Tags: OIL | GAS | OFFSHORE DRILLING | MERGERS

Offshore Drillers See Increased Merger Interest

Friday, 02 Apr 2010 11:24 AM

A weakened and fragmented offshore oil and natural gas industry could soon be targeted by cash-rich private equity firms and strategic buyers.

While oilfield services deals have hogged much of the attention in the past few quarters, bankers and investors are increasingly scanning the M&A horizon for offshore drilling rigs as that industry steadily pulls out of a slump.

Apart from the big three — Transocean , Diamond Offshore Drilling and Noble — many see potential action from Pride International, Rowan and Seadrill.

The last is run by Chairman John "Big Wolf" Fredriksen, a billionaire whom one banker called essentially a financier.

Even if none of the sector's main players were interested, a recent Bain & Co. survey of private equity firms, who are sitting on an estimated $1 trillion in undeployed capital, found that half of them would be interested in investing in energy.

Jorge Leis, the head of Bain's oil and gas practice and a former research engineer at Royal Dutch Shell's Shell Oil said contract drilling looks quite fragmented and thus an ideal place to burn some of the $1 trillion in private equity "dry powder."

"But there's also plenty of dry powder in the corporate space as well," Leis said. "In any cycle, everything else being equal, the strategic buyers do have an advantage."

One plus for private equity is that a buyout would allow an honorable exit for anyone reluctant to be bought by a rival — an apparent problem, since bankers say the drillers have been talking deals for a long time but few have been struck.

"Offshore drillers circle each other, but no one's a seller — they're all buyers," one banker said.

A few bankers identified Rowan Chief Executive Matt Ralls, who was chief operating officer at GlobalSantaFe before Transocean bought it in 2007, as one possible seller.

Ralls himself indicated his interest in deals in an interview with Reuters on Tuesday, saying he would expand Rowan's deepwater interests after disposing of its onshore rigs and manufacturing unit LeTourneau Technologies.

Pride has aligned itself for the much-anticipated deepwater boom, and possibly M&A, by spinning off a shallow-water unit, Seahawk Drilling, last August.

As for Seadrill, ranked fourth among independent offshore drillers and second among deepwater drillers, past moves have led to expectations that Fredriksen — known as "Storeulv" or "Big Wolf" in Norway — has another deal up his sleeve.

Seadrill has a history with Pride, with the Norway-listed company rebuffed in its bid for Pride two years ago and retaining a stake of nearly 10 percent in the Houston-based company.

But Pride's rejection was in 2008, when oil prices were on their way up to record levels and before the global recession forced the world to alter its view of energy demand growth.

The slump in rig contracting rates since has forced many to rethink their go-it-alone approach, especially as geographic reach becomes more of an asset, and as the deepwater push leads to more investment in rigs that cost about $500 million each.

Analyst Longdley Zephirin, of the Zephirin Group, sees weak natural gas prices as an impediment to mergers in offshore, which nonetheless look "inevitable" since most U.S. drillers want to pay less in tax by re-establishing domicile abroad.

Rowan has clearly expressed an interest in doing such a deal to cut its own tax bill, and Zephirin has identified Bermuda-based Scorpion Offshore as an ideal match, since its rigs were all built by Rowan's LeTourneau.

But while the companies have not yet found a way to consolidate, some big private equity outfits have hired seasoned veterans of the energy business as they look to do some sort of deal to build expertise in the sector.

This means that First Reserve, a well-established leader in energy-focused private equity, would face more competition for any deal given all the new interest, according to Bain's Leis.

"They have to contend not only with the corporate buyers, now they're going to have to start contending with private equity players that may not know enough to not overpay."

© 2015 Thomson/Reuters. All rights reserved.

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