Friday, April 2, 2010

Offshore Drillers See Swelling M&A Interest

Now that it's 2007 all over again, and I am playing with oceanic oil drillers again, it's time to brush up on the subject. 
  1. [Sep 4, 2007: I'm Buying One Group Today - Deep Sea Oil Drillers]
  2. [Sep 13, 2007: I found Goldman's Other Deep Sea Driller Pick - Atwood Oceanics]
  3. [Oct 11, 2007: Could it Finally be Time for the Deep Sea Drillers?]
Ah those were the days, writing 8 posts a day to an audience of 40 people. ;)

People often ask how do you know about so many stocks / sectors ... frankly, a lot of it is rehash.   You do this long enough and you will have touched just about every sector and countless stocks.  For example I spent the past 3 weeks reading up on JDS Uniphase (JDSU) and Finisar (FNSR).  Folks, these are 1999 stocks; all I had to do was figure out what they were up to the past 11 years. ;)  But I digress.

Earnings in this sector have been poor, but as I stated yesterday - if the oil keeps rallying on HAL9000 buying fits, you must acquit.  Of course if oil falls back in the days and weeks to come, ignore this entire entry. ;) I much prefer deep sea oil drilling versus shallow bodies of water since the contracts pay the most and last the longest period of time (i.e. stability) - not to mention Petrobras (PBR) has been busy locking up much of the world's supply [May 15, 2008: Petrobras Hordes the World's Deep Sea Oil Drillers] but there is limited selection of public companies in this group; certainly there is no pure play.   When I first began the blog major player GlobalSantaFe (GSF) was an independent company (which I owned) but was gobbled up by Transocean (RIG), creating the sector's heavyweight.  ($28.5 Billion market cap)

As the next year progressed (remember summer 2007 to summer 2008 was a commodity boom time, even as the greater market struggled) we had our hands in 2 other names that I thought might be buyout candidates - Pride International (PDE) ($5.5B mkt cap) which had turned from a land based driller to ocean [Aug 19, 2007: Some Updates on Pride International] [Sep 13, 2007: Kramer Agrees with me on Pride International - no, not Cramer... Kramer!], (I used to be a lot more funny in 2007) [May 2, 2008: Restarting Pride International as Takeover Bait]  and Atwood Oceanics (ATW) ($2.3B mkt cap).  The former name actually got a bid (not while I was holding the stock) from Seadrill (SDRLF) but rejected it.

We also have Diamond Offshore (DO) ($12.7B mkt cap) and Noble (NE) ($11B mkt cap) as similar sized players although with a bit different fleets.

I am not as familiar with Rowan (RDC) (also cited in the article below) since I've never traded it, but it certainly has far and away the best technical setup of the names presented.  It is not a 'deep sea' operator but still might be a potential buyout candidate - the chart says something is up.

Rowan Companies, Inc. provides a range of onshore and offshore contract drilling services in the United States and internationally. As of December 31, 2009, it provided contract drilling services through a fleet of 23 self-elevating mobile offshore drilling platforms and 29 deep-well land drilling rigs

One last wildcard...believe it or not everyone's favorite daytrading dry bulk shipper - DryShips (DRYS). [May 22, 2008: DryShips - Earnings Growth Continues & Potential Deep Sea Oil Drilling Play] Back from the dead. [Mar 30, 2009: DryShips Gets Going Concern Note]

Upon my "rehashing" into the space - I came upon this article which indicates (yet again) there could be some M&A activity in the space.  Of course I picked up DO yesterday which is one of the larger players, rather than a buyout candidate but I learned the past few years not to anticipate any sort of buyout in the space - you could be waiting for years.  But ... you never know:
  • A weakened and fragmented offshore oil and natural gas industry could soon be targeted by cash-rich private equity firms and strategic buyersWhile 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 Ltd (RIG), Diamond Offshore Drilling Inc (DO) and Noble Corp (NE) -- many see potential action from Pride International Inc (PDE), Rowan Cos Inc (RDC) and Seadrill Ltd (SDRLF).  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.  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.  (this sounds similar to the strategy Pride embarked upon 3 years ago)   Pride has aligned itself for the much-anticipated deepwater boom, and possibly M&A, by spinning off a shallow-water unit, Seahawk Drilling Inc (HAWK), 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.
  • 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. 
Long Diamond Offshore Drilling in fund; no personal position 

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