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Ensco to Merge With Rowan, Form Leading Offshore Driller


Offshore drillers Ensco plc ESV and Rowan Companies plc RDC have reached an agreement to merge in an all stock deal.The enterprise value of the combined entity is projected at $12 billion, based on the closing price of the companies’ shares on Oct 5, 2018.

Terms of the Deal

For each share held, Rowan shareholders will get 2.215 Ensco shares. On completion of the merger, Ensco and Rowan shareholders will own about 60.5% and 39.5%of the outstanding shares of the combined entity, respectively.

On completion of the deal, the combined company’s board of directors will include Ensco’s president and CEO, Carl Trowell as well as Rowan President and Chief Executive Officer, Tom Burke. The board will also include five additional members from Ensco’s current board and four additional members from Rowan’s current board.

Rowan's joint venture with Saudi Aramco – ARO Drilling – has approved the transaction.

Fleet Status of the Combined Company

The combined company will have a fleet of 82 offshore rigs, which includes 28 floaters and 54 jack-ups. This includes two drillships as well as a jack-up rig under construction and does not include rigs that are part of Rowan’s ARO JV in Saudi Arabia.The new entity will possess the most technically-advanced fleet in the industry.

Within the fleet of 28 floating rigs (drillships and semisubmersibles), 25 are ultra-deepwater rigs equipped todrill in water depths of more than 7,500 feet and have an average age of six years. This makes it among the youngest and most competent fleet in the industry. The combined fleet will also have the second-largest fleet of the highest-specification drillships in the industry, with 11 of these being seventh generation ultra-deepwater rigs.

The 54-rig jack-up fleet comprises 38 units that have many of the advanced features as requested by clients with shallow-water drilling programs. These features include increased leg length, prolonged cantilever reach and better hoisting capacity. The jack-up fleet of the combined company comprises seven ultra-harsh environment units and nine additional modern harsh environment rigs.

Benefits From the Deal

The merger will create a leading offshore driller based on the fleet size, geographic presence and customer base.

The merged entity expects to realize annual pre-tax synergies of about $150 million. Of the total, more than 75% of targeted synergies areprojected to be realized within ayear of closing.The deal, expected to close in the first half of 2019, is projected to be accretive to cash flow per share in 2020.

The combined company’s balance sheet is expected to have liquidity of about $3.9 billion, including $1.9 billion of cash and short-term investments. This will provide the entity financial flexibility to continue fleet upgrade and improve drilling efficiencies. The total revenue backlog for the combined company is estimated at about $2.7 billion, excluding ARO Drilling’s substantial backlog that is unconsolidated.

Offshore Drilling Industry Enjoying M&A Boom

While the offshore drilling market is far from being dead, it is no secret that there is a major overhang of drilling rigs ordered when crude prices were trading at $100 a barrel prior to the boom years of 2014, compared with around $70-$75 recently.Consequently, the drillers are struggling with diving dayrates, lower rig utilization and margin compression. Several quarters of reduced activity and diminishing contract backlog indicates continued pressure on revenues, earnings and cash flows for most of the players. Therefore, consolidations would likely lead to a less-fragmented sector offering synergy and scale benefits.

Ensco itself had completed merger with Atwood Oceanics in October 2017, when it became the largest jack-up operator in the world. In September, Ensco’s rival, Transocean Ltd RIG, announced that it will buy Ocean Rig in a transaction worth $2.7 billion. Earlier in 2018, Transocean also completed the acquisition of the floater specialist Songa Offshore. Even Diamond Offshore Drilling Inc DO, during its last earnings announcement, stated it was assessing opportunities to acquire rigs and companies. Earlier in the week, Canada’s largest drilling contractor Precision Drilling Corporation announced the takeover of its peer Trinidad Drilling Limited, the third largest driller in the nation, in a deal worth C$1.03 billion

Price Performance

In the past year, Ensco’s and Rowan’s shares have surged 57.5% and 47.8% compared with the industry’s 18.3% rally.

Zacks Rank

Both Ensco and Rowan currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

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