U.S. Offshore Driller Consolidation Expected in 2007

Maritime Activity Reports, Inc.

December 8, 2006

According to Reuters, tight demand, attractive valuations and a Norwegian company that has said it is ready to get bigger have sparked widespread expectation for consolidation in the U.S. offshore drilling sector in 2007. Possible scenarios include a leveraged buyout by a private equity firm, large-scale recapitalizations or the acquisition of a U.S. driller by an overseas company, U.S. analysts said. And a lot of industry attention is focused on Norwegian driller SeaDrill Ltd., which said in no uncertain terms in November that it was looking to grow.

SeaDrill is controlled by Norwegian shipping magnate John Fredriksen, who analysts credit with the know-how and experience to make an acquisition work, citing his leadership in building tanker company Frontline Ltd. SeaDrill also bought another Norwegian oil driller, Smedvig, earlier this year and has risen to a number six ranking worldwide since it was founded in May 2005, the company said. LBO? Offshore drillers are also seen as juicy targets for private equity firms who expect the companies' profit cycle to extend beyond 2009, a scenario that equity investors are not pricing into the stocks, analysts said.

Drillers' profits have surged and available rigs have become scarce and expensive over the past two years as oil and gas producers have spent heavily to take advantage of sky-high energy prices. Bear Stearns analyst Robin Shoemaker recently wrote in a note to clients that Houston, home of many drilling companies, is said to be "crawling" with private equity firms looking to make deals. But because U.S. drilling executives who have lived through boom and bust cycles are wary of merging with each other, a leveraged buyout or acquisition by a foreign company such as SeaDrill is more likely, analysts said. So far this year, the Philadelphia Stock Exchange Oil Service index, which includes some drillers, has risen nearly 16 percent. Source: Reuters

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