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Ensco, Atwood Merger Pointing to Leaner, More Cost-Competitive Offshore Sector

Ensco plc and Atwood Oceanics Inc. agreed Tuesday to merge, creating what one analyst called "an offshore drilling bellwether" that would rival any now working in shallow or deepwater.

The all-stock transaction, valued at $840 million, would bring together the fleets of UK-based Ensco and Houston-based Atwood, combining 26 floaters and 21 ultra-deepwater rigs. The geographically diverse drillers, with operations and drilling contracts spanning six continents, work in the Gulf of Mexico, Brazil, West Africa, Middle East, North Sea, Mediterranean and Asia Pacific.

The estimated enterprise value of the pro forma company is $6.9 billion, based on each company’s closing prices last Friday (May 26). The merged company also would have about $3.7 billion in revenue backlog.

"The combination of Ensco and Atwood will strengthen our position as the leader in offshore drilling across a wide range of water depths around the world -- creating a broad platform that we can build upon in the future," said Ensco CEO Carl Trowell, who is to continue as CEO and president. "This acquisition significantly enhances our high-specification floater and jackup fleets, adding technologically advanced drillships and semisubmersibles, and refreshing our premium jackup fleet to best position ourselves for the market recovery.”

Under terms of the agreement, unanimously approved by each board, each Atwood share would be traded for 1.60 shares of Ensco. Ensco shareholders would own 69% of the revamped company with Atwood shareholders owning 31%. Realized annual pre-tax expense synergies are estimated at $65 million for full-year 2019 and beyond.

"We believe that the purchase price for these assets represents a compelling value to our shareholders, which is augmented further by expected synergies from the transaction," Trowell said.

With the merger, Ensco would add six ultra-deepwater floaters and five high-specification jackups, giving the company a fleet of 63 rigs, comprised of ultra-deepwater drillships, deep- and mid-water semisubmersibles and shallow-water jackups, along with a diverse customer base of 27 national oil companies, supermajors and independents.

Within the fleet of 26 floating rigs (semisubmersibles and drillships) are 21 ultra-deepwater drilling rigs with an average age of five years that are capable of drilling in water depths of 7,500 feet or more. The 37-rig jackup fleet would be the largest in the world, with advanced features for shallow-water drilling programs that include increased leg length, expanded cantilever reach, more hoisting capacity and offline handling capabilities.

"By bringing together our high-specification rig fleets, technology and innovation, and talented rig crews, we plan to continue delivering high levels of operational and safety performance to an even larger group of clients," Trowell said. "We will remain one of our industry’s best capitalized companies. Our combined financial strength, diverse customer base and larger scale should lead to greater strategic and competitive advantages as well as cost efficiencies, allowing for opportunistic investments through the market cycle."

Atwood CEO Rob Saltiel called the combination "an ideal strategic fit. Both companies are passionate about operational excellence, safety and customer satisfaction with core values and cultures that are perfectly aligned. We believe the combined company will offer an unmatched rig fleet and workforce. These attributes, anchored by a strong balance sheet, should enable the company to thrive as market conditions improve and allow Atwood shareholders to fully participate in the market recovery."

Ensco would continue to be traded on the New York Stock Exchange under "ESV" and remain headquartered in the UK, with senior executives based in London and Houston. Ensco's current executive management team would continue with Chairman Paul Rowsey, COO Carey Lowe and CFO Jon Baksht. Two members of Atwood's board are to join Ensco when the transaction is completed.

"While current market conditions are challenging, Ensco will be ideally positioned to meet increasing levels of customer demand as the market recovers," management said.

Expense savings are expected from consolidating corporate staff departments and shore-based operations in overlapping markets, as well as standardizing systems, policies and procedures across the organization.

The transaction, set to close in 3Q2017, is subject to shareholder approval but no financing conditions.

"Consolidation has been long overdue, and the Ensco-Atwood merger is the first step toward a less fragmented industry," said Rystad Energy's Liz Tysall, senior offshore rig analyst. The combined fleet would give Ensco "the largest blended fleet as compared to other offshore drilling contractors with fleets including both floaters and jackups."

According to Rystad's RigCube database, the two companies combined would have slightly under 55 years of contracted rig backlog.

"We believe this transaction may kick-start a much needed merger and acquisition (M&A) cycle in the offshore drilling group," said Evercore ISI analysts. "For several quarters now we have voiced the notion that improvement in the beleaguered offshore drilling subsector is predicated on two key catalysts -- continued rig attrition and further M&A/consolidation."

The joint announcement "is a major step forward for a sector that is just beginning to see stabilization in terms of contracting and dayrates." The combined company would represent an "offshore drilling bellwether that rivals the likes of Transocean in terms of fleet size," Evercore analysts said. "The combined fleet will be among the most technologically advanced in the industry..."

In Atwood, Ensco is acquiring four drillships, including two under construction, each outfitted with dual blowout preventers (BOP) and the most advanced auxiliary equipment, as well as two semisubmersibles, one with dual BOPs. According to Evercore, catalysts for the Atwood floaters include Noble Energy Inc.'s Leviathan Phase II offshore Israel for the Advantage floater, and the Kosmos/BP plc exploration success in Senegal for the Achiever floater. Noble issued a final investment decision (FID) on Leviathan in late February.

An analysis by Sanford C. Bernstein Co. LLC in March tallied152 offshore projects that were under appraisal around the world, 30% more than a year ago. Bernstein's annual "Long List" reported 65 offshore projects under appraisal for FID in 2017, with 51 in 2018 and another 36 in 2019.

"Taking only two years ahead, the comparable dataset from last years' Long List was 90 projects," said Bernstein's Nicholas J. Green. "Simplistically therefore, we can say the offshore is looking 29% more optimistic than a year ago."

A leaner and more cost competitive industry in the deepwater has emerged as the energy industry gets back to work, with the most compelling projects worldwide closer to competing with U.S. tight oil plays, according to Wood Mackenzie. BP in December issued an FID for the $9 billion Mad Dog Phase 2 project 190 miles south of New Orleans. Kaikias, about 130 miles offshore Louisiana in Mississippi Canyon, was sanctioned by Royal Dutch Shell plc in February.

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