Offshore Drillers Feel Urge to Merge


"Deepwater drilling market has a very bright future."

Earlier this month, colleague Josh Wilburn posed the question, "What Will Seadrill Buy Next?" That's proven timely, as Pride International is reportedly seeking strategic alternatives, with Seadrill and Ensco tipped as the most likely merger partners. Apparently, Noble passed on the deal.

Speculation surrounding a sale of Pride is nothing new. Seadrill built a ~10% stake in the company in 2008 and still holds it. Pride has increased its attractiveness as a takeover target by jettisoning its undesirable mat-supported jack-up business, Seahawk Drilling, last year. That spinoff left the firm quite leveraged to the deepwater drilling market, which has a very bright future barring an unexpected oil-price collapse.

Ensco and Seadrill have squared off recently. In May, Ensco made a partial tender offer for the shares of Scorpion Offshore. Seadrill trumped this offer (with a modest 1.25%/share premium) and picked up the company.

Seadrill is by far the more aggressive industry consolidator. Its chairman has even spoken about combining with industry heavyweight Transocean (NYSE:RIG; SIX:RIGN), making clear that no target is too ambitious. I would definitely tap Seadrill as the most likely Pride partner. Pride itself said Seadrill's high-quality assets would be a good strategic fit.

Struggling Seahawk is looking at asset-sale transactions, recapitalization, sale or merger. It's hard to imagine any current operator would buy or merge with Seahawk, given the near-term drag on performance. A financial sponsor of some sort might see the merits of eating some losses with an eye to rebound a year or two down the line. As I've outlined in the past, Seahawk's earnings power under such a scenario could make the shares worth >$20. The problem is that such a rebound would require a return of demand for the drilling of shallow-water GOM wells—not the deep-shelf variety McMoRan Exploration is targeting.

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