Is Fredriksen Drilling for a Takeover of Pride Int'l? (PDE)

Includes: FRO, GLNG, PDE, SFL
by: Travis Johnson

John Fredriksen, controlling shareholder of SeaDrill, ltd. [SDRL.OL], among other ventures, is one of the wealthiest men in the world. Indeed, he was the wealthiest man in Norway until he moved his legal residence to Cyprus. Watching Fredriksen's moves and acquisitions is hugely popular among European investors, especially those in the shipping sectors or those who are involved in the Oslo market.

I've certainly been guilty of this myself -- Fredriksen made me a lot of money with Frontline (NYSE:FRO) and Ship Finance (NYSE:SFL). He has made himself billions on those companies and on Golar (NASDAQ:GLNG). Frontline is the largest operator of VLCC oil tankers, SFL owns and finances ships, particularly Frontline's, and GLNG is a smaller liquified natural gas tanker owner.

Lately, Fredriksen has gotten a lot of attention for his moves in Asia. He's invested heavily in the Korea Line Corporation, a local shipping company, through Golar in an attempt to get exposure to the liquified natural gas [LNG] market in Asia, where LNG is much more heavily used than in the US. And he also seems to be making a play for Hyundai Merchant Marine, which has many Koreans up in arms.

But what has been of interest to me most recently is Fredriksen's efforts to consolidate the offshore drilling industry. Norway has always been home to very aggressive investors and operators in all maritime areas, and Fredriksen is certainly no different. When Keppel started seeing huge runups in orders for drilling rigs, it was Norwegian investors and speculators placing their orders first, not the more risk-averse operators who fear growth (much as we're seeing with the tanker market now, some of the bigger operators are starting to fear a glut of new rigs hitting the market in the coming years).

SeaDrill has been Fredriksen's primary vehicle for investing in the ocean rig space, and as I've written before, he's growing it quickly -- the takeover of Smedvig expanded their rig count dramatically and brought in operating expertise. The company is currently taking advantage of all their purchase options to get as many more rigs into operation as they can, as quickly as they can. They own about a third of Apexindo as well and are rumored to want to acquire the rest from Medco, the majority owner (an Indian investment firm is also apparently trying to acquire a majority position, but since it's an Indonesian company there's no telling where this will go or if a full takeover will ever happen). Regardless of who owns the majority, SDRL appears to be pleased with the operations at Apexindo and seems to be trying to work more closely with them as partners and building the business.

But the next step for Fredriksen is up in the air -- rumors have swirled that SeaDrill will make a bid for a US-based driller in an effort to expand their geographic exposure (and it wouldn't hurt that the dollar is dipping now and making these drillers look more appealing in Norwegian Kroner terms). So who might that be?

There are many US operators of ocean rigs -- Helmerich and Payne, Rowan, Atwood, and Ensco are all relatively small ones that might be tasty targets.

But the one that looks most likely to me right now is Pride International (NYSE:PDE), a $5 billion company that owns and operates a very wide variety of rigs around the world. I've taken a small position in near-term options in PDE on the off chance that I'm right (and on a bet that the shares will recover from recent scandals), and actually have considered purchasing PDE as well. The options have already doubled in a week, so selling those and purchasing some common shares might be an option if I learn of more promising news in the weeks to come.

So why Pride International? It's a troubled company at the moment and like most of its competitors it's priced at a very low forward PE of well under 10. Shares recently have dipped significantly on failure to file the 10-K because of allegations of bribery of foreign officials. While that's certainly illegal and serious, I don't think it threatens the future of the company. I'd have to guess that bribery is a fairly normal part of doing business in third world countries with large oil deposits.

But why would I think SDRL is going after PDE? The following are several hints I've gleaned from local and foreign news.

● According to news reports, Fredriksen and Tor Olav Troim, his right hand man and a SDRL executive, have visited the headquarters of Pride in Houston. That's a solid hint that they might be working on something, though it could be something much more minor like the sale of rigs or of divisions, or a failed overture.

This hasn't been reported in English to the best of my knowledge, but with my trusty Norwegian-English dictionary the gist is fairly clear from these articles (and others) from the Norwegian press: Rykter om riggkjøp and Brennhete riggrykter. The rumors may also just be remaining chatter from last September, as Fredriksen was then reported to have bought some PDE shares. I don't know if those were given up in favor of the Smedvig acquisition or if he still holds them.

● Pride's Chief Operating Officer recently resigned as well. This could have some relation to a possible takeover, though it's probably more likely just a well timed retirement in light of Pride's recent scandals.

● A Norwegian investment house that has often been closely linked to Fredriksen's acquisitions has purchased at least 5% of PDE according to recent SEC filings. Skagen Funds (owned by Stavanger Fondsforvaltning AS) has filed with the SEC as a 5% owner of only two US-listed companies recently: Pride International and Stolt-Nielsen, a Norwegian company and major shipper and fish farm operator. And to make the linkage a little more interesting, Skagen has also recently increased it's holdings to more than 5% of Korea Lines, another company that Fredriksen is trying to acquire. Coincidence? Skagen says it is, but there have been rumors in the past about Fredriksen and Skagen working together. It could also just be that Skagen follows Fredriksen closely and tries to ride on his coattails, or that as Norwegian maritime investors they naturally have similar interests, I don't know.

The combination of all of these factors seems to point to Fredriksen's clear intent to purchase a US-based driller. His meeting with Pride management, Pride's depressed shares on a temporary scandal, and Skagen's significant purchase of Pride shares all make me willing to place a small bet on a takeover bid from SeaDrill for Pride. That's not to say it will happen, of course, but even if it doesn't I'm thinking that Pride looks fairly appealing at these lower prices.

PDE 1-yr chart: