Calgary– Rigs that were built orange or yellow, some of which picked up a tan coat, will now have a new colour – the greenish blue of Trinidad Drilling.
On June 11, Trinidad Drilling Ltd. and CanElson Drilling Inc. announced an combination worth $505 million. However, while the value of the deal is over half a billion dollars, just a small fraction of that will be paid in cash. Shareholders of CanElson will have the option of receiving 1.0631 Trinidad shares for each CanElson share, or $4.90 in cash. Cash payouts are being limited to a total of $50 million.
While the deal represents a 23.5 per cent premium to the 20-day volume weighted average trading price of the CanElson Shares on the TSX for the period ending June 10, 2015, CanElson’s 52-week high was $8.78 in early July, 2014. That high is also the highest price for stock in the last five years, according to MarketWatch.com.
The $505 million includes the assumption of approximately $36 million in CanElson debt.
The deal is expected to close by the end of August, subject to regulatory and shareholder approval.
The addition of CanElson’s 51 rigs, including six former Totem Drilling rigs and eight former Eagle Drilling rigs, will bring Trinidad’s total land rig fleet to 163. That will make the combination the third-largest fleet in Canada and eighth-largest in the United States. Each company also has small joint ventures in Mexico which are included in the 163 total rigs.
A typical Saskatchewan-based CanElson drilling rig operates with a crew of 21 when drilling (four shifts of five, one rig manager). However, of their 13 Saskatchewan-based units, only five were working in the province as of June 11. Three were near Stoughton and two in the Flat Lake area southeast of Oungre. All five were working for Crescent Point Energy Corp. On that day, there were 39 drilling rigs active in Saskatchewan.
“Our combination with CanElson is a good strategic move for both Trinidad and CanElson. It will create a diverse company with more scale and resources and a solid financial position and an expanded team to lead it,” said Lyle Whitmarsh, Trinidad’s chief executive officer.
“Our combined fleet will be one of largest and most active fleets in North America, with a combined total of 163 land rigs.
If the deal goes forward, two directors from CanElson will join the Trinidad board, Elson McDougald and Dale Johnson to the Trinidad Board, with Don Seimen also adding the board at a later time.
“We also expect most of the CanElson management team will also join Trinidad,” Whitmarsh said.
CanElson president and CEO Randy Hawkings is among those expected to join Trinidad. “We are also in the process of finalizing the remaining staffing positions, although we expect the majority of CanElson employees will come over to join Trinidad.”
Whitmarsh said this will provide the company with a larger, more diverse fleet to meet customer demands. An analyst during the conference call noted that Trinidad had largely gotten away from mechanical rigs in favour of AC-powered rigs. The inclusion of CanElson’s mechanical rigs will bring that design back into greater prominence with the company.
Hawkings said the deal made sense for both sets of shareholders, with two companies with above-average utilization and strong performance.
Redundancies are expected to be low, and just $10 million is expected to be found in synergy savings in 2016, half of that in operations. This is primarily in terms of corporate administration and yards. Trinidad, it was noted, had already gone through rounds of cuts and wage rollbacks.
Upon completion of the transaction, on a fully diluted basis and assuming the maximum cash consideration is elected, current Trinidad shareholders will own approximately 60 per cent and CanElson shareholders will collectively own approximately 40 per cent of the combined company.
Whitmarsh noted the deal came from a mutual “sit-down and let’s see if any of this makes sense.”
“We’ve been working on this for six months.”
That would also correspond with the cratering of oil prices, which hit a six-year low in January.
When asked about that, Hawkings said the synergies and opportunities were not affected by the oil price, but their day rates have. Going forward, with a strong fleet and strong team of people, the company is positioned to expand when things do pick up.
Whitmarsh added, “I think it’s a fair comment that the deal is about the future; the future of what the combined entity will look like, what we can do in the marketplace, the return we can get for our shareholders. While we all look at what’s going on in the market today, we manage our business according to what’s coming at us. Certainly this deal is about what we can do going forward much more than the current share price or oil price, back six months ago.”
Asked if this is an exit strategy for CanElson investors, Hawkings said he and the insiders are taking Trinidad shares. “The management team is committed, the insiders, but I can’t speak to the rest of the investors,” he said.
Regarding the impact in southeast Saskatchewan and Manitoba, Hawkings said, “We’ve competed head-to-head with Trinidad rigs. We’ve worked for similar customers down there. We anticipate that we will just keep carrying on and continuing to service that area of southeast Saskatchewan and southwest Manitoba without change.”
CanElson’s CanGas compressed natural gas business is expected to continue. Hawkings noted that both Trinidad and CanElson have rigs capable of running on natural gas, and customers continue to ask for that service, allowing them to use their own gas on their own rigs. “Customers we are currently working for consider it a value-add,” he said.
The Estevan SJHL team has, for the previous several years, been known as the “CanElson Drilling Estevan Bruins,” with the drilling company as the name sponsor for the team. This followed on from the “Eagle Drilling Estevan Bruins.” Bruins head coach and general manager Chris Lewgood said the team is working on its sponsorship for next year.