Thursday, February 10, 2011

Offshore Drillers Rise In Wake Of Ensco Buyout Of Pride


Shares of offshore drillers Atwood Oceanics Inc. (ATW) and Rowan Cos Inc. (RDC), among others, jumped as Ensco PLC’s (ESV) $7.3 billion deal for Pride International Inc. (PDE) lifted the sector’s valuation and sparked debate as to who’s next.
U.K.-based Ensco said Pride shareholders will receive a combination of stock and cash amounting to $41.60 per Pride share, or a 21% premium to Friday’s closing price. The deal will create the second-largest offshore driller in the world after Transocean Ltd. (RIG, RIGN.VX).
Pride’s shares surged 16% to $39.80 and helped lift shares of Atwood and Rowan.

Jefferies said in a note that although there are several smaller offshore drillers in the market, the two larger companies investors are likely to focus on as takeout targets are Atwood, due to its attractive newbuild pipeline, and Rowan, due to its high-spec jack-up fleet.
Atwood Chief Financial Officer Mark Mey said that while at the right price, everybody is for sale, there’s nothing that Atwood is currently doing to accelerate that focus on the company.
“What we’re doing is trying to create long-term shareholder value,” Mey said.
A representative for Rowan couldn’t immediately be reached for comment.
Atwood closed 5.5% higher at $43.06, while Rowan rose 3.3% to $37.77. Both stocks hit 52-week highs Monday.
Morgan Stanley, which upgraded Atwood to overweight from underweight, said the Ensco-Pride deal implied a valuation of more than $800 million per newbuild floater, suggesting a net asset value of $52 a share for Atwood.
In addition, the firm said, Atwood’s recent management changes and its current fleet renewal program should allow the company to trade at a premium to its larger U.S. peers–despite having historically traded at a discount. As a result, Morgan Stanley raised its price target on the stock to $55 from $36.
The firm also has an overweight rating on Rowan.
Other drillers seeing a lift included Hercules Offshore Inc. (HERO), up 2.9% at $3.59.
“A deal like this is good for the entire group, just the fact that there’s interest in rigs,” said Global Hunter Securities analyst Matt Beeby. “It shines the light on this group again as far as being attractive, and rigs are still going to be needed.”
The offshore drilling industry has been under pressure since the Deepwater Horizon disaster in the Gulf of Mexico. A drilling moratorium imposed after the explosion was officially lifted late last year, but U.S. authorities have been slow to award new deep-water drilling permits. Analysts say the uncertainty surrounding the sector has made it ripe for consolidation.
“Being bigger is better in the offshore business,” said Duncan Williams analyst Lewis Kreps. He added that after the accident last spring, companies are going to have to be big to meet all the qualifications, have a strong balance sheet and need to be diversified both in terms of geography and customer base.
Pride had been exploring a sale since last year and held talks with a number of possible suitors including Seadrill Ltd. (SDRL, SDRL.OS), a large Norwegian drilling contractor that already owns roughly 9% of Pride after an aborted attempt to buy the whole company in 2008.
Global Hunter’s Beeby said that while Seadrill may retain shares of Ensco, the deal could also serve as a catalyst for Seadrill to put cash to use. He noted that investors are likely bidding up shares of Rowan on the possibility of a Seadrill/Rowan-type of deal, which could make an attractive venture.
He said that Rowan is largely considered a quality jack-up player, but doesn’t have a floating rig business, whereas Seadrill has both. However, Beeby said he doesn’t know that Rowan would be willing to sell itself.

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