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Transocean to buy rival for US$2.9b to add drillships

An oil and gas drilling rig owned by Transocean Ltd sits idle in the Grand Harbor in Valletta, Malta.

[NEW YORK] Transocean Ltd, the world's largest offshore drilling company, agreed to buy a smaller rival in a US$2.9 billion deal, with rates for deepwater rigs forecast to double in two years.

The cash-and-stock acquisition of Ocean Rig UDW Inc will give Transocean a fleet of nine ultra-deepwater drillships and two harsh environment semisubmersibles, plus two additional ships under construction, the companies said in a statement Tuesday.

Offshore oil drilling was hit particularly hard during the price slump, squeezed by higher costs and the resurgence of the US shale industry. As major oil companies from Exxon Mobil Corp to BP Plc canceled offshore projects, the groups that provide the high-tech drilling ships needed to operate in deep waters suffered.

Customer interest in offshore activities is now increasing. Day rates for ultra-deepwater drilling will double by 2020, Vernier, Switzerland-based Transocean said on a conference call with analysts to discuss the deal, citing data from Wood Mackenzie Ltd. Once the Ocean Rig transaction is complete, Transocean will have 57 floaters.

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"The combination of constructive and stable oil prices over the last several quarters, streamlined offshore project costs, and undeniable reserve replacement challenges has driven a material increase in offshore contracting activity," Transocean Chief Executive Officer Jeremy Thigpen said in the statement.

Given Ocean Rig's high-quality floater fleet and "relatively clean" balance sheet, Ocean Rig was a prime take-out target and the merger is "a highly logical strategic fit," Tudor, Pickering, Holt & Co. said in a note after the deal was announced.

The Ocean Rig deal is the largest in the oil and gas drilling industry this year, according to data compiled by Bloomberg. It's Transocean's biggest acquisition since its purchase of Songa Offshore SE, which was completed in January.

Transocean is offering 1.6128 newly issued shares plus US$12.75 in cash for each share of Ocean Rig. Upon completion, Transocean shareholders will own about 79 per cent of the combined company and Ocean Rig shareholders will own the remainder.

Transocean plans to finance the purchase with cash on hand and funding commitments from Citigroup Inc. The deal is expected to close in the first quarter.