Transocean Shares Take a Beating Over Songa Offshore Deal

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August 16, 2017

By David Wethe and Joe Carroll (Bloomberg) — Transocean Ltd. dropped to the lowest in more than two decades as investors panned its deal to buy Songa Offshore SE in the biggest offshore drilling industry deal since oil prices collapsed three years ago.

The enterprise value is about $3.4 billion, half of which is Songa debt assumed by the combined entity, the companies said. The 47.50 kroner ($5.97) a share offer implies an equity value for Norway’s Songa of about $1.2 billion. The transaction, pre-accepted by 77 percent of Songa investors, will be settled in shares, cash and a convertible bonds.

The deal “worsens credit metrics” for Transocean, in part because of the convertible bonds the buyer will use to finance a portion of the transaction, Marc Bianchi, an analyst at Cowen and Company LLC, said in a note to clients.

SEE ALSO: Transocean to Buy Norwegian Rig Firm Songa Offshore for $1.1 Billion

Songa, on the other hand, surged as much as 37 percent on a deal that will add four harsh-environment, semi-submersible rigs to Transocean’s fleet. Those vessels — on long-term contracts with Norwegian oil producer Statoil ASA — will boost the contract backlog of the world’s largest offshore driller by 40 percent to $14.3 billion as the industry recovers from the worst slump in a generation.

“The acquisition will strengthen Transocean’s position as the leading offshore driller with exposure to deep- and harsh-water markets,” Transocean CEO Jeremy Thigpen said in a statement. “Songa Offshore is an excellent strategic fit.”

Transocean closed 5.7 percent lower at $7.91 in New York on Tuesday, after slumping as much as 10 percent for the biggest intraday drop in more than a year and the lowest price since debuting in 1993. Songa closed 29 percent higher at 43.70 kroner in Oslo. (On Wednesday afternoon, shares of Transocean (NYSE:RIG) were trading down over 4% at $7.58).

The offer is “attractive” for Songa, while Transocean gets a “very strong backlog,” Vidar Lyngvaer, an analyst at SpareBank 1 Markets, said in a note to clients. Yet analysts including James West at Evercore-ISI said the market believes Transocean overpaid for the rigs.

Read: Transocean’s Songa Offshore Deal Is Biggest in Oil Downturn

Day rates would need to double to about $450,000 per harsh-environment rig “to justify the implied value paid per rig,” Martin Huseby Karlsen, an analyst at DNB ASA, wrote Tuesday in a note to investors.

Transocean began exploring the possibility of acquiring Songa a number of months ago, Thigpen told analysts and investors Tuesday on a conference call.

“We actually feel pretty good about the valuation, especially given the backlog and really nice day rates for a prolonged period of time,” Thigpen said.

The deal will boost sales from Transocean’s backlog by 35 percent next year to $2.7 billion, and by more than half in 2019 to $2 billion.

Enlarged Fleet

The transaction follows Transocean’s sale of its entire fleet of jack-up rigs to Borr Drilling Ltd. for $1.35 billion earlier this year, and rival Ensco Plc’s proposed acquisition of Atwood Oceanics Inc. for $863 million. The collapse of oil prices in 2014 coincided with an influx of new rigs into the market just as exploration companies began cancelling drilling projects.

Transocean’s purchase of Songa, which is expected to close in the fourth quarter, also includes three additional semi-submersible rigs, pushing the combined company’s fleet to 51 floating rigs, in addition to four drill ships under construction. Transocean said it may scrap some of the older units.

Apart from Songa debt, the deal’s $3.4 billion enterprise value includes an estimated $660 million Transocean convertible bond, $540 million of Transocean equity and $480 million of cash.

The deal would make Perestroika AS, Songa’s biggest owner, Transocean’s largest shareholder with a stake of about 12 percent. Perestroika’s owner and Songa Chairman Frederik W. Mohn would join Transocean’s board.

Transocean considered the Songa deal partly because of the increased relationship with Statoil, Thigpen said. Songa’s contracts with Statoil extend as far out as 2024.

“We see a lot of opportunities with Statoil, both in the Norweigan market, but also globally,” Thigpen said on the call. “This just gives us even more exposure to them and more opportunity to demonstrate our differentiated performance.”

© 2017 Bloomberg L.P

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