Deep-water deal puts rig owners in play

In the drilling business, state-of-the-art technology has become a top priority.

By Jim J. Jubak Feb 9, 2011 2:39PM
Jim JubakHere are my two conclusions from the Ensco (ESV) bid to buy Pride International (PDE).

First, the Deepwater Horizon disaster in the Gulf of Mexico has put a big premium on owning the newest deep-water drilling rigs. The theory is that with regulatory scrutiny getting tighter and international standards increasingly demanding state-of-the-art technology, companies with newly built rigs will have an edge in getting business and in what they can charge for that business.

After buying Pride, Ensco will own 74 rigs, second only to Transocean's (RIG) fleet of 138. Of those 74, 21 will be ultra-deep-water and deep-water rigs. But just as important -- and maybe more important post-Deepwater Horizon -- the combined company will have the second-youngest fleet in the drilling industry. The youngest fleet belongs to Norway's SeaDrill (SDRL), which, by the way, owned 9.4% of Pride International before the Ensco bid. 

SeaDrill hasn't yet announced what it will do with its share of Pride International, but so far it looks like SeaDrill won't launch a rival offer.

On the logic of this deal, if Ensco liked Pride International enough to pay a 16% premium to the stock price before the deal, investors should love SeaDrill. Yet that stock was down almost 1% Wednesday. I guess the assumption is -- and I think it's correct -- that no one is likely to launch a bid for SeaDrill.

Second, the deal has put other drilling stocks into the Wall Street rumor mill. The names I'm hearing are drillers Rowan Companies (RDC) and Diamond Offshore (DO) and oil service company Weatherford International (WFT). None were up Tuesday, when the Ensco bid was announced, with declines ranging from 1.035% for Rowan to 0.56% for Weatherford.

But I don't think we've seen the last deal in this space.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of SeaDrill and Weatherford as of the end of December. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

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