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Ensco/Atwood merger seen as offshore M&A harbinger, but analysts split on deal

With Ensco plc's announced acquisition of Atwood Oceanics Inc., the offshore oil drilling industry may be entering a phase of consolidation after a few brutal years amid a commodity price downturn. Whether this move is a good first step, however, is a matter of debate among industry watchers.

During a May 30 conference call discussing the deal, which would create an offshore giant with a combined enterprise value of about $6.9 billion, Ensco CEO Carl Trowell said the Atwood acquisition would get Ensco out ahead of the curve as companies battered by the industrywide pullback start to get back on their feet. The combined company would have 26 rigs, with deepwater floaters having an average useful age of just five years.

"This is probably a good time to start acting in preparation for a recovery in the market. It's been a long time now where people have been discussing the general need for M&A within the space," he said. "I think that we've been long saying that as we go through this cycle, which is arguably the worst one the sector's ever been through, that a highly disaggregated challenged sector would benefit from consolidation. And I think we're reaching the point where it's now time to enact that."

Analyst James West of Evercore ISI agreed with Trowell's assessment, saying in a May 30 note, "We believe this transaction may kick start a much needed M&A cycle in the offshore drilling group."

"For several quarters now we have voiced the notion that improvement in the beleaguered offshore drilling sub sector is predicated on two key catalysts — continued rig attrition and further M&A/consolidation," West said. "Today's joint announcement ... is a major step forward for a sector that is just beginning to see stabilization in terms of contracting and dayrates."

Barclays took a very different tone in a report released May 31, saying "Ensco's acquisition of Atwood Oceanics doesn't make a whole lot of sense to us." The firm said that while Ensco's fleet becomes younger, it does not take any rigs off an already oversupplied market.

"The value created from cost savings (~$300mm after transaction costs and taxes) is almost entirely offset by the premium paid on the assets," Barclays said. "Management cited diversification of assets and scale as strategic rationales behind the deal, but that's a difficult argument to make considering the massive overcapacity of deepwater rigs in the market we believe will linger for many years. While this is the first meaningful offshore driller M&A we've seen in years (wouldn't be surprised to see another few), we neither see it really helping to consolidate the market (just way too much capacity) nor re-rating the sector with asset prices this low."

Bernstein analyst Colin Davies took a middle stance, crediting Ensco for moving quickly when consolidation in the sector is "inevitable" but saying it will be some time before the company sees a return on its investment.

"Following the largest new build cycle in decades, we believe consolidation is inevitable and will create a smaller number of leading offshore drillers. ESV has moved early to secure a smaller portfolio which enhances its overall fleet quality," he said. "However, unless we see a much stronger macro into 2018, the deal may appear [negative] early given [Atwood]'s currently weak backlog. … The value creation premise is from low cost, high quality assets that will benefit from rig market recovery later in the decade."