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Aug 13, 2018

Trinidad Drilling shares jump as Ensign Energy prepares takeover offer

Trinidad Drilling jumps as Ensign preps takeover bid

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CALGARY -- Shares in Calgary-based Trinidad Drilling Ltd. leaped by almost 15 per cent on Monday after cross-town rival Ensign Energy Services Inc. announced it would make a hostile $470-million cash takeover bid.

The offer of $1.68 per share comes less than two weeks after Trinidad announced it would abandon a strategic review that included considering a corporate sale or asset sales to reduce debt and attract investors.

Including Trinidad's estimated net debt of $477 million as of June 30, the total value of the takeover would be about $947 million, Ensign said in a news release.

Trinidad said Monday it has struck a special committee and hired advisers to examine the Ensign bid so that it can provide advice to its shareholders.

Ensign, which already owns 9.8 per cent of Trinidad's shares, said it tried to discuss a deal after Trinidad announced ending its review on Aug. 1, but the board had unacceptable conditions, including the signing of a confidentiality agreement with a lengthy standstill provision.

"We strongly believe that the Trinidad board and management of Trinidad, as fiduciaries of the company, should have engaged with Ensign, without a standstill, to pursue an attractive opportunity to surface shareholder value," the statement reads.

"The Trinidad board's failure to fully engage with Ensign has led us to bring the offer directly to you, the shareholders and true owners of the company."

Ensign called on the Trinidad board to allow the bid period to be shortened from the legal minimum of 105 days to 35 days, pointing out a higher bid is unlikely to emerge given that the target company's review found no viable alternatives.

Full details of the bid are to be included in a formal offer to be filed with regulators within the next two weeks, it said.

In its statement, Trinidad said Ensign didn't take part in its strategic review process and therefore hasn't had access to information that would "better allow it to understand" its business and operations.

Trinidad shares rose 22 cents on Monday to $1.73, five cents higher than the bid. Their five-year-high close of $12.75 was set in June 2014.

Ensign shares rose through the day to reach $6.28, up 5.5 per cent, by about 2:30 p.m. ET.

Ensign's offer greatly undervalues Trinidad, said Jason Tucker, an oilfield services analyst and partner at Paradigm Capital in Calgary.

"We have a target price on it of $3 (per share) and I think $3 is probably more than fair," he said, adding Trinidad has an enviable position in the Permian Basin in Texas that could attract an American buyer.

"Ensign and Precision Drilling are the only logical takeout candidates for a deal of that size by a Canadian player, but I think there are more options at this point."

In a research note after Trinidad halted its review and adopted a five-year plan instead, analyst Ian Gillies of GMP FirstEnergy Capital said the news was negative and would likely result in it continuing to trade at a discount to other drilling companies.

"We appreciate the company's five-year plan but believe the oilfield services business cycle could ultimately derail its goals," he wrote.

"We are disappointed with this outcome given our view that consolidation remains a key tenet of a healthier oilfield services market in North America."

Both Ensign and Trinidad have Canadian, U.S. and international operations, but Ensign is much larger.

In the second quarter ended June 30, traditionally a slow period for Canadian drillers due to the melting landscape, Ensign posted a net loss of $37 million on revenue of $263 million, while Trinidad had a loss of about $12 million on revenue of $130 million.

Several Canadian drillers, including Trinidad and Precision, have moved rigs from Canada to the United States as demand grows much more quickly south of the border.

In July, the Petroleum Services Association of Canada adjusted its 2018 Canadian drilling forecast down by 500 wells to 6,900 oil and gas wells, 200 fewer than were drilled in 2017, and nearly seven per cent less than its April forecast for 7,400 this year.