Helmerich and Payne announces $2 billion acquisition of Scottish drilling company

Tulsa’s Helmerich & Payne just expanded its worldwide oil and gas exploration business with a $1.9725 billion cash acquisition of KCA Deutag International Limited, a global drilling company based in Abeerdeen, Scotland.

The acquisition will give H&P more ability to reach the Middle East where KCA Deutag has a “significant land drilling presence,” stated the annouoncement. The Middle East represents nearly two-thirds of KCA Deutag’s calendar year 2023 Operating EBITDA. It has other operations in South America, Europe and Africa and what are called asset-light offshore management contract operations in the North Sea, Angola, Azerbaijan and Canada. Some of the operations focus on “super major customers” and offer H&P long-term earnings visibility through a robust backlog.

At day’s end following the announcement, H&P stocks showed a nearly 9% gain.

Under the terms of the agreement, which has been unanimously approved by the H&P Board of Directors, H&P will acquire KCA Deutag International Limited for $1.9725 billion in cash. The transaction is expected to close prior to calendar 2024 year end, subject to customary closing conditions and regulatory approvals.

The transaction will be funded with cash on hand and new borrowings.

“This is a historic and transformative transaction for the Company, and we are excited about what this means for H&P’s future, as it accelerates our international expansion particularly in the Middle East and enhances the Company’s global leadership in onshore drilling solutions,” stated  President and CEO of H&P, John Lindsay.

He indicated that what it means for H&P is the generation of sizeable incremental cash flows and he’s confident “this transaction will deliver near- and long-term growth and value creation for H&P shareholders.”

“Our experience in the industry combined with a Middle East market poised for continued growth should be indicative of the importance and the compelling reasons for executing on this acquisition at this time. Acquiring KCA Deutag gives H&P immediate scale in core Middle East markets in a way that would be challenging to replicate organically,” added Lindsay.

“Furthermore, as there is very little geographic overlap, we view this transaction more than just acquiring assets, but rather acquiring operations with quality people.”

At KCA Deutag, CEO Joseph Elkhoury said the deal is a milestone of the company and means benefits to all stakeholders.

“The size, scale and financial strength of the combined organization will provide a stable foundation for long-term growth and diversification to safeguard a sustainable and prosperous future for our people.”

The acquisition

• Accelerates international growth strategy, significantly increasing Middle East presence: This acquisition provides immediate and significant exposure to land operations in key markets in the Middle East, which generated a large majority (~70%) of KCA Deutag’s calendar year 2023 Operating EBITDA. Through the transaction, H&P will increase its Middle East rig count from 12⁽¹⁾ to 88 rigs, 71 of which are in Saudi Arabia, Oman and Kuwait. Based on award activity to date, the pro forma company would be one of the larger rig providers in the Middle East.

• Enhances scale and diversification: With KCA Deutag, H&P will have a robust geographic and operational mix across the U.S. and international crude oil and natural gas markets and diversified geographical exposure in earnings and cash flow streams. The transaction adds a complementary asset-light offshore management contract business, primarily comprising 29 offshore platform rigs under management, and a manufacturing and engineering business with three facilities serving the energy industry. H&P expects this transaction to grow its international land operations from ~1%⁽²⁾ on a standalone basis to ~19%⁽²⁾ on a pro forma basis based on calendar year 2023 Operating EBITDA. Offshore operations are expected to grow from ~3%⁽²⁾ on a standalone basis to ~7%⁽²⁾ on a pro forma basis based on calendar year 2023 Operating EBITDA.

• Strengthens cash flow and durability: The Middle East rig market is expected to continue to grow in the coming years. With an additional ~$5.5⁽³⁾ billion contract backlog from KCA Deutag, supported by a blue-chip customer base, the Company will have highly resilient revenues and cash flow and increased earnings visibility. On a combined company basis, the last-twelve months (LTM) Operating EBITDA is ~ $1.2 billion.

• Generates attractive returns: The transaction is expected to be immediately accretive to cash flow and free cash flow per share, and increasingly accretive thereafter, with double-digit free cash flow accretion expected as soon as 2025. Transaction returns are expected to exceed cost of capital by 2026.

• Committed to balanced and sustainable financial practices and investor returns: H&P expects to maintain its high-quality investment grade credit rating with debt reduction a capital allocation priority for one to two years post-close. The focus will be on reducing the net-debt-to-Operating EBITDA ratio from 1.7x at close to at or below 1.0x. The Company intends to maintain its current base dividend and intends to pay the fourth and final installment of the fiscal 2024 supplemental dividend as declared on June 5, 2024. Thereafter, the Company does not anticipate providing a supplemental dividend during the near-term deleveraging period. As the Company reduces debt, it will continue to target select investment opportunities with strong return profiles and will consider additional opportunistic returns to shareholders beyond the base dividend through the several years following close.

• Opportunity to realize synergies: Despite little geographic overlap, H&P expects to realize ~$25 million in run-rate synergies by 2026, driven primarily by reduction in overhead and procurement savings. H&P also expects to refinance KCA Deutag’s existing debt, which will enable the Company to reinvest in the acquired business at a lower cost of debt.

Given the Company’s projected cash flow generation and increased visibility with long-term contracts, H&P will be well positioned to quickly reduce debt utilizing pre-payable term loans, newly issued bonds with staggered maturities and strong cash flows. H&P expects to refinance KCA Deutag’s existing debt at a lower cost of capital.

Following the completion of the transaction, H&P will remain headquartered in Tulsa, Oklahoma, and John Lindsay will continue to serve as President and Chief Executive Officer and as a member of the H&P Board of Directors. There will be no changes to the existing H&P Board of Directors.

Upon closing the transaction, H&P expects to have three primary operating segments: North America Solutions, International Solutions, and Offshore Solutions. H&P’s North America Solutions segment will remain unchanged.

Source: PR News Wire