Ensco, Pride Combine to Create the World's Second Largest Offshore Driller

Ensco PLC (NYSE: ESV), a U.K.-based energy company, announced yesterday (Monday) that it agreed to buy Pride International Inc. (NYSE: PDE), for $7.3 billion in cash and stock in a deal that will create the world's second-largest offshore driller.

The transaction represents a further transformation of the U.S. offshore drilling industry, which is still struggling to recover from last year's explosion of Transocean Ltd.'s (NYSE: RIG) Deepwater Horizon drilling rig, which killed 11 workers and spewed roughly 4.8 million gallons of crude into the Gulf of Mexico. Transocean, based in Vernier, Switzerland, is the world's largest offshore driller.

Ensco will pay $41.60 a share for Texas-based Pride, a 21% premium to its closing price on Friday. The purchase would be the largest for Ensco, and is the second-largest acquisition of a U.S. oil services company in the last year.

Under the terms of the deal, Pride holders will receive 0.4778 share of Ensco plus $15.60 in cash for each share of Pride common stock. Once the deal closes, Pride holders will own about 38% of Ensco's outstanding shares.

Pride has been pursuing a sale of the company since last year, and has been holding discussions with a number of possible buyers including Seadrill Ltd. (NYSE: SDRL), a big Norwegian drilling contractor. Seadrill already owns a 9.9% stake in Pride after a failed attempt to buy the whole company in 2008, Forbes reported.

Analysts say the offshore oil drilling sector is ripe for consolidation due to uncertainty following the Gulf spill. Tighter regulations in the United States will make it harder for small drillers to compete and benefit large companies with modern fleets of deepwater rigs, like Transocean and Ensco.

For Ensco, which recently moved its headquarters to the United Kingdom from the United States, the deal would significantly boost the number of deepwater rigs in its fleet, which command much higher rates than shallow-water rigs.

The acquisition will expand Ensco's fleet of offshore drilling vessels to 74, including 21 rigs capable of operating in seas of 4,500 feet (1,372 meters) or deeper.

The combination will cut at least $50 million in pretax operating costs, immediately add to earnings and will boost Ensco's backlog of unfilled orders to $10 billion, Ensco said in a press release.

"The combination is an ideal strategic fit, as our rig types, markets, customers and expertise complement each other with minimal overlap," Dan Rabun, Ensco's chief executive, said in a press release.

The offshore drilling industry in the United States has been in limbo after the Deepwater Horizon, a drilling rig leased by BP PLC (NYSE ADR: BP), exploded and sank off the Louisiana coast on April 20, 2010.

In response to the disaster, U.S. President Barack Obama's administration in May halted offshore exploration in waters deeper than 500 feet, leading many companies to relocate their rigs out of the Gulf to other offshore fields in regions like West Africa, The Wall Street Journal reported.

Even though the government lifted the drilling moratorium in late 2010, officials have been slow to issue any new deepwater drilling permits. And even after new permits are issued, many analysts believe it will take many more months for production to return to normal.

Last week, U.S. District Judge Martin Feldman of New Orleans ruled the Obama administration acted in contempt by continuing its deepwater-drilling moratorium after he struck the policy down last June, Bloomberg reported.

Interior Secretary Ken Salazar instituted a second drilling moratorium in July that was contested in a lawsuit by the industry claiming the ban was harming the Gulf Coast economy, which is heavily dependent on deepwater drilling activities. That ban was rescinded in October, before Feldman could rule on its validity.

Feldman later ruled that the enhanced drilling safety rules Salazar imposed to permit companies to resume offshore exploration violated federal law. Opponents of those rules insisted that regulators were continuing to block the resumption of drilling after Feldman's rulings.

Interior Department regulators acted with "determined disregard" by lifting and reinstituting a series of policy changes that restricted offshore drilling following the explosion, Feldman ruled on Feb 2.

"Each step the government took following the court's imposition of a preliminary injunction showcases its defiance," Feldman said in the ruling. "Such dismissive conduct, viewed in tandem with the re-imposition of a second blanket and substantively identical moratorium...provide this court with clear and convincing evidence of the government's contempt."

The Offshore Marine Service Association, a group representing offshore service vessels and shipyards, urged the president to end what it called an informal moratorium on offshore drilling.

"President Obama claims to have lifted the Gulf moratorium, yet not a single deepwater permit has been issued in nine months," Jim Adams, the association's president, said in a release last week. "As a result, thousands of workers are out of jobs, Americans are paying more for gasoline and heating oil, and our nation is becoming even more dependent on unstable nations for our energy needs."

Wyn Hornbuckle, a Justice Department spokesman, told Bloomberg News the government is reviewing Feldman's ruling but declined further comment.

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