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A rig is set up at Precision Drilling yard in Nisku, Alta., Feb. 17, 2014.AMBER BRACKEN/The Globe and Mail

Precision Drilling Corp. has launched a friendly $550-million takeover bid for Trinidad Drilling Ltd., besting a hostile offer from Ensign Energy Services Inc. and ratcheting up resurgent deal-making in the energy industry.

Precision, Canada’s largest oil and gas drilling contractor, said on Friday it agreed to offer 0.445 Precision shares for each share of Trinidad. With the assumption of Trinidad’s $477-million in long-term debt, the offer is worth $1.03-billion.

The bid complicates the ambitions of Ensign, the No. 2 player in the Canadian drilling business, which must now decide whether to up the ante. In August, Ensign, whose chairman and largest shareholder is London-based billionaire Murray Edwards, made an unsolicited bid of $1.68 a share in cash for Trinidad. That offer is due to expire on Dec. 14.

Precision’s entrance as white knight represents an escalation in takeover activity in the oil patch, which has gone through four years of contraction. The market has remained negative for Canadian companies in particular, as export constraints have muted the impact of rising global oil prices. This week, Husky Energy Inc. made a $3.3-billion hostile offer for oil sands company MEG Energy Corp., and investors are speculating whether there will be a rival bidder in that situation too. This summer, junior producer Iron Bridge Resources Inc. agreed to a sweetened offer from Velvet Energy Ltd. after rejecting an earlier unsolicited approach.

The combined Precision and Trinidad would have 152 rigs in Canada, excluding 50 earmarked for sale, and 170 in the United States, which is in the midst of a boom as oil companies pour billions of dollars into shale plays in Texas. It will also operate rigs in Mexico and the Middle East, a region Precision has identified as key to its future.

Precision estimates it can deliver annual cost savings of $30-million by acquiring Trinidad, and that the addition of Trinidad will bolster its balance sheet as the sector recovers, chief executive officer Kevin Neveu told analysts in a conference call.

“Debt reduction remains a top priority for Precision,” Mr. Neveu said. “The strength in cash flow generated by this combination will ensure we meet or exceed our long-term targets while improving our financial flexibility to pursue the most attractive growth opportunities.”

Precision’s bid equated to $1.91 for each Trinidad share, based on the suitor’s stock price of $4.30 a share on the Toronto Stock Exchange on Friday. Trinidad shares jumped 5 per cent to $1.93.

Ensign made its bid on Aug. 13, two weeks after Trinidad closed the book on a formal six-month search for “strategic alternatives,” which is frequently code for shopping the company to potential buyers. It had said at the time that its board concluded it would continue as a stand-alone company under a five-year operational plan.

Ensign had suggested previously that the absence of a deal after the formal search meant the odds of a rival bid to its own were low. “This failed strategic review process is a clear indication of lack of other viable alternatives for Shareholders to realize an immediate premium and liquidity,” it said in its offer circular, mailed in late August.

Ensign offered little indication of its next move. “Ensign is reviewing today’s announcement and will update the market in due course,” said Ian Robertson, a spokesman for the company. Besides the price, it will have to decide whether investors might desire stock to reap rewards from a recovering industry.

Ensign owns nearly 27 million Trinidad shares, representing about 9.8 per cent of those outstanding, giving it some leverage in the battle.

An acquisition of Trinidad would still make sense for Ensign, although the economics get weaker as the price rises, said Jon Morrison, analyst at Canadian Imperial Bank of Commerce.

“With that said, should Ensign elect to increase the bid to exceed the one being made from Precision, there is still a healthy amount of financial accretion to be had on the part of Ensign,” he said.

Trinidad has agreed to pay Precision a break fee of $20-million should the deal not proceed.

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