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Transocean deal a sign of rising confidence

Betting on better times ahead, the rig supplier is building a stronger fleet

Transocean's proposed takeover of Ocean Rig underscores the offshore industry's belief that drilling in ultra-deepwater and harsh environments is set to increase over the next five years, and that rig rates will increase accordingly.

The cash-and-stock deal is worth around $2.7bn including debt and gives Swiss-based market leader Transocean a 79% controlling stake in Athens-based Ocean Rig. The transaction, due to be completed in the first quarter of 2019, is subject to the approval of both firms' shareholders.

The acquisition gives Transocean an extra nine ultra-deepwater drillships, two harsh environment semi-submersibles, and another two ultra-deepwater drillships now under construction. That gives the company a combined fleet of 57 floaters.

Transocean said Ocean Rig's fleet adds $743m to its contract backlog-the value of contracts yet to be completed-bringing the total to $12.5bn at an average day rate of $413,000. Combining the fleets would create annual cost savings of around $70m, it added.

Transocean, a market leader, has been a strident proponent of the need for consolidation in the rig market, and has already acted on that tenet, agreeing to buy Norwegian rival Songa Offshore in August last year, in a deal valued at $3.4bn.

Good timing

The Ocean Rig deal's timing comes amid an apparent sweet spot for acquisitions in the sector.

"This is a valuable opportunity to acquire Ocean Rig at a good price, before the recovery that we know is coming—even if the speed and length of that recovery remain a grey area," Leslie Cook, an upstream supply chain analyst at Wood Mackenzie told Petroleum Economist

While deep-water activity is no longer at rock bottom and oil prices are back up at levels last seen in late 2014, companies such as Ocean Rig are still struggling to get all their rigs and vessels operational. Their storage-which is at varying levels or readiness, mainly in Greece-is a continuing cost. With deeper pockets, Transocean is in a much better position to nurse the fleet while the market picks up.

Transocean's chief executive Jeremy Thigpen believes contract awards in the ultra-deepwater market will start to pick up in earnest in 2019 and 2020. He said in a presentation on the acquisition that this "should lead to day rate appreciation as we move through next year".

Wood Mackenzie thinks the premium ultra-deepwater drillship market has reached its nadir and that rates for some of the highest-specification assets, such as those acquired by Transocean, could double within two or three years. As demand rises that in turn will push operators to seek out these newer, more efficient rigs to keep cost down.

Transocean says it is retiring two of its older, less competitive rigs and may retire more, as it seeks to focus on that high-spec rig market.

More acquisitions?

Thigpen is keen to stress that, following the Ocean Rig deal, that Transocean still has $3.7 billion in liquid funds. That raises the possibilities of further acquisitions, though the company is saying nothing specific about that.

A number of smaller outfits that were battered by the recent sector downturn may be seeking better endowed suitors. An obvious candidate would be drillship operator Pacific Drilling, which has been struggling to put together a financing package to enable it to exit Chapter 11 bankruptcy.

Neither is Transocean the only shark in the pool. "We certainly expect more consolidation to occur, whether it's led by Transocean or another company with a strong balance sheet-Diamond Offshore comes to mind," Cook said.

Houston-based Diamond has been making a strong recovery after lean years during the sector downturn, and has received plenty of support from sector analysts of late.

Another company with potential for a tie-up with another player is Maersk Drilling, which its Danish parent, A P Moller-Maersk said in August would be spun off and listed in Copenhagen next year. Moller-Maersk has been searching for a buyer for the unit for some time, but Maersk Drilling's chief executive says he believes the unit can compete with its rivals as a standalone company.

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