Offshore driller Seadrill (NYSE: SDRL) has been active this year. They completed the purchase of Scorpion offshore this past spring, and speculation that something new is in the works could escalate now that the company has refreshed its war chest with a $350-million bond offering completed at the end of September.
Takeover rumblings have bubbled for months. Rumored targets have included Pride International (NYSE: PDE) (of which Seadrill owns roughly 10%), Noble Energy (NYSE: NE), and even Transocean (NYSE: RIG).
Shipping magnate John Fredriksen, the force behind Seadrill, has historically built his empire through shrewd deals and industry consolidation. Much of the recent takeover conjecture has focused on valuations, but perhaps it is an error to look for the cheapest opportunity. If John Fredriksen is right on the general direction of oil and offshore drilling in particular -- and his track record is good in this department -- many of the drillers are attractive right now.
Any acquisition decision will likely be driven by the overall quality of asset, rather than the lowest valuation. If you wish to benefit from Seadrill's possible purchases, buy the assets that John Fredriksen likes.
So what does he like?
Seadrill has stated that "the easy oil is gone" and that new drilling will take place at greater depths and in more remote locations. Very simply, this means the choice assets will be harsh environment jack-up rigs like the one Seadrill purchased this past summer, and deep water drillships to capitalize on Brazilian offshore fields and potential resources off the coast of West Africa.
Who has them?
Maybe Pride will indeed be the target, with its growing fleet of deep water drillships, maybe even Transocean is within the realm of possibilities.
Or maybe, despite all the speculation, Seadrill actually gets smaller as it spins off some assets to a Brazilian subsidiary in response to Brazilian regulation, or spins off its service subsidiary.
A lot of maybes, but one thing is likely: John Fredriksen won't stand still for long.
But if you want to benefit by owning the driller that John Fredriksen likes best, buy Seadrill itself.
After all, he owns roughly a third of outstanding shares (through trusts) and this degree of ownership should help to align shareholder and management interests.
Seadrill is quite attractive on its own merits, with an 8% dividend, projected forward valuation of 9 times earnings, and large backlog.
Why guess when you don't have to?
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