Precision Drilling to buy Trinidad in all-shares white knight merger

Canada's largest contract drilling company is moving to solidify its position with a $540-million all-share merger offer for the country's third-largest driller.

But the real attraction for Precision Drilling Ltd. is Trinidad Drilling Ltd.'s "super-spec" American rig fleet as the Canadian drilling industry remains in a deep funk due to commodity price discounts and low investor confidence.

"We've said many times that acquisitions are not a priority for Precision, but in this case the value creation opportunity was too compelling for us to ignore," said Precision CEO Kevin Neveu on a Friday conference call.

"Both Precision and Trinidad have focused on the United States and the Middle East as our primary growth geographies. This combined platform substantially reinforces our scale and market relevance in these key regions, positioning us for sustained growth and technology deployment."

Trinidad rejects Ensign bid

In a news release, Trinidad said shareholders should support Precision's white knight offer and continue to reject an all-cash $470-million hostile take-over bid from Ensign Energy Services Inc., Canada's second-largest driller, launched in August.

All three companies are based in Calgary.

Trinidad's shares were ahead 11 cents or about six per cent at $1.95 at noon on the Toronto Stock Exchange. Precision Drilling shares were at $4.31, down 13 cents or about three per cent, and Ensign was off 40 cents or 6.3 per cent at $5.95.

The Ensign bid was made soon after Trinidad ended a strategic review process that allowed prospective buyers to examine the company. It said no suitable offers had been received.

Trinidad said the Precision bid is worth $2.11 per Trinidad share based on Precision's 30-day volume-weighted average share price. That's a premium of 25 per cent over the Ensign offer and 17 per cent over Trinidad's 30-day price of $1.81, it said.

'Significant international growth platform'

"This combination of two high-quality drilling contractors creates the third-largest drilling contractor in the robust U.S. market and provides a significant international growth platform," noted Trinidad CEO Brent Conway in a news release.

The Precision-Trinidad merger is positive for the Canadian drilling market because it will reduce an oversupply of rigs chasing too few wells, said Houston-based analyst Taylor Zurcher of Tudor Pickering Holt & Co.

"If Trinidad was solely a Canadian company, I doubt Precision would have gone ahead with this deal," he said. "I think the real reason they like this deal is for the U.S. assets, and that's because the U.S. market is just a really tight market at the high end."

Drilling activity in key American oil and gas fields where advanced technology rigs that can drill long horizontal wells are in demand is up over last year while Canadian activity is flat.

Ensign's offer was "bargain basement" but Precision's bid is a fair valuation, Zurcher said.

30% of drilling market

Post-merger, Precision's rig count would be behind U.S. leader Helmerich & Payne Inc. and second-place Patterson-UTI Energy Inc. and likely tied with Nabors Industries Ltd., he added.

In Canada, Precision would have about 30 per cent of the contract drilling market.

The deal is worth $1.03 billion if $477 million in Trinidad debt is included and would result in Trinidad shareholders owning about 29 per cent of Precision.

The combined company would have 398 drilling rigs if the deal closes 170 in the U.S., 26 in the Middle East and 202 in Canada, although Neveu said the plan is to immediately sell 50 rigs in Canada from both fleets. It expects about 215 rigs would be actively working.

Precision said it expects to realize more than $30 million per year in savings from synergies with Trinidad.

In July, low natural gas prices were cited by the Petroleum Services Association of Canada in cutting its 2018 Canadian drilling forecast to 6,900 oil and gas wells, 200 fewer than were drilled in 2017.

Earlier this year, Akita Drilling Ltd. said it hoped to gain greater access to the U.S. market by buying Calgary rival Xtreme Drilling Corp. in a $209-million cash-and-shares deal.

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