Ensco plc and Rowan Cos. plc agreed Monday to merge in an all-stock transaction, creating one of the largest offshore drilling companies in the world, with extensive reach into ultra-deepwater basins including the U.S. Gulf of Mexico (GOM).

Based on the closing price of each company’s shares on Friday (Oct. 5), the estimated enterprise value of the company when the merger is completed is $12.0 billion. The share exchange was valued at around $2.38 billion.

The two companies have complementary businesses, with a combined 82 rigs spanning six continents and collectively serving more than 35 customers, including the largest national oil companies, international majors and independents.

Once the merger is completed, the company would be the second largest offshore contract driller in the world behind Transocean Ltd., with operations spanning six continents in nearly every major deep- and shallow-water basin including the U.S. GOM, Brazil, West Africa, North Sea, Mediterranean, Middle East, Southeast Asia and Australia. Ten Ensco rigs and six Rowan rigs now work in the GOM.
“By merging our high-quality rig fleets and infrastructure covering the world’s most prolific offshore basins, we increase our scale while maintaining a shared focus on high-specification assets that will include ultra-deepwater drillships and versatile semisubmersibles, as well as harsh environment and modern jack-ups,” said Rowan CEO Tom Burke, who is to become president and CEO of the combination.

Rowan shareholders also would benefit from the addition of “significant backlog and substantial scale in ultra-deepwater operations.”

The definitive agreement was approved unanimously by each board, and the Saudi Aramco partner to Rowan’s ARO Drilling joint venture also consented. Each Rowan share is to be exchanged for 2.215 Ensco shares, with Ensco owning 60.5% and Rowan holding 39.5%.
Annual pre-tax expense synergies are forecast at about $150 million, with more than 75% of targeted synergies expected to be realized within one year of closing. The transaction is projected to be accretive to cash flow/share in 2020 following an anticipated closing in the first half of 2019.

Ensco CEO Carl Trowell, who would become executive chairman, said the merger would create “an industry leader in offshore drilling across all water depths, with significant advantages to capitalize on future opportunities and better serve our customers.”

The two companies share a “common culture built around safety and operational excellence, innovation, technical expertise and customer satisfaction,” Trowell said.

The combined rig fleet of 28 floaters and 54 jack-ups would be among the most technologically advanced in the industry, capable of providing a wide range of drilling services to an expanded base of global clients and positioned to meet increasing levels of customer demand for the highest-specification ultra-deepwater drillships and harsh environment jack-ups.

Within the combined fleet of 28 floating rigs, i.e. drillships and semisubmersibles, are 25 ultra-deepwater rigs capable of drilling in water 7,500 feet or deeper, with an average age of six years. The fleet also would be the second largest for highest-specification drillships at 11.

The 54-rig jack-up fleet combined would include 38 units equipped with advanced features requested by clients with shallow-water drilling programs, such as increased leg length, expanded cantilever reach and increased hoisting capacity. The jack-up fleet also would include seven ultra-harsh environment units and nine other harsh environment rigs.
The balance sheet of the combination would have around $3.9 billion of liquidity. The total estimated revenue backlog for the combined company is about $2.7 billion.

The combined company would be headquartered in the UK, where both Ensco and Rowan are currently domiciled, and senior executive officers would be located in London and Houston.
The transaction is subject to approval by shareholders and regulatory authorities, as well as customary closing conditions. In addition, the transaction would be subject to court approval under a UK court-sanctioned scheme of arrangement. The transaction is not subject to any financing conditions.

“Simply put, this is a beautiful combination from a strategic perspective,” said Tudor, Pickering Holt & Co. analysts, with Rowan gaining “immediate scale and breadth in the ultra-deepwater market (while adding significant contract backlog)…” Ensco also benefits by regaining “its position as top global jackup player” with the addition of Rowan’s fleet.

Wood Mackenzie’s principal analyst Leslie Cook said, “As we have been saying for the past two years, consolidation among drillers is paramount to a recovery. In that respect, this announcement comes as no surprise. Ensco and Rowan are companies that have strong brand recognition in both the jack-up and floater sectors.

“What makes a company like Rowan particularly interesting for Ensco is the opportunity to further high-grade their growing portfolio with premium assets and expand their footprint in key markets such as Middle East, Latin America, Europe and U.S. Gulf of Mexico.”

The combined company would have the second-largest floating rig fleet and become the largest player in the jack-up sector, Cook said. “This is an excellent value for the shareholders of both companies.”