Transocean Merger Sparks Consolidation Talk for Other Drillers

NEW DELHI, Jul 20, 2007 (Dow Jones Commodities News)

Minutes after the two largest offshore oil and gas drillers agreed to merge, attention shifted to who would be next.

Transocean Inc. (RIG) and GlobalSantaFe Corp. (GSF) said Monday they will merge in an all-stock deal. The new company, which will operate under the Transocean name, will combine the largest operator of deepwater rigs with the biggest owner of shallow-water jackup rigs outside the U.S.

Anyone with a significant presence abroad is a candidate for a follow-up deal, analysts said, in what could trigger further consolidation in the red hot oil services industry.

"Bigger is better in a commodity business like offshore drilling...(the deal) will pressure other players to combine," noted Dan Pickering of Pickering Energy Partners in a note Monday.

Speculation about consolidation has been a regular feature of the offshore drilling sector for over a year. The industry is in the middle of a multi-year boom driven by high oil prices and dwindling supplies, with no signs of slowing. Attention has long been focused on two-year-old Norwegian-owned Seadrill Ltd. (SDRL.OS), which hinted at being in the hunt to buy a more-established competitor. The company backed off those rumors earlier this year, but could now be pushed to make a deal, said Poe Fratt, an analyst with A.G. Edwards in St. Louis.

"This creates a little more urgency for them to go after somebody, there's one less company," he said.

Candidates to buy or sell including Diamond Offshore Drilling (DO), Noble Corp. (NE), Ensco International (ESV) and Pride International (PDE), Pratt said.

"At the end of the day, this is driven by the favorable outlook for international markets, including the deepwater markets," he said.

Stocks across the sector rose dramatically at the start of trading on Monday. GlobalSantaFe rose 5.5% to $78.89 and Transocean by 5.7% to $116.28. Diamond Offshore is up 2.8% to $111.43, Noble is up 2.8% to $105.35 and Pride is up 2.1% to $39.03.

Rig Shortages

The new Transocean will control 14 of 31 active drillships, the rig capable of drilling in the deepest water, according to Rigzone, an industry website.

Those rigs are developing deepwater fields that the energy industry views as the best hope to boost production in order to meet rising demand. Oil companies pay as much as $500,000 a day for Transocean to operate its drillships, as offshore rigs are in short supply.

But while Transocean dominates the ultra-deepwater now, it won't for long. Nearly 20 new drillships, and numerous other rigs capable of operating at great depths, are currently under construction.

"It's not like the market is closed, you have brand new entrants" such as Seadrill, Fratt said. "Clearly the barriers weren't high."

Copyright (c) 2007 Dow Jones & Company, Inc.

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