Transocean’s Songa Offshore Deal Is Biggest in Oil Downturn

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August 15, 2017

Credit: Songa Offshore

By Mikael Holter and David Wethe (Bloomberg) — Transocean Ltd. agreed 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 47.5 kroner ($5.96) 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 bond. Transocean shares fell on the news.

Songa shares 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.”

Songa rose 29 percent to 43.70 kroner a share in Oslo, while Transocean fell the most in more than a year, down 9.1 percent to $7.63 at 10:32 a.m. in New York.

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.

Questionable Value

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.

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.

Transcoean considered the Songa deal partly because of the increased relationship it would give Transocean 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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