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* Spill compounds worries about U.S. concentration
* Looming liabilities also seen as big concern
* Larger offshore drillers could swallow smaller ones
By Michael Erman
NEW YORK, June 30 The United States has
suddenly become a much riskier place for oil drillers to
operate, a consequence of the Gulf of Mexico oil spill that
could spark a deal making binge.
The offshore oil drilling sector has long been seen as ripe
for consolidation. But the conditions created by the oil spill
should accelerate deals, as it becomes tougher for smaller
drillers to compete.
Bankers and analysts said the spill and subsequent
moratorium illustrates the need for offshore drillers to be
globally diversified. Drillers with too much U.S. exposure are
already facing legal and economic troubles. [ID:nN28271791]
"Who knew that it would be the United States" spotlighting
the need for diversification, asked one energy investment
"But having a better balance geographically is important --
customers want it and, increasingly, from a financial
perspective, you can see it has value," the banker said.
The banker said diversification not only adds value, but
also would help a company redeploy assets quickly if
Energy investment bankers said most drillers smaller than
the U.S. "big three" -- Transocean Ltd RIGN.VX(RIG.N),
Diamond Offshore Drilling Inc (DO.N) and Noble Corp (NE.N) --
could be targets.
That list includes companies like Rowan Cos Inc (RDC.N),
Pride International Inc PDE.N, and Ensco Plc (ESV.N).
Although the spill will speed consolidation in the sector,
depressed stock prices could lead the drillers to focus on
asset sales first, Lukas Daul, an analyst at Sweden's SEB
Enskilda, said in a research note.
Since the explosion of the Deepwater Horizon drilling rig
on April 20 that caused the massive Gulf oil spill, the shares
of oil service companies have plunged.
Dow Jones' oil equipment services index .DJUSOI, which
includes oil services companies as well as drillers, is down
around 23 percent over that period and most offshore drillers
have fallen further.
Noble Corp shares, for instance, are down 25 percent over
the period, Diamond Offshore shares have dropped 30 percent and
Pride International has fallen 32 percent.
"We think the initial deals will be asset-based," Daul
wrote. "We expect players with uncontracted newbuilds, limited
operational track records in deepwater drilling and without
fully secured construction financing to end up in the hands of
LIABILITY ALSO A PROBLEM
Liability and rising costs could also be an issue for
smaller drillers, as oil and gas companies may look to share
risks more equally with drillers and lawmakers may tighten
regulations on offshore drilling in the U.S. [ID:nN30229965]
Even excluding rising costs, oil companies might lean
towards hiring a larger driller over a smaller one in the
offshore sector because of perceived risks.
"Can you imagine a scenario where a medium sized E&P
company had done the blowout with some crappy second tier rig
company?" another energy investment banker said, suggesting it
would have a been an even greater public relations catastrophe
than the BP oil spill.
"I think there will be a trend toward bigger drillers for
liability purposes, as well as for the sake of appearances,"
the banker said.
Consolidation in the industry may have already started. On
Monday, offshore oil and gas driller Noble Corp agreed to buy
privately held Frontier drilling for more than $2 billion,
adding seven new vessels to its fleet.
In May, Norway's SeaDrill Ltd (SDRL.OL) trumped Ensco in a
battle to take over smaller rival Scorpion Offshore Ltd
The roots of both deals predate the spill, but one
executive has already said the changing environment is pushing
the company to look for deals.
"What has happened to the sentiment on the sector since
April 20 has scared some people. And happily we are not one of
those (companies)," Noble Chief Executive said on a conference
call earlier this week. "I think there may be some more
opportunities, so we've still got our eyes open."
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(Reporting by Michael Erman; additional reporting by Matt
Daily and Braden Reddall in San Francisco; editing by Andre