Transocean-Songa Offshore: Who Is Next On My Bucket List? – Seeking Alpha

Image: The Drillship Maersk Viking

Note: On May 25, 2017, Maersk Drilling has been awarded a contract extension for the ultra-deepwater drillship Maersk Viking, by oil major Exxon Mobil (NYSE:XOM). The estimated value of the contract extension is $22.5 million, with a duration of 150 days (@$150k/d).

Maersk Drilling is part of the Maersk group or A.P. Moller - Maersk based in Denmark.

Whether we like it or not, a new phase has clearly begun in the offshore drilling industry, as I was predicting as far as a year ago. I call it, the "consolidation" phase.

It is a normal stage in the life of an industry in which components in the industry start to merge to form fewer components, in order to cope with a new and tougher business model and reduce cost by synergies.

It started slowly later last year with Rowan (RDC) and Saudi Aramco's new 50/50 joint venture on November 21, 2016. Please read my article about the deal, click here.

However, it is early 2017 that the process of consolidation increased significantly, with the creation of a new offshore company called Borr Drilling (BORR.OSE) in Norway.

1 - On January 24, 2017, Borr Drilling completed the delivery of the two Hercules JUs, the Triumph and the Resilience, now called the Borr drilling Ran (formerly the Hercules Triumph - 2013) and the Borr drilling Frigg (formerly the Hercules Resilience - 2013).

2 - On March 20, 2017, Borr Drilling acquired Transocean's (NYSE:RIG) entire jackup fleet for $1.35 billion, including $320 million of cash. Please click here to read my article on March 21, 2017.

3 - I could also mention here John "big John" Fredriksen and its new Northern Drilling venture, but it is purely an investment company and not really a rig operator, created to ease the Seadrill (SDRL) restructuring.

4 - On May 30, 2017, with the controversial proposed acquisition of Atwood Oceanics (ATW) by Ensco (ESV) in an all-stock transaction. Please click here to read my article about the deal.

5 - More recently, on August 15, 2017, Transocean announced that it intends to acquire Songa Offshore for a total transaction value of $3.4 Billion. Please click here to read my article about the deal.

According to Steve Marshall from Upstreamonline,

"Further rig players are on the radar screen for possible acquisition by predatory rivals after the Transocean-Songa offshore deal as the drilling market is perceived as having reached the bottom, according to an analyst."

As an investor, it is paramount to recognize this trend as early as possible and take advantage of the market by selectively accumulating stocks that are selling off now based on a short-term negative perception - using a debatable backward dynamic valuation - while the industry is about to turn around.

Despite a difficult environment, the growing sentiment in the offshore drilling sector is that the market has stopped degrading, prompting oil producers to look ahead for new opportunities in order to increase their fast declining oil & gas reserves, at a very attractive cost per barrel never achieved before.

There is always a silver lining in every dark cloud... And, it is the jackup segment rebounding recently. The contracting activity in the jackup segment has shown clearly a nascent recovery shaping up during the first half of 2017.

It is slowly expanding to the floater class, and I was glad to report several welcomed contracts, such as the Seadrill Drillship West Saturn in Brazil, the Ensco three drillship contracts in West Africa or even the Maersk contract mentioned above.

Granted, it is not an easy call, and oil prices are not really helping either. However, it is now a fact offshore drillers are announcing more and more contracts for jackups and floaters as well. We should listen to the players in the field, because they know what they are talking about.

Recently, I covered the second quarter earnings results of numerous offshore drillers such as Ensco, Noble (NE), and Transocean, and I heard the same encouraging comments about a drilling market embarked on a gentle recovery mode.

Ms Terry Bono said in the conference call:

We also see multiple bidding opportunities globally where we have identified almost 60 floater programs that could begin within the next 18 months.

We are participating in multiple bids and seeing more opportunities in other parts of the Latin America, including Trinidad, Colombia, Guyana and Suriname as a number of operators have programs that should begin in the next 12 to 18 months. In addition to the FID approval for ExxonMobil's Liza development offshore Guyana, Tullow recently signed a 10-year lease for the Orinduik Block in the Guyana-Suriname Basin. We are also excited about deepwater opportunities in Mexico, including the recent large discovery of the Zama field by the Talos JV.

We will have to differentiate the companies who are "prime acquisition candidates" and the ones who are the "buyers" such as Ensco or Transocean. In some cases, the same company can be considered as both, such as Noble Corp. or Rowan.

List of "Prime acquisition candidates" can be long and highly controversial.

List of potential "Buyers" is not as long.

1 - Diamond Offshore (DO)

2 - Rowan Companies

3 - Noble Corp. Plc

4 - Transocean Ltd.

5 - Ensco Plc.

6 - Seadrill Ltd. (After the restructuring).

7 - Borr Drilling.

Note: I believe Noble Corp., Diamond Offshore, and Odfjell Drilling are the three companies most likely to announce a deal soon.

This situation is not an easy one for investors, especially if you are already a shareholder of one or several companies indicated above.

An acquisition is a delicate move for the company that acquires another one on future expectations, and generally, the market tends to punish the "buyer" for a little while, whereby boosting the "acquisition candidate" who enjoys a quick premium.

Transocean stock tumbled about 10% or more on the Songa acquisition in just two days, and the deal is so complex that I cannot decide whether it is a clever move or else. Songa traded up ~40% on the news.

This is what basically counts. Investors could not care less if the deal was a good one or a bad one, especially when you have an equal amount of so-called analysts telling you it is either a good deal or a total catastrophe.

However, you can profit either by buying the "acquisition candidate" before it happens, if you are clever enough to guess who is next. You can also buy the "sell off" after the deal is released, if you understand how the situation will play out the next few months. The name of the game is to profit, and I hope this article will help you.

Ms Janne Kvernland from Nordea Markets said:

There are more than 60 different contractors in the floating rig arena and 120 in jack-ups, of which 30 and 70 players in the respective segments have just one to three rigs. About 55% of the floaters are in the hands of the top 10 biggest contractors, while the corresponding figure for jack-ups is 40%. A key buying criterion for potential bidders is drilling capability and there is also a preference for contract backlog.

She thinks, Odfjell drilling is the most suitable now because the company owns semi-submersibles secured on profitable charters with clients such as Statoil (NYSE:STO), BP (NYSE:BP), and Wintershall, with day rates higher than the barebone level of $200K/d or $150k/d we are now experiencing. I am not so convinced Odfjell drilling is really a candidate now, because of the size of the acquisition.

By the way, Ms Kvernland commented on the recent Transocean-Songa deal and said that the deal "makes perfect sense" for Transocean as it safeguards the company's leading position in the North Sea after scrapping 33 floaters - including eight in the North Sea - while also "boosting its backlog to $14.3 billion and bolstering its relationship with Statoil." Additionally, Ms Kvernland said,

It is a good price for shareholders in Songa and fair for Transocean given the backlog.

On the other hand, DNB markets described the deal as "expensive", given it prices each of the Cat-D rigs at between $160 million to $210 million above Songa's own valuation. The analyst said that a day rate of around $450k/d would be required to justify such a price (Songa rigs are actually working at $470k/d under the Statoil contracts).

Important note: Do not forget to follow me on the offshore drilling industry. Thank you for your support, it is appreciated.

Disclosure: I am/we are long RIG, ESV.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I won many offshore driller including RIG and ESV either for the long term or short term trading.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Read more from the original source:

Transocean-Songa Offshore: Who Is Next On My Bucket List? - Seeking Alpha