00:00So, two of the bigger names in offshore drilling, Transocean has the largest backlog, Valeris has the largest fleet.
00:09Valeris' name may not be that familiar to a lot of folks here.
00:13It was actually a combination of two companies called Ensco and Rowan a few years ago.
00:17But they are two of the biggest offshore drillers.
00:20And I think that this deal really has both offensive and defensive motivations.
00:26Offshore drilling is in a little bit of a recovery mode, really kind of has been.
00:33Most of the drillers went bankrupt, actually, during the 2020-21 downturn.
00:40Transocean was really one of the only companies that did not go bankrupt.
00:44Valeris did.
00:46And so, Transocean's kind of been saddled with all this debt as a result of not having their balance sheet wiped during bankruptcy.
00:54And so, that's been a limiting factor on their growth for quite some time.
00:58And this deal, which is an all-stock deal, will accelerate their leveraging process and remove some of that burden from them and better enable them to capitalize on an upturn in offshore drilling.
01:12And the second thing that's important to note here is that it brings a jack-up fleet.
01:16Jack-ups are basically shallow water rigs, okay, as opposed to the deep-water drill ships or floaters.
01:27And Transocean had exclusively been a floater fleet.
01:32Jack-ups are more to the seabed.
01:34The seabed's lower in shallow water.
01:36And Valeris is one of the biggest players there.
01:39And so, this gives Transocean exposure to the jack-up or shallow water market, which has really undergone an interesting phase in that it was a bit of a downturn the last couple of years.
01:52The biggest jack-up driller is Saudi Aramco.
01:56And a couple of years ago, Saudi Aramco made significant cuts to their drilling program.
02:02They essentially, Saudi Arabia, abandoned plans to increase their oil production capacity to 13 million barrels a day.
02:10And what we've seen since then is a lot of jack-up rigs being laid off effectively in 2024 and 2025.
02:18Indications suggest those rigs will return this year, so that market is bottomed and may be on the cusp of an upswing.
02:27So, this deal will give Transocean the ability to participate in that recovery.
02:33So, in terms of why now, when it comes to the timing of this deal, the CEO of Transocean cited a multi-year drilling upcycle.
02:40Where are we in that cycle?
02:41Are we, you know, first inning?
02:43Are we third inning?
02:45It's kind of been an interesting upcycle.
02:47So, we saw an inflection in 22 and 23.
02:52And 24 and 25, we've seen kind of a plateau to a slight pullback.
02:57Now, I do believe we're in a recovery and have been, and this has kind of been more of a mid-cycle pause associated, rather than a downturn in offshore drilling.
03:07So, I do think the recovery is intact, but I think the cadence has certainly slowed and, in fact, deteriorated.
03:17And offshore drillers like energy service companies have been off to the races this year.
03:23I think the oil price has held in better than expected.
03:27Some of that is due to some of the tensions in the Middle East, Iran, et cetera, Venezuela as well.
03:34So, the punchline really is that we're still in, I think, a mid-cycle pause until maybe the second half of this year.
03:40And in terms of what inning we're in, I think we're probably, like, third, fourth inning, but it's been kind of an unconventional recovery.
03:50Will the regulators allow these two companies to get together?
03:52Yeah, I think so.
03:54And it's a good question.
03:55These are the two of the largest players that are out there.
03:58And RIG's CEO expressed extreme confidence that that will be the case.
04:05It's a competitive market.
04:07There's a lot of fragmentation, smaller players in the market.
04:11And it's generally the quality of certain assets that determine which guys win which contracts.
04:18A lot of it depends on which RIGs are capable of drilling for which projects.
04:23And so, no, I do think that this should get a relatively quick approval.
04:31Certainly, they're talking second half of this year.
04:34That's a much shorter timeline than the last major oil field services merger, which was Schlumberger Champion X.
04:41That took over a year, two year and a half, to approve and required significant divestitures.
04:46But offshore drilling is a different market.
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