Citigroup: Transocean (RIG.US)-Seadrill (SDRL.US) merger more likely to create largest offshore drilling operator

Seadrill (SDRL.US) is in merger talks with larger rival Transocean (RIG.US), according to reports from overseas media, and Citigroup analysts believe the deal is likely to happen. The merger of the two companies, which currently have 24 and 11 active deepwater rigs respectively, is expected to create the largest offshore operator.

Transocean is the only public offshore rig company that did not go bankrupt during the last economic cycle, and therefore has a large legacy debt, which Citigroup analysts believe would be a deleveraging event for Transocean if the merger were to happen. The analysts also believe that the merged company would have a stronger financial base.

Citigroup believes that Transocean needs to use its premium valuation to buy cash flow and accelerate its deleveraging, and Seadrill seems to be a good choice, with a modern deepwater rig portfolio that matches Transocean and a large enough size to expect to reduce RIG's leverage by nearly 30% by 2025. Citigroup says that while current day rates are reasonable, concerns about oil prices next year suggest now is a good time to strike a deal.

Citigroup says that if the merger were to happen, Seadrill's stock price would be around $55, while Transocean's stock price would continue to rise.