Investopedia: Macando Takes Out Another Seabird

Given the scope and scale of the Macando explosion and oil spill disaster in the Gulf of Mexico, it is not at all surprising that it pushed a company out of business. Many people will be angry to learn, though, that it was not one of the prime culprits like BP (NYSE:BP) or Halliburton (NYSE:HAL) that was taken down by the disaster. Instead, a relative small offshore driller is the first to go. 

Seahawk Clipped
Seahawk Drilling (Nasdaq:HAWK) had the second-largest jackup fleet in the Gulf of Mexico, but not the staying power to surmount several fundamental problems with its business model. Spun out of Pride International (NYSE:PDE) in August of 2009, Seahawk had issues from the start.

Of the company's rigs, none were built later than 1982 and some were built in the 1970's. While 10 rigs were upgraded in 2002, the fact remains that this was an old and out-of-date fleet. Perhaps even more problematic, Seahawk was entirely dependent upon the Gulf of Mexico (a region seen as in decline) and hugely dependent on Pemex, Mexico's state oil company, as a customer. More than 70% of the company's revenue in 2009 came from Pemex and this is even more problematic considering that Pemex is not particularly well-run and that Seahawk had an ongoing tax dispute with the Mexican government. (For more, see A Primer On Offshore Drilling.)

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Investopedia: Ensco Digs Deep To Go Deep

Mergers and acquisitions seem to pick up when a market is just turning, so Monday's deal between Ensco (NYSE:ESV) and Pride (NYSE:PDE) may be a good sign that the offshore drilling market is about to enter another cyclical upswing. By the same token, it could just be a sign that Ensco realizes that its tough to get fair treatment from major integrated energy companies as a smaller company and that scale can produce some inherent advantages. 

The Terms of the DealWith the deal announced Monday, Ensco will acquire Pride with a combination of cash and stock worth $41.60 per share. In addition to $15.60 in cash, Ensco will hand over 0.4778 shares of stock to complete the deal. That represents a 21% premium for Pride shareholders and a pretty healthy multiple for Pride relative to industry norms.

What the New Ensco will Look Like
When the deal is complete, Ensco will control 74 rigs, with 21 that function in deepwater and ultra-deepwater. That will make Ensco the second-largest deepwater player, second to Transocean (NYSE:RIG). Ensco will also have 47 jackups in the fleet, with 27 good for drilling in depths in excess of 300 feet.

It is not all about the number of rigs, though. While companies like Diamond Offshore (NYSE:DO), Noble (NYSE:NE) and Transocean may have been historically more focused on deepwater assets, the new Ensco will have a newer fleet. Newer matters - newer rigs are often more powerful and more technologically advanced, and can allow drillers to do more in less time and complete complex jobs that older rigs may not be able to handle. That, in turn, often spells better dayrates.


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Why Transocean Will Recover

There is no question whatsoever that these are very difficult days for Transocean (NYSE:RIG). Because of its role in the BP Gulf oil spill, the company finds itself under a microscope like never before, and it seems reasonable to assume that its is going to be facing legal trouble for years to come. All of this has taken a toll on the stock, which is now discounted based on the assumption of a very bleak future for the world's leading deep water driller. 

But not so fast. Even if Transocean bears a larger share of responsibility for the oil spill, I don't think this affects the company's potential in the long term. For better or worse, deep water drilling is here to stay. Plus, Transocean is a leading operator in the field, and it would take years for another company to build a fleet that could rival Transocean's. To me, this means the company has above-average odds of recovering from this matter.


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