HOUSTON, May 24 -- Pride International Inc., Houston, and Marine Drilling Cos. Inc. in adjacent Sugar Land, Tex., are merging through a $2 billion stock-swap into a newly formed Delaware firm that will be the third largest offshore drilling contractor, company officials said Thursday.
The combination will provide the new firm with "economies of scale" in a rapidly improving global drilling market, said company officials. It will especially benefit from the burgeoning US gas market that is stimulating drilling in the Gulf of Mexico, they said.
"The merger with Marine Drilling creates a premier global drilling contractor with strong positions in the deepwater markets, in the jack up markets, particularly in the Gulf of Mexico, as well as in the Latin American land market," said Pride International Pres. and CEO Paul A. Bragg.
The deal "combines Pride's operating leverage with Marine Drilling's financial strength to create an extraordinary company with size, geographic scope, and balance sheet flexibility," he said.
But during a telephone conference call among company executives and financial analysts Thursday, one caller lambasted Pride International officials for "giving away your stock at $30/share" through the merger, which he described as "a great coup for Marine Drilling." With Pride's marine rig fleet operating at full utilization, the caller claimed he could see no upside opportunities for the company through the merger.
Pride International is one of the world's biggest drilling contractors, operating a diverse fleet of 305 rigs in more than 20 countries. Marine Drilling has a fleet of 17 mobile offshore rigs, including two deepwater semisubmersibles and 15 jack ups. It also has one jack up configured as an accommodation unit in the Gulf of Mexico.
"Why now?" asked one analyst of Jan Rask, president and CEO of Marine Drilling. Marine went through financial problems in the early 1990s as the company restructured its debt and let go back about a half-dozen mobile marine rigs that were financed through loans guaranteed through the US Maritime Administration (Marad).
"We have rebuilt the company in the last 4-5 years. This is a tremendous opportunity to increase shareholder value going forward," Rask replied. "It gives us economies of scale in the jack up market in the Gulf of Mexico. That market is the world's largest."
He said, "Pride International is the right partner at the right time. Because of the strong demand for jack up rigs, we are gradually approaching replacement cost pricing. I can think of no other combination which would result in the upside that Pride and Marine Drilling represent, together with a balanced financial position."
The highly fragmented drilling business is the last segment of the oil service industry to undergo consolidation. Because much of the industry's capital investment occurs up front with the purchase and maintenance of rig fleets, there was little that companies could do to reduce costs through mergers during the downturn.
But growing demand for both land and marine drilling has stimulated consolidation as contractors vie for rigs in various markets.
The combined company will have a fleet of 77 offshore rigs, one of the largest in the world. That includes two drillships, 11 semisubmersible rigs, 35 jack up rigs, and a combination of 29 tender-assist, barge, and platform rigs. Six of the floaters are newly constructed and capable of operating in water depths of 5,000 ft or more.
The company also operates a fleet of 246 land rigs in international markets.
The new company will retain Pride International's name and Houston base.
Stockholders will get one share of stock in the new company for each share held in either of the two current companies. Once the merger is completed in the last quarter of this year, Pride International stockholders are expected to have 56% of the new firm's 155 million fully diluted shares outstanding.
Robert L. Barbanell, Marine Drilling's current chairman, will be chairman of the new company. Bragg will be president and CEO of the new company. Four members from each of the current companies' boards of directors will be picked to serve on the new firm's eight-member board of directors.
Rusk said, "I'm going to stay for some time to assist in the combination of these two companies. How long, I don't know."
International markets for offshore rigs are "heating up" and will likely pull some rigs out of the Gulf of Mexico by offering higher day rates, Bragg said.
"If a handful of rigs leave the gulf, we'll see prices move up here," said Rask.
Noting the aging fleet of mobile offshore rigs around the globe, Bragg said the industry will need to build replacement rigs as well as more rigs capable of working deep waters beyond 5,000 ft. The US Minerals Management Service has sold thousands of exploration leases at those depths in the Gulf of Mexico over the past 5 years, with fewer than 100 rigs worldwide capable of working in those water.
"At some point, we will build more rigs, but not until we see longer-term contracts," said Bragg.