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Stock Analyst Update

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.

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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.

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Preston Caldwell does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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