Size Matters for World’s Oil Drillers in a Post-Macondo World

Two years ago, Seahawk Drilling Inc. was plotting to expand its fleet of rigs worldwide. Now the Houston-based company may sell itself after BP Plc’s well explosion in the Gulf of Mexico thrust the industry into regulatory limbo.

“If we can’t be more diversified, I would rather sell the company to somebody else and let them try to do it,” Seahawk Chief Executive Officer Randall Stilley said in an interview, Bloomberg Businesweek reports in its Jan. 24 issue.

Mergers and acquisitions among offshore drillers are likely to accelerate as size becomes a matter of survival in the $125 billion industry. Intensifying government scrutiny and rising customer demands may crank up costs so high only the largest companies can compete, bankers and analysts say. There were $5.3 billion of deals involving drillers last year, more than triple 2009, according to data compiled by Bloomberg.

“What you have to do these days to get a contract if you’re a driller is going to get tougher and tougher,” said Mark Bentley, who advises on energy mergers and acquisitions at Greenhill & Co. in London. “This means the industry will increasingly rely on larger companies.”

Oil giants Exxon Mobil Corp., Chevron Corp. and Royal Dutch Shell Plc are demanding drillers have the highest-quality equipment and the most experienced rig workers to drill in waters that can cost them as much as $1 million a day, said Brian Uhlmer, a Houston-based analyst at Global Hunter Securities.

U.S. Permits

On top of that, regulators have yet to issue the first permit for deep-water drilling in the Gulf since ending a moratorium imposed after the Macondo well disaster, the biggest offshore oil spill in U.S. history. Applications are being returned by the Interior Department for more information on how companies are meeting environmental and equipment standards imposed since the April 20 explosion.

That’s put a squeeze on drillers. “The drillers have to scrap, upgrade and modify because of environmental concerns and to meet new requirements,” said Bjarne Skeie, who last year sold his stake in Skeie Drilling & Production to Rowan Cos. Inc.

“New regulations, stricter permitting/certification procedures and higher insurance costs could push small-caps with limited operating experience into the arms of stronger players,” Robin Shoemaker, an analyst for New York-based Citigroup Inc., wrote in a Jan. 11 report.

Buyers, Sellers

Rowan, Ensco Plc and Pride International Inc. may be attractive targets, according to Shoemaker. Ensco, with a market value of $7.5 billion, trades at 12.64 times earnings, while Rowan has a price-to-earnings ratio of 12.46, lagging the 13.99 average among drillers, according to Bloomberg data.

Other potential takeover targets include the drilling unit of Greece’s Metrostar Management Corp. and Vantage Drilling Co., Global Hunter’s Uhlmer said. Transocean Ltd., Diamond Offshore Drilling Inc. and Seadrill Ltd. may be buyers, he said.

Representatives for Metrostar, Vantage, Diamond Offshore, Transocean and Rowan declined to comment. Seadrill and Ensco representatives didn’t return calls or e-mails seeking comment.

Seadrill, controlled by Norwegian billionaire John Fredriksen, has been the most acquisitive driller since 2006, with 11 announced transactions worth $4.96 billion, according to Bloomberg data. The company, which is based in Bermuda and has a market value of about $14.3 billion, agreed on Jan. 3 to buy two ultra deep-water rigs for $1.2 billion.

Oil Price Rise

Seadrill owns a 9.4 percent stake in Pride International Inc., a Houston competitor with a market value of $5.7 billion. Pride trades at 26.5 times earnings, making it twice as expensive as Rowan and Ensco. Seadrill said Nov. 30 it’s maintaining its position in Pride while “evaluating” options for the shares.

Recovering rates for rigs, higher oil prices and more flexible financing markets may also be an impetus for deals -- and also give some small drillers a chance to stay independent.

Oil prices have reached a more than two-year high of $91.86 a barrel and rental rates for the industry’s most expensive rigs, which can drill in deep waters, may be $450,000 a day this year and $475,000 in 2012, according to a Jan. 6 Goldman Sachs Group Inc. report. Rates reached more than $600,000 a day in 2008.

“The level of desperation has been tempered,” said Ian Macpherson, a London-based analyst at Simmons & Co. who estimates the 15 publicly traded drillers that operate about two-thirds of the global offshore rigs have a combined enterprise value of about $125 billion.

The figure -- a measure of market value, preferred equity and debt that is used as a proxy for the takeover value of a firm -- excludes some larger publicly traded companies with drilling units.

Rigs Increase

The number of active rigs worldwide rose 29 percent during the past year to 3,227, according to data published by Baker Hughes Inc., an oilfield-services provider, as exploration picks up in Brazil and western Africa.

“Today’s environment is one of eager buyers and reluctant sellers, but deals can and will be done,” Citigroup’s Shoemaker wrote.

Seahawk’s Stilley is holding on to hopes that he can avert a sale if banks agree to finance his plan to buy rigs that are already operational and bringing in revenue.

For now, that option hasn’t materialized.

“We didn’t set this company up to be a small Gulf of Mexico driller,” Stilley said. The future of Gulf drilling means the timing for expanding Seahawk “has changed due to the uncertainty.”

To contact the reporters on this story: Jacqueline Simmons in Paris at jackiem@bloomberg.net; David Wethe in Houston at dwethe@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net.

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