Calgary – It looks like Ensign Energy Services is out and Precision Drilling Corporation is in, as Precision announced on Oct. 5 it had entered into an arrangement to buy out Trinidad Drilling Limited in an all-stock deal.
The merger deal would see Precision acquire all of the issued and outstanding common shares of Trinidad on the basis of 0.445 common shares of Precision for each outstanding Trinidad share.
The aggregate transaction value is approximately $1.028 billion, including the assumption of approximately $477 million in Trinidad net debt. Upon completion of the transaction, existing holders of Trinidad shares will collectively own approximately 29 per cent of Precision.
That’s a substantially different deal than what Ensign had proposed directly to Trinidad’s shareholders on Aug. 30, after Trinidad’s board rejected its initial offer. That cash offer was for $947 million offer to purchase Trinidad Drilling Ltd. for all of the issued and outstanding common shares of Trinidad, at $1.68 per Trinidad common share. The Ensign offer included Trinidad's estimated outstanding net debt of $477 million as at June 30, 2018, the total value of the transaction is approximately $947 million. Ensign already owns 9.8 per cent of Trinidad’s common shares.
Trinidad had been shopping itself around for several months as part of its strategic review.
In making its August offer to Trinidad’s shareholders, Ensign noted their offer is fully financed and has a “high likelihood of completion.” They also said there is an “extremely low likelihood of a competing offer.”
Trinidad had spurned the Ensign offer.
Kevin Neveu, president and chief executive officer of Precision said in a release, “This transaction creates exceptional value for both Trinidad and Precision shareholders. The combination provides a truly unique opportunity to combine two highly-focused drilling contractors that are pursuing similar growth initiatives and competitive strategies and importantly, operating similar Tier 1 assets.”
“From a strategic perspective, Trinidad is a perfect fit with Precision. We can realize immediate synergies, estimated to be over $30 million, through fixed cost reductions, operational efficiencies and reduced public company costs. Over the long-term, the additional scale will further strengthen Precision’s operating leverage and positions the company to service our customers’ continued transition to High Performance drilling services with high spec AC rigs. Additionally, this combination allows us to better differentiate our service offering through our combined industry leading drilling technology initiatives and a larger operating platform.”
“The incremental free cash flow generated through this combination will ensure Precision meets or exceeds our long-term debt reduction targets and improves our financial flexibility to pursue growth opportunities in the United States and in international markets."
Transaction rationale
Precision said this merger would be a unique combination of two highly focused drilling contractors pursuing similar strategies with complementary Tier 1 assets.
Trinidad’s fleet of 141 drilling rigs includes 61 high spec AC rigs that fit 90 per cent within Precision’s standardization protocols and are equipped with major components that are well aligned for fleet integration.
Precision will have a North American fleet that includes over 200 active rigs and 322 total rigs. As the third largest driller in the U.S., Precision will have strong positions in all key shale plays and will be positioned for improving industry activity. The company will have an expanded platform for technology deployment and an increased inventory of economically upgradeable rigs.
Precision said the company will have improved cash flow generation capabilities in Canada given excellent fixed cost leverage and operating synergies. Trinidad’s customer mix and rig fleet is complementary and the company is well positioned for liquified natural gas and Deep Basin development. Precision has identified 50 rigs from the combined fleet that it intends to hold as assets for sale.
In 2019, Precision expects to realize more than $30 million in annual synergies through corporate efficiencies and facility consolidations. Precision will leverage its increased scale and realize long term incremental operating efficiencies through its recently upgraded IT infrastructure, technical support centers in Nisku and Houston and its supply chain management and manufacturing capabilities.
Together they would have an expanded platform for U.S. and international growth and technology deployment, Precision noted.
On the international front, Precision said it will benefit from the deployment of international rigs into long-term contracts. Precision’s operating experience, infrastructure and scale in Saudi Arabia and Kuwait will support successful project execution. With an expanded international platform, Precision is well positioned to win future tenders and to leverage the combined company’s fleet of 26 international rigs.
Leveraging the technology capabilities of both companies will be a priority and Precision’s Process Automation Control (PAC) platform was designed to incorporate third party technologies such as those in the Trinidad technology portfolio. Precision is an industry leader in technology and through the combination Precision will have a total of 167 AC rigs capable of running automation technologies.
In a release, Trinidad noted the exchange ratio translates to $2.11 per Trinidad share based on Precision's 30-day volume-weighted average share price of $4.73 on the TSX for the period ending October 4, 2018. That represents a premium of 25 per cent to the all-cash $1.68 per share hostile take-over offer from Ensign launched on August 30, 2018; a premium of 17 per cent to Trinidad's 30-day volume-weighted average share price of $1.81 for the period ending October 4, 2018; and a premium of 14 per cent to the closing price of Trinidad Shares of $1.84 on October 4, 2018.
The Precision and Trinidad boards have each unanimously approved the transaction and recommended their shareholders approve the deal.
The transaction is expected to be completed in late 2018 and is subject to TSX, court and regulatory approvals and the satisfaction of other customary closing conditions.
It will require approval by at least 66 2/3 per cent of the Trinidad securities represented in person or by proxy at a special meeting of Trinidad security holders. The issuance of the Precision shares pursuant to the transaction will require approval by a simple majority of the Precision shares represented in person or by proxy at a special meeting of Precision shareholders pursuant to the requirements of the TSX.
Trinidad has agreed that it will not solicit or initiate discussions regarding any other business combination or sale of material assets. Precision has the right to match any superior proposals within a five day period. The transaction provides for a non-completion fee of $20 million payable by Trinidad in certain circumstances if the transaction is not completed.
As of Oct. 5, Precision Drilling had eight active rigs in Saskatchewan and 11 down rigs. Five of those active rigs were in northwest Saskatchewan, one was in southwest Saskatchewan and two were in southeast Saskatchewan. Two down rigs were in the northwest, five in west central, two in the southwest and two in southeast Saskatchewan.
Trinidad Drilling showed four active rigs in Saskatchewan and eight down rigs, all in southeast Saskatchewan.
Combined, the merged company would have 31 of the 113 rigs currently listed in Saskatchewan, or 27.4 per cent of the Saskatchewan fleet.
