Calgary-based Ensign Energy Services Inc., one of the leading land-based drillers in North America, has launched a hostile bid to take over its cross-town rival Trinidad Drilling Ltd. for C$947 million (US$720 million), including debt.
Ensign, which already owns nearly 10% of Trinidad, was rejected in a previous buyout attempt. The latest offer represents a 20% premium to Trinidad’s volume-weighted average price between Aug. 1-10.
“We believe that our offer is compelling and represents a clearly superior alternative to continuing on the course set by the current Trinidad board and management,” Ensign management said. “The standalone alternative of Trinidad is highly uncertain and relies on successful execution of key initiatives over a lengthy period of five years, initiatives which we strongly believe should have already been part of Trinidad's corporate strategy versus being a ‘future plan.’”
Trinidad launched a strategic review of its operations earlier this year, concluding it on Aug. 1. According to Ensign, the review was “unsuccess” as the board made no decisions. After the review was concluded, Ensign approached the company to negotiate a takeover.
Ensign is one of the leading global land-based drilling and well service contractors, serving oil, natural gas and geothermal operators. Among other things, Ensign provides contract drilling, directional drilling, underbalanced and managed pressure drilling, rental equipment, well servicing and production services.
Trinidad designs, builds and operates high-specification drilling rigs for North American and overseas companies. It has 68 rigs in Canada, 66 in the United States, six in Mexico and two in the Middle East.
Trinidad shareholders “face a highly uncertain future and an unpredictable share price,” Ensign management said, but the “100% cash consideration for the common shares” would give Trinidad shareholders “certainty of value and immediate liquidity.”
All of the financing required to fund the entire purchase has been secured, Ensign noted.
It also noted that it already has a “proven track record of closing significant acquisitions,” including its US$510 million acquisition in 2011 of the U.S. land drilling division of Rowan Cos. Inc.
Evercore ISI analysts said “the proposed transaction represents a compelling value proposition for Ensign and if consummated, would thrust Ensign to the upper echelon of the land driller market. Furthermore, we believe the continued consolidation of the land driller market as a positive for the industry at large as it concentrates rigs in more discipline hands.”
Ensign, in issuing its second quarter results earlier this month, said operating days were higher in the United States from a year ago due to “increased demand in oilfield services caused by a price recovery of crude oil and natural gas commodity prices.”
Operating days were lower in Canada and internationally “mainly due to geopolitical factors and the lack of access for oil and natural gas to markets,” management said.
By geographic area, the United States accounted for 56% of total revenue in 2Q2018, with 17% from Canada and 27% from international operations.
Gross margin increased to 27.9% of revenue, net of third party, versus year-ago gross margin of 26%.
As of Aug. 2, Ensign had 29 drilling and coring rigs under contract, with 14 under contract that have a remaining term longer than six months (25% of the marketed fleet).
In the United States, Ensign management said bottlenecks and takeaway capacity “are generating some concerns for the Permian Basin. Rig counts have been flat, and until some of these constraints are dealt with, the rig count is expected to remain flat.
“However, resource basins in California and Colorado are still seeing increases in demand. The overall consensus is that the United States will remain flat to a modest increase in drilling rigs for the remainder of 2018 with growth expected to continue into the 2019.”
The rising rig count “should allow for additional pricing increases, as recent capital expenditure programs for oilfield service companies have thus far limited the construction of new drilling rigs which constrains the supply of high spec equipment.”
Of Ensign’s 67 marketed U.S. rigs, 44 are under contract, including 19 that have a remaining term of more than six months (28% of the marketed fleet).