Offshore drilling mergers raise hopes for sector recovery By Reuters

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© Reuters. Transocean’s GSF Development Driller II crosses Istanbul’s Bosphorus on its way to the Black Sea

By Liz Hampton

HOUSTON (Reuters) – Mergers among offshore oil drillers are raising hopes that consolidation could bring relief to a sector struggling to emerge from an industry downturn triggered by low crude prices.

Transocean Ltd (NYSE:), one of the world’s largest offshore drilling contractors, on Tuesday agreed to buy Norwegian rival Songa Offshore SE for $1.1 billion. The deal follows Ensco Plc’s pending purchase of Atwood Oceanics Inc in a transaction valued at $839 million.

The deals would bolster both companies’ positions in major oil and gas-producing regions: Transocean in the North Sea and Ensco in offshore Australia. They come as oil prices remain below where they began the year, adding to worries about excess rig capacity continuing into the next year.

“I think everyone realizes that consolidation is important for the health of this market,” Transocean Chief Executive Jeremy Thigpen said on a conference call on Tuesday.

Transocean’s acquisition of Songa, which has a fleet of rigs designed for harsh drilling environments, also provides it with four advanced rigs contracted to Norwegian oil company Statoil (OL:).

Offshore drillers are leasing rigs at cash break-even prices and do not have much room to go lower, said Leslie Cook, an analyst with Wood Mackenzie.

“Although demand going forward is expected to be flat to moderate, one thing that may help in the North Sea is that some of those rigs are aging out,” Cook said.

Despite the potential strategic benefits of the merger, U.S.-listed shares of Swiss-based Transocean touched a record low on Tuesday, following news of the deal, before closing down 5.7 percent at $7.91.

Not all offshore drillers are convinced consolidation is the right in the near term. Diamond Offshore said in July, when it released second-quarter earnings, that it was evaluating opportunities to acquire rigs and companies, but “deal economics simply don’t work for us” at current prices. Noble Corp (NYSE:), during its earnings call in early August, also said it too soon to consider acquisitions.

Still, an increase in acquisitions may help offshore companies recover by allowing them to raise prices.

“As more assets are concentrated in fewer hands, the companies will try to move pricing higher,” said James West, a senior managing director at investment bank Evercore ISI.

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