Bankruptcy Plagues Offshore Drilling Market

The most significant bankruptcy of the current oil downturn has shone a spotlight on what is perhaps the most oversupplied corner of the energy world: the market for offshore rig services.

Samson Resources, an independent oil producer bought just four years ago for $7.2 billion, said in its late Wednesday filing for creditor protection that a 60 percent crude price slide had upended its business.

In the offshore space, restructurings and asset sales are widely seen as likely and some chief executive officers are now openly talking about acquisitions.

Paragon Offshore, which has an outdated fleet, said on Thursday it has hired Weil, Gotshal & Manges, a well-known restructuring firm, and the investment bank Lazard.

And Vantage Drilling, which has a hefty debt load, has also said it retained financial adviser Lazard to explore options. Vantage did not provide additional comment.

Leaders of Transocean, Noble Corporation and Rowan Companies say they are now on the prowl - to both eliminate competition in a saturated rig market and to pick up new rigs at bargain basement prices.

Talk of offshore consolidation - rare in a sector that saw its last big deal in 2011, when Ensco bought Pride International - comes as executives see prices staying low for a long time, meaning even less work for rigs.

"We believe we are the natural consolidator," Transocean Chief Executive Officer Jeremy Thigpen said at the Barclays energy conference last week. "The industry needs to consolidate, and so we're certainly looking and just waiting."

Thigpen, who recently took his new post after being chief financial officer at highly acquisitive National Oilwell Varco, seems to be steering Transocean in a new direction.

Insiders say the Switzerland-based company lost its technological edge and hesitated to invest after the deadly 2010 explosion of its Deepwater Horizon rig leased for BP’s Macondo well.

In a distressed industry, buyers may find cheap targets. Second-hand rigs are going for half the price of building a new rig, which can run to $600 million.

Consolidation would also allow buyers to scrap older rigs faster. Rental rates for new rigs bring in about $375,000 a day, almost 50 percent more than old rigs.

Vantage, along with Pacific Drilling, has a young fleet that would be valuable to larger rivals Transocean or Diamond Offshore Drilling - both of which are saddled with old rigs, said Bill Costello, a portfolio manager of the Westwood Small Cap Value fund.

The average age of Pacific and Vantage's fleets is three years, compared with 16 years across the industry, said Leslie Cook, a consultant at Quest Offshore Resources.

Pacific spokeswoman Amy Roddy acknowledged the company's rigs are attractive but said "we do not have a plan or desire to be taken over."

Diamond may have the most financial flexibility to make an acquisition because the company does not have to set aside money for new rig payments, said Edward Jones analyst Rob Desai.

Diamond, which did not comment, has just one ultra-deepwater rig on order, while Transocean has seven.

Any buyers are more likely to save dwindling cash balances and take out whole companies in stock rather than pay cash for individual assets, even those of bankrupt companies, analysts said.

Companies will likely be taken out at eight to 10 times forward earnings before interest, taxes, depreciation and amortization (EBITDA), said Reorg Research analyst Kyle Owusu.

That is less than half of Ensco's valuation for Pride.

"We are looking at buying, we're looking at distressed assets," Rowan CEO Thomas Burke said at the Barclays conference.

Noble Corp Chief Executive David Williams said he is a potential buyer but is biding his time.

"We fully expect to participate in consolidation in the industry, if and when we believe it's appropriate, and we get the reasonable valuations that we want to get," he said.

Asked how much Noble would pay for a new high-tech rig, he quipped: "I wouldn't give 10 cents right now."