed during the first quarter of 2019, is subject to the approval of both Transocean and Ocean Rig shareholders and the satisfaction of customary closing conditions, including applicable regulatory approvals.

Retiring two rigs

Also, consistent with the company’s strategy of recycling less competitive rigs, Transocean will retire two of its floaters, the ultra-deepwater drillship C.R. Luigsand the midwater floater Songa Delta. The rigs will be classified as held for sale and will be recycled in an environmentally responsible manner. Both floaters are currently stacked.

Transocean anticipates re-ranking the combined fleet, which may result in additional rigs being recycled.

It is worth reminding that Transocean earlier this year completed the acquisition of another offshore driller, Songa Offshore, in a $3.4 billion worth deal.

When it comes to Ocean Rig, the driller in September 2017 completed its debt restructuring. The company’s restructuring schemes provided for substantial deleveraging of the scheme companies – it and its subsidiaries – through an exchange of approximately $3.7 billion principal amount of debt (plus accrued interest) for new equity of the company, approximately $288 million in cash and $450 million of new secured debt.

Following the restructuring, Ocean Rig in January made significant changes to the company’s management, including the change of the CEO, CFO, and COO.

Transocean-Ocean Rig merger ‘not a surprise’

Commenting on the Transocean-Ocean Rig announcement, Leslie Cook, principal analyst, upstream supply chain, at Wood Mackenzie, said: “The announcement is not a surprise. Industry consolidation is necessary to get these premium assets back to work over the next two to three years. The Ocean Rig fleet aligns very well with Transocean’s best-in-class portfolio.”

She added: “It is Wood Mackenzie’s view that the premium ultra-deepwater drillship market has reached the bottom and rates for some of the highest-spec assets have the potential to double in the next couple years as active utilization begins to tighten.

“Operators are already demonstrating a preference for newer rigs that offer greater efficiency in their drilling programs,” Cook said.

Cook also added: “As rates begin to float back up, the need to keep drilling costs down will drive demand for these newer rigs that can offer efficiency gains.

“By buying Ocean Rig, Transocean is positioning itself to offer the industry premium rigs at competitive dayrates. This is a winning deal – for Transocean, for Ocean Rig and for the industry.”

Offshore Energy Today Staff

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