A new company is born: Ensco (ESV) and Rowan (RDC) have completed the previously announced merger and have formed a new company, EnscoRowan, which will trade under the ticker ESV. Rowan shareholders have received 2.750 Ensco shares for each Rowan share they owned. The shares of the combined company had a 4:1 reverse stock split, resulting in approximately 197 million ordinary shares outstanding. Now that this merger is a completely done deal, it's high time to look at the fleet and financials of the combined company, as well as on the perspectives of its shares.
Source: Bassoe Offshore, fleet status report, author's work
Ensco and Rowan combined into the world's biggest company which has 75 rigs. Also, EnscoRowan inherited Rowan's 50% share in ARO Drilling, a joint venture with Saudi Aramco, which has 16 jack-ups (all of them are drilling). Investors and traders alike should note that the fleet status report dated April 11, to which I linked above, only includes information previously disclosed by both companies. The market will have to wait for further information regarding contractual changes for the company's fleet.
The combined company has a material presence in all segments. In my opinion, the key moving parts in the long term are the cold stacked rigs - in EnscoRowan's case, they have chances to return back to the fleet, but they also have chances to rust to death.
As per Bassoe Offshore, the company's cold stacked rigs have a valuation of $1.1 billion-$1.25 billion. Out of 16 cold stacked rigs, 5 are given scrap valuation. These are jack-ups Ensco 70 (1981), Rowan California (1983), Ensco 71 (1982), Ensco 97 (1980) and Rowan Gorilla IV (1986). Other cold stacked jack-ups (Ensco 105 (2002), Ensco 111 (2003), Ensco 112 (2008), Ensco 113 (2012) and Ensco 114 (2012)) have chances to return to the marketplace, especially Ensco 113 and Ensco 114 of PPL Pacific Class 400 design, which has been proved to be in demand by Borr Drilling (OTCPK:BDRLF).
Cold-stacked floaters may become a material long-term problem. Ensco has four cold-stacked semi-subs: Ensco 8500 (2008), Ensco 8501 (2008), Ensco 8502 (2010), Ensco 8506 (2012). Their design is in demand - sisterships Ensco 8503, Ensco 8504 and Ensco 8505 are currently drilling. However, recent semi-sub reactivations (with upgrades) proved to be a costly endeavor (I have most recently discussed this topic in my article on Diamond Offshore (NYSE:DO)). The biggest worries are for drillships Ensco DS-3 and Ensco DS-5 - they don't look like good survival candidates right now as there are many rigs available and the market is far from the point when it will look at cold-stacked rigs.
In the short-term, warm-stacked drillships are the units to watch. Things look normal on the jack-up side, especially due to Rowan's jack-ups which were fully booked prior to merger. In short, Ensco has improved its fleet by getting working jack-ups and 4 good drillships, as well as the exposure to the Saudi Arabia market via ARO Drilling.
At the end of 2018, the combined company would have had $1.6 billion of cash on the balance sheet and $7.5 billion of debt. Before 2024, EnscoRowan has to deal with roughly $1 billion of debt, followed by a wall of debt in 2024-2026 (this wall is typical for the whole industry). The addition of Rowan to Ensco materially improved the latter's short-term liquidity.
In its merger announcement, the combined company stated that it will have credit facility capacity of $2.3 billion through September 2019, followed by capacity of $1.7 billion from October 2019 to September 2022. With no near-term liquidity worries, the key question is the strength and the timeline of the offshore drilling market rebound - EnscoRowan will definitely need to refinance its 2024-2026 debt, so it needs good utilization and healthy dayrates by that time. At current point, this looks like a viable scenario to me.
Stock price performance
In my opinion, the shares of Ensco and Rowan were pressured by Rowan shareholders who did not like the combination with a riskier Ensco and exited Rowan shares after a major run-up at the beginning of this year. Now that Ensco and Rowan are one company, this factor is no longer in play. Also, Ensco shares (together with many other offshore drilling stocks) completely missed the recent developments on the oil price front. I believe that it creates a potential for a catch-up play in EnscoRowan's stock.
From comments in recent offshore drilling articles, I know that the reverse stock split is viewed as a negative factor by some investors and traders. I do not believe that it will be a negative catalyst in this case. Reverse stock splits usually end with a major sell-off because they are done by companies in complete distress that struggle with the $1.00 share price requirement and have to artificially increase their share price, decreasing the share count and opening the stock for more short selling. Here, the situation is completely different: short-term liquidity is very healthy, and the reverse stock split is the result of the combination of two companies.
It will be very interesting to hear the thoughts of Ensco Rowan's management during the first-quarter reporting season (the date has not been announced yet). Until then, the stock may gradually gain more interest in case Brent oil (NYSEARCA:BNO) stays above $70.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ESV over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I may trade any of the above-mentioned stocks.