Trinidad Drilling Ltd. is buying CanElson Drilling Inc. for $469-million as the crude price collapse forces mid-tier oil rig operators to plot ways to cope with dwindling revenue and growing competition.
The Calgary-based companies had previously cut staff and lowered salaries as their oil producer customers chopped spending, leaving more than half their drilling capacity unused in the first quarter. Executives rejected the notion, however, that they were forced into a transaction.
The deal, to create the third-largest rig fleet operator in Canada and eighth-largest in the United States, is aimed at both bolstering financial strength in the downturn and setting the stage for an oil-price recovery, they said.
"For each company, it adds a strength that the other didn't have as much, so given the current world I think that all makes sense," said Dana Benner, an analyst at AltaCorp Capital Inc. "Is it exacerbated by this commodity price environment? Yeah, absolutely. I think the environment is driving it, but then again I think it makes sense anyway."
The marriage of two mid-sized players shows how the industry is in a drive to cut costs as business has slowed, with the aim of emerging as more formidable competitors once producers resume drilling in the Montney in British Columbia, Bakken in Saskatchewan and Permian in Texas, major resource regions where Trinidad and CanElson are active.
The $34.6-billion (U.S.) takeover of Baker Hughes Inc. by Halliburton Co., announced late last year, was a warning to the rest of the sector and points to more consolidation as heft and lower costs become crucial, Mr. Benner said. Trinidad's and CanElson's combined market capitalization is $1-billion (Canadian).
Drillers and oil field service companies have laid off thousands of workers in Canada as the well count has dropped with the fall in crude prices below $50 (U.S.) a barrel. U.S. benchmark oil has since made up some lost ground, settling at $60.77 on Thursday. Still, since the start of this year, weekly rig use has only twice crept above half the available units.
Under the deal, shareholders of CanElson will get either 1.0631 of a Trinidad share or $4.90 (Canadian) in cash for each of their shares. The cash option is capped at $50-million. Trinidad will also assume $36-million of CanElson debt.
The offer represents a 23.5-per-cent premium to the previous 20-day average price of CanElson stock. Both companies' shares have been under severe pressure. Before Thursday, Trinidad had fallen more than 60 per cent in 12 months and CanElson sank more than 45 per cent.
Trinidad said it expects to realize cost savings of as much as $10-million starting next year. There are no plans for job cuts, although both companies have already laid off large numbers of staff, said Lyle Whitmarsh, Trinidad's chief executive officer.
The transaction will improve Trinidad's balance sheet during the commodity price trough, reducing debt to just over two-times annual cash flow from the current ratio of more than 2.5 times. But that's not the main attraction, Mr. Whitmarsh said.
He acknowledged during a conference call that the transaction was hammered out with the industry in contraction, rather than expansion. "The strategy still would have made sense, but it's just the timing around when it happened, when we decided to sit down and discuss it.
"The strategy carries through back to higher oil prices and certainly higher gas prices."
Following the close of the deal, three CanElson directors will join Trinidad's board, including founder Elson McDougald.