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Precision (PDS) Outbids Ensign in C$1.03B Buyout of Trinidad

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In a bid to further cement its market position, Canada’s largest drilling contractor Precision Drilling Corporation (PDS - Free Report) is set to acquire its peer Trinidad Drilling Limited, the third largest driller in the nation, in a deal worth C$1.03 billion. Notably, Precision Drilling would make up for approximately 30% of the contract drilling market in Canada, following the acquisition. Interestingly, the combined company will become the third largest driller in North America in terms of rig count, on par with Nabors Industries Limited (NBR - Free Report) , while remaining just behind Helmerich and Payne Inc. (HP - Free Report) and Patterson-UTI Energy Inc. (PTEN - Free Report) .

Deal Highlights

The deal is valued at around C$550 million in equity. Precision will exchange 0.445 shares of its common stock for each share of Trinidad, per the terms of the deal. Precision’s bid represents around 17% premium to Trinidad’s weighted 30-day average price of C$1.81, thus valuing the latter at C$2.11 a share. The deal also assumes Trinidad’s net debt estimated at C$477 million, thus pushing the total value of the transaction to C$1.03 billion.

Subject to satisfactory closing conditions and other regulatory approvals, the deal is set for closure by late 2018. Post the culmination of the deal, Precision will own 71% stake in the combined entity and Trinidad will hold the remaining 29%. Precision currently carries a Zacks Rank #4 (Sell). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Deal Benefits

Acquiring Trinidad’s super-spec American rig fleet has been the primary deal motive for Precision. Notably, the Canadian drilling industry is still mired in funk due to widening differentials, along with the oversupply of rigs and stiff competition. The deal looks fairly compelling for Precision as it solidifies the company’s position in the relatively lucrative U.S. counterpart, wherein drilling demand is soaring, given advanced technologies.

The buyout will integrate the premier assets of both the companies, in turn bolstering the scale and leadership position of the combined entity in the whole of North America. The deal will enable the companies to pool their expertise in the region and share their best practices, making it well positioned for international growth. The deal will add 141 drilling rigs (including 61 complementary top-tier assets) to Precision’s portfolio. Post-acquisition, the combined entity is likely to have 398 drilling rigs, including 170 in the United States, 26 in the Middle east and 202 in Canada.

The transaction aims to reduce costs through economies of scale. The strategic acquisition is expected to lead to significant commercial, financial and operational synergies, due to the integration of assets, systems and staff. The deal is expected to result in cost savings of around $30 million per year.

Trinidad Rejects Ensign’s Offer: Will Ensign Sweeten its Bid?

Importantly, as Canadian oilfield slump is not showing significant signs of abatement, Trinidad had started a comprehensive strategic review process early this year, in a bid to contemplate on different strategies to enhance shareholders’ value. However, the review process concluded in August without receiving any lucrative bids for merger or sale.

Post the strategic review process, Canada’s second-largest driller went hostile with C$947 (C$470 million in cash and C$477 as assumption of debt) million bid for Trinidad. However, Trinidad has rejected Ensign’s hostile take-over-bid and accepted Precision’s proposal, which represents 25% premium over Ensign’s offer. Nonetheless, the battle is not yet over, with analysts believing that Ensign can still increase its two-month old bid, further heating up the war.

While Ensign’s next move is certainly a wait and watch story, one can’t deny that the pace of consolidation in the Canadian energy sector is certainly picking up.

Canadian Oil Patch Consolidation Intensifies

Consolidation has been picking up pace in Canada so that the companies can achieve economies of scale and synergies, thereby boosting their earnings and reducing competition for services.

In April 2018, Vermillion Energy Inc. inked an all-stock deal with Canadian rival Spartan Energy Corporation for C$1.4 billion. In June, Baytex Energy Corporation secured a $2.3-billion deal to acquire Raging River for broadening its scope of operations in Duvernay Shale.

In fact, of late, hostile takeovers are no more a matter of anomaly for the Canadian energy industry. Last year, Total Energy Services Corporation outstripped Western Energy Services on the hostile takeover of Savanna Energy Services. A few days back, Husky Energy’s $6.4-billion offer to buy MEG Energy Corporation marked the third hostile bid this year after Ensign’s offer to buy Trinidad and Velvet Energy’s deal with Iron Bridge Resources.

Industry observers believe that such consolidations are much needed for the Canadian Energy industry, and one wouldn’t be surprised if Ensign and Precision further sweeten their offers to acquire Trinidad.

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