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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 (Reuters) - 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 banker.
“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 necessary.
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 established players.”
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 SCORE.OL.
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." (For more M&A news and our DealZone blog, go to www.reuters.com/deals) (Reporting by Michael Erman; additional reporting by Matt Daily and Braden Reddall in San Francisco; editing by Andre Grenon)