Transocean-Seadrill merger would be ‘logical deal at logical time,’ Citi says

Seadrill (NYSE:SDRL) +9.5% in Thursday’s trading following Bloomberg’s report late yesterday that it is in merger talks with larger offshore driller Transocean (RIG), a deal Citi analysts think has a reasonably high probability of occurring.

Transocean (RIG) currently owns 24 active deepwater rigs and Seadrill (SDRL) has 11 active deepwater rigs, so a combination of the two companies would create the largest offshore operator.

Given that Transocean (RIG) is the only public offshore rig company to not go bankrupt in the last cycle and thus has loads of legacy debt, Citi analysts believe a merger would be a deleveraging event for Transocean and likely put the combined company on a much stronger financial footing.

Citi thinks Transocean (RIG) needs to take advantage of its premium valuation to purchase cash flow and accelerate its deleveraging, and Seadrill (SDRL) would seem a good fit given that its fleet mix of modern deepwater rigs fits with Transocean while scale is sufficiently large to reduce RIG’s leverage by nearly 30% on 2025 estimates; while dayrates currently are healthy, there’s concern over crude prices next year, suggesting now may be a good time for a deal, Citi says.

If the merger ultimately happens, Citi says it would expect Seadrill (SDRL) shares to be worth ~$55 while remaining accretive to Transocean (RIG) shares.