Ensco-Rowan Deal May Mean Shift in Offshore Drilling
The combined company--which is a true merger of equals--will have a total market enterprise value nearly on par with industry leader Transocean.
Offshore drillers Ensco (ESV) and Rowan (RDC) shook the industry on Oct. 8 by announcing an agreement to merge the two firms. Completion of the transaction is expected in first-half 2019, pending shareholder and regulatory approvals. The combination is a true merger of equals, with a stock-for-stock transaction valuing the firms roughly equivalently to their current market capitalization ratio. The combined company would have a total market enterprise value of about $12 billion, nearly on par with industry leader Transocean.
The market reacted positively to the news, with Rowan and Ensco shares both up about 4%. Other offshore drillers’ shares were up generally in the range of 2%-3%, suggesting the market sees the merger as a catalyst for improved offshore drilling industry conditions overall. We are more skeptical in our view on the merger’s benefits, with our fair value estimates unchanged for now. And although we may tweak our fair value estimates up later to incorporate the lower-hanging fruit (for example, general and administrative expense) among the projected synergies, we retain our basic outlook that both companies (along with the rest of the offshore drillers) look very overvalued.
The market’s reaction seems to imply that consolidation will drive a stronger industry environment. We note that this merger alone doesn’t dramatically shift the competitive environment among offshore drillers. Rowan only adds four floater rigs (or about 1.5% of the industry floater fleet) to Ensco’s fleet. The addition of jack-ups is more significant, but even post-merger, the top five companies by jack-up fleet size will still only command a paltry one third of the industry jack-up fleet. Still, combined with other recent industry transactions, including Transocean’s $2.7 billion acquisition of Ocean Rig announced last month plus Ensco’s own prior $600 million acquisition of Atwood completed a year ago, the announcement signals that the trend to consolidation is building momentum.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Preston Caldwell does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.