On Monday, a typical day for merger and acquisition announcements, another blockbuster deal in the offshore drilling universe was unveiled. Ensco will acquire Rowan Companies in an all-stock deal with an estimated enterprise value of $3.8 billion.
The deal brings together two of the leading offshore drilling companies, each with a colorful history. Wall Street analysts are questioning the valuation of the deal as they try to assess it impact. The companies have estimated that by combining the two companies, 75% of the $150 million annual savings will be achieved in the first full year of operation of the combined company.
One analysis estimated that Ensco is paying $163 million per jackup drilling rig that is not a part of Rowan’s joint venture in Saudi Arabia. The analyst thought this was expensive, in light of the current market, but still acknowledged that the deal was an “offensive” move by Ensco.
What we believe is being missed is the significance of the Ensco-Rowan deal, following the Transocean–Ocean Rig merger. While each merger is company specific, collectively they will affect the entire industry’s future. These two blockbuster combinations are equivalent to the monumental consolidation phase the offshore drilling industry underwent in the late 1990s, following the devastating industry collapse of the mid-1980s. That industry consolidation wave positioned offshore drilling for the 2000s’ boom. These deals have the potential for a similar impact.
While it will take a while for all of this to play out, since the Ensco-Rowan deal won’t be completed until 2019 and the consolidation benefits won’t be seen until 2020 financial results, the die has been cast. The premium offshore drilling assets are moving into the hands of stronger, more disciplined managers — Ensco and Transocean. The major oil companies will quickly realize that their ability to leverage idle premium rigs against each other has diminished, meaning it will be easier (in relative terms) for offshore drillers to push day rates higher and increase profitability. This marks a critical inflection point for the offshore drilling industry, and one that has occurred (and is critical) in the recovery phase during every major industry downturn.
From an historical viewpoint, this deal brings together two companies shaped by the pedigrees of their key creators. The Fort Worth, Texas-based land driller, Rowan Drilling Companies, founded by the two Rowan brothers, transitioned into one of the leading offshore drilling companies following its move to Houston and installation of life-long drilling engineer, Robert “Bob” Palmer, as CEO.
On the other side of the ledger is Ensco, built on the bankrupt shell of driller and oilfield service company, Blocker Drilling, a victim of the 1980s downturn. With the backing of legendary investor Richard Rainwater and the management skills of oilfield executive Carl Thorne, who helped the Clements family build global drilling powerhouse Sedco Inc. in the 1970s and 1980s, Ensco rose from the ashes to become one of the premier offshore drilling companies of the past 25 years.
The offshore drilling industry is being reshaped. This was a necessary step in the industry’s recovery. The industry’s future will be different from its past. A critical ingredient for a successful recovery lies in controlling the premium assets. These two deals ensure that recovery.