With the state of doing business in the in the oil rig industry in a state of flux, industry analysts were not at all surprised by the decision of Transocean Ltd. (NYSE: RIG) to acquire Ocean Rig UDW Inc. (NASDAQ: ORIG) for $2.7 billion on Sept. 4.

Transocean is now in line to have the top fleet of premium ultradeepwater and harsh environment rigs.

“The announcement is not a surprise. Industry consolidation is necessary to get these premium assets back to work over the next two to three years,” Leslie Cook, a principal analyst for Wood McKenzie, said in a statement. “The Ocean Rig fleet aligns very well with Transocean’s best-in-class portfolio.”

What made this deal necessary was the combination of constructive and stable oil prices during the last several quarters, streamlined offshore project costs and reserve replacement challenges driving material increases in offshore contracting activity, according to Transocean CEO Jeremy Thigpen.

“It is Wood Mackenzie’s view that the premium ultradeepwater drillship market has reached the bottom and rates for some of the highest-spec assets have the potential to double in the next couple years as active utilization begins to tighten,” Cook said. “Operators are already demonstrating a preference for newer rigs that offer greater efficiency in their drilling programs.”

With the acquisition Transocean has become the market leader for consolidation in the offshore drilling industry, said Liz Tysall, a senior analyst for oilfield service research with Rystad Energy. The acquisition adds nine high-spec ultradeepwater drillships plus two more under construction and two harsh environment semisubmersibles.

Transocean now has a combined fleet of 57 floaters, 17 of the top 50 and 31 of the top 100 deepwater drillships in the industry. The deal also enhances Transocean's exposure and ability to capitalize on the ultra-deepwater market recovery.

“In contrast to Transocean’s recent acquisition of Songa Offshore, which included 24 years of backlog, this acquisition positions Transocean for a market upturn in the ultradeepwater drillship segment, particularly in two key areas of the Golden Triangle,” Tysall said in a statement. “Ocean Rig operates in three of Transocean’s key markets: Brazil, West Africa and the North Sea. The newly combined fleet will have just under one year of contracted backlog in Brazil, just over four years of contracted backlog in West Africa and just over 27 years of contracted backlog in the North Sea going forward.”

Transocean said it has also decided to retire the C.R. Luigs ultradeepwater drillship) and the Songa Delta midwater semisubmersible. Going forward the company plans to continue to retire rigs that are no longer a strategic fit for its fleet. Since 2014, Transocean has scrapped a total of 45 rigs, including the two rigs just announced. The company has indicated that it will continue to explore opportunities in the market for further enhancement of its rig fleet.

“As rates begin to float back up, the need to keep drilling costs down will drive demand for these newer rigs that can offer efficiency gains,” Cook said. “By buying Ocean Rig, Transocean is positioning itself to offer the industry premium rigs at competitive day rates.”

Terrance Harris can be reached at tharris@hartenergy.com

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