Analysts Like Possibilities of Merger within Offshore Drilling Industry

The merger of Pride International and Marine Drilling Cos., announced Thursday, represents consolidation in the offshore drilling industry that's overdue, says an analyst.

Compared with the onshore industry, there are too many drillers offshore, according to Jim Rollyson of Raymond James & Associates in Houston.

This deal creating a company that will be the industry's second largest, when measured by fleet size, is a significant step in that direction. The only company with a larger fleet will be Transocean Sedco Forex, also of Houston.

The biggest positive for Pride is this combination will enable it to get higher day rates on new contracts, said Rollyson, who prefers to call it greater pricing leverage.

It is a good step from the macro perspective -- we need a lot more consolidation in the offshore market, he said.

The stock-for-stock deal is expected to close late this year and will give the merged company an offshore fleet of 77 rigs, including drillships, semisubmersibles and jack-up rigs.

The merged Pride also will have 246 land rigs, making it one of the larger companies in that category as well.

It combines a smaller company with substantial cash flows and virtually no debt, Marine Drilling, with a larger company that took on debt in order to buy new rigs.

This transaction combines Pride's operating leverage with Marine Drilling's financial strength to create an extraordinary company with size, geographic scope and balance sheet flexibility, Pride's President and Chief Executive Paul Bragg said in a written statement.

Because of a strong demand for jack-up rigs, we are gradually approaching replacement-cost pricing, and I can think of no other combination which would result in the upside that Pride and Marine Drilling represents, said Jan Rask, the president and CEO of Marine Drilling.

Replacement cost pricing is the price level at which the day rates are high enough to justify construction of new drilling rigs.

Pride's stock dropped $5.15 Thursday to close at $27.50, while Marine Drilling's declined fell $1.17 to close at $26.55. The investors who were hoping to make money from a buyout of Pride were disappointed when that didn't happen, Rollyson said. The deal was announced on a day when the entire sector was off.

Pride's stock zoomed Wednesday amid speculation that it would be acquired by another company such as Nabors, the largest land driller.

With the addition of Marine's jack-up rigs, Pride will double its presence in the U.S. Gulf of Mexico, notes Standard & Poor's in its analysis. Of Marine's 15 jack-ups, 14 are in the Gulf, Rask said.

Although contracts operations in the Gulf are typically on a short-term basis, the feverish search for natural gas in its shallower waters makes it a good place to be.

The merged Pride stands to benefit from a broadened asset base, an increased presence in the U.S. Gulf of Mexico -- a market with positive demand fundamentals -- a moderate expansion of its higher-quality, deep-water fleet, and an improved financial profile resulting from the de-leveraging effects of an all-equity transaction, said Standard & Poor's.

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