Many investors are swallowing their
today. Yet, with another merger in the oil patch, investors will continue to speculate on where the next deal will appear.
One day after the stock of Pride International, a contract oil driller, soared on speculation that the company would be purchased by a competitor, Pride announced Thursday that it would combine with
in a merger of equals. The deal calls for shareholders of both companies to receive one share of the new company for each share of either Pride or Marine.
Pride closed Wednesday at $32.65. Marine Drilling closed at $27.72.
The deal immediately took the wind out of Pride's investors. The stock, which traded close to $33 Wednesday, dropped to $27.50 in early Thursday trading. "Given the way the expectations were built on Wednesday, there is a lot of disappointment in the marketplace," says Dan Pickering, director of research at
Simmons & Co.
, a Houston energy investment boutique and a member of the
TSC Energy Roundtable. "Pride investors thought for sure they would be taken out at a premium."
The merger itself isn't extraordinary. The deal, which the companies value at about $2 billion, creates the third-largest offshore drilling company, with more than 150 offshore rigs and more than 240 land-based drilling rigs. The company will retain its headquarters in Houston and employ more than 10,000 worldwide.
"There is nothing terribly exciting about the deal," says Marshall Adkins,
director of energy research and a member of the
TSC Energy Roundtable
. "It does make some sense from a cost perspective as it does create some synergies."
Pickering's analysis suggests the deal is slightly dilutive, yet agrees that it creates synergies. "You gain some economies of scale in the deepwater and jack-up business," he notes. "And, from Pride's perspective, the balance sheet improves."
Drilling the Rumors
While the Pride-Marine merger occupied investors' minds Thursday morning, the talk will quickly shift to speculation on the next merger in the oil patch. That conjecture -- like Wednesday's speculation regarding Pride -- is likely to be only partly right.
"When rumors like these start, they tend to take on a life of their own," says Pickering. "Rumors beget rumors, and it winds up on television, and 75% of the time the rumors have some basis in fact but get the details wrong. That is exactly what happened here."
As for other deals being spurred by the Pride-Marine merger, most analysts advise not to count on it. "There will be a lot of speculation regarding the next deal, but they will prove to be wrong," says Bryan Dutt, portfolio manager at
Ironman Energy Capital
and a member of the
TSC Energy Roundtable
. "Given the performance of the contract drillers, people may hope and pray for more deals, but I just don't see that." Dutt notes that the
Philadelphia Stock Exchange Oil Service Index
, or OSX, is relatively flat year to date and over the past 52 weeks.
Going Nowhere Fast
Pickering agrees that the Pride-Marine deal won't lead to additional consolidation among drillers. "It doesn't create a huge amount of urgency for other companies to do something," he says. "It doesn't mean they won't, but it doesn't force other transactions to happen."
He also wouldn't look for the current deal to light a spark under other drilling stocks. "I don't think this is any type of near-term catalyst to spur the group," he says.
While Raymond James' Adkins agrees, he does think that, over the long term, consolidation among drillers will continue. "There are other companies where combinations make a lot of sense," Adkins says. "Companies like
come to mind. You go down the list, and you wonder why you wouldn't put a few of these together to create a greater critical mass."
Don't hold your breath, however. "You'll see about one deal a year over the next five years," Adkins conjectures. "You have to work through a lot of egos and what people think their companies are really worth."
Smaller-scale consolidation is likely to continue, although investors will find it difficult to directly profit. A plethora of small, private drillers continue to operate both on land and offshore, which provides plenty of asset-acquisition opportunities for large public companies.
"As for contract drillers, I see bits and pieces going to and fro, but I don't see megamergers out there," says Ironman's Dutt. "I think there will be grand speculation that you will, but that won't be correct."
That leads Pickering to a conclusion that investors should heed: "I wouldn't want to own these names based on takeover speculation."
That's advice that Pride investors should have drilled into their heads.
The Jeffords Move: Lights Out or Energizing?
With Sen. James Jeffords of Vermont
making the leap to independence, a lot of talk will focus on the impact of his decision on legislative reception for
energy plan and energy stocks.
Clearly, control of the
poses challenges for the entire Bush agenda. "There will be more debate, more conflict, and it will take longer to get things done," says Pickering, noting the specific impact on the energy plan. "This is not positive, on the margin, for the energy initiative Bush is attempting to put into place."
And, Wednesday's selloff in the oil patch was in anticipation of Jeffords' jump. "Psychologically you saw the impact Wednesday," notes Dutt. "Short term, there will be a lot of negative rhetoric aimed at the energy industry."
However, both Pickering and Dutt make cogent, yet somewhat ironic arguments. With Democratic control of the Senate and the possibility that Bush initiatives to spur production will be delayed, the chance increases for higher, more volatile commodity prices.
And that means potentially higher profits for energy companies. In an ironic twist, we have
pointed out in the past that the Bush energy policy might ultimately benefit consumers with lower prices, while squelching the profit growth of energy companies.
Conversely, an energy policy that has little in the way of additional supply incentives may actually push oil and gas prices higher. That, in turn, could lead to increased profits for oil and gas companies at the expense of consumers. "The longer it takes to bring new supply to market, the longer commodity prices feel pressure and remain volatile," says Pickering. "Tighter supply and higher prices mean higher earnings for energy companies."
Oh, the irony of politics.
Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to
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