By Claire Poole
(Sept. 4) – Texas lawyers toiled over the Labor Day weekend, as two oil and gas-related deals worth more than $4.5 billion were announced Tuesday.
Transocean Ltd. said it agreed to purchase Ocean Rig UDW for $2.7 billion, continuing the consolidation of the offshore drilling business. And Southwestern Energy Co. plans to sell its Fayetteville Shale exploration and production and midstream assets to Kayne Anderson-backed Flywheel Energy for $1.865 billion, signifying Southwestern’s exit from the basin.
In the first deal, King & Spalding was Transocean’s U.S. legal advisor. Most of the attorneys were in the Atlanta office but partner Martin Hunt, who offices in Houston and London, worked on cross-border issues. Houston partners Dan Rogers and Pete Hays also had material roles.
Transocean general counsel Brady Long said he and senior associate general counsel Daniel Ro-Trock and deputy general counsel Dave Faure led the deal.
Long has worked for Transocean for almost three years. He previously was general counsel of Ensco plc and Pride International, which Ensco acquired. Early in his legal career, the University of Texas-educated lawyer was an attorney at BJ Services and an associate at Bracewell.
Seward & Kissel in New York was Ocean Rig’s U.S. legal advisor. Orrick represented an affiliated entity with attorneys in its New York office.
The financial advisors were Citi for Transocean, including Steve Trauber, Serge Tismen and Jason Howard, and Credit Suisse for Ocean Rig, including Jens Becker, Ryan Tull, Greg Weinberger, Yan Zhong and Theo Konstantatos.
On the Southwestern deal, Vinson & Elkins counseled FlyWheel with a team led by partner Bryan Loocke and senior associate Danielle Patterson along with associates Erin Mitchell and Ben Glass. Partner Mike Telle, senior associate Matthew Falcone and associates Mike Marek and Nettie Downs advised on the corporate equity line.
Other Texas lawyers on the team were counsel Suzanne Clevenger and associate Lauren Miller on energy regulatory; partner Larry Nettles (environmental); partner Stephen Jacobson and associate Austin Light (executive compensation/benefits); partner Sean Becker (labor/employment); and partner Todd Way, senior associate Julia Pashin and associate Christine Mainguy (tax).
The acquisition financing team was led by partner Guy Gribov with help from associates Jason Blackmer and Erin Webb.
Latham & Watkins represented Southwestern, including partners Jeff Muñoz and associates Chris Bennett, Bo Rose, Cassy Romano and Johnny Ellis.
L&W partner Tim Fenn and associate Jim Cole counseled on tax matters and partner Catherine Ozdogan on finance. The firm’s team on a conditional tender offer for up to $900 million of its senior notes was led by partners John Greer and Ryan Maierson, along with associates Monica White and Felicia Alexander. Two attorneys from the firm’s Los Angeles office pitched in on benefits and compensation matters.
Southwestern general counsel John Ale said he worked on the deal in-house along with associate general counsel Billy Dixon and Chris Lacy.
Ale joined Southwestern five years ago after previously serving as general counsel at Occidental Petroleum Corp. Before that he practiced at Skadden Arps Slate Meagher & Flom and V&E. The University of Virginia-trained lawyer also clerked for Chief Justice Warren E. Burger of the U.S. Supreme Court and Judge Edward Tamm of the U.S. Court of Appeals for the D.C. Circuit.
J.P. Morgan was Southwestern’s financial advisor, including Mark Deverka. Houlihan Lokey Capital Inc. also provided evaluation services to the company’s board, including: Rob Teigman, Chris Croft, Kirk Tholen and Jerry Eumont.
The deal for the Southwestern assets also includes $438 million worth of contractual liabilities. The parties expect the transaction to close in December.
The assets include 915,000 net acres, 4,033 operated producing wells, 3.7 trillion cubic feet of proved reserves as of the end of last year and expected production next year of 225 billion to 230 billion cubic feet and associated midstream gathering infrastructure and compression. The deal also includes natural gas hedge positions.
Southwestern said the strategic and transformative action repositions it to deliver greater value from its higher-return Appalachian natural gas properties in West Virginia, which also produce oil.
“Our shareholders will benefit from an optimized portfolio, stronger balance sheet, including improved financial flexibility, and the return of capital to all shareholders through a share repurchase program,” Southwestern CEO and president Bill Way said in a statement.
Southwestern also announced a share buyback of up to $200 million and the allocation of up to $600 million over the next two years to supplement cash flow to further develop its Appalachia assets and accelerate its path to self-funding.
The company expects to have $2.3 billion in debt when the deal closes and a $2 billion revolver. It’s targeting a long-term sustainable debt/EBITDA ratio of 2 times by 2020.
As a result of the transaction, Southwestern said it expects additional annualized interest and organizational cost reductions of $60 million to $75 million. Southwestern anticipates offsetting federal taxes using existing net operating losses.
In the Transocean-Ocean Rig deal, Transocean will swap 1.6128 of newly issued shares of its stock plus $12.75 in cash for each share of Ocean Rig. That implies a value of $32.28 per Ocean Rig share, a 20.4 premium over Ocean Rig’s 10-day volume weighted average share price.
Transocean intends to fund the cash portion of the transaction with cash on hand and financing provided by Citi.
Transocean shareholders will end up with 79 percent of the combination while Ocean Rig will hold 21 percent.
Transocean said the Ocean Rig purchase positions it as the leader in ultra-deepwater and harsh environment drilling, adding nine high-specification ultra-deepwater drillships, two harsh environment semisubmersibles and two high-specification ultra-deepwater drillships under construction.
The buyer will end up with 57 floaters, with 17 of the top 50 and 31 of the top 100 ultra-deepwater drillships in the industry. Transocean said its contract backlog will balloon by $743 millon to an industry-leading $12.5 billion with an average dayrate of $413,000.
Transocean expects the deal to result in annual cost synergies of $70 million. It hopes to close the transaction in the first quarter if it clears shareholders from both companies and regulators.
Transocean CEO and president Jeremy Thigpen said in a statement that the proposed acquisition gives the company the opportunity to continue enhancing its fleet of ultra-deepwater and harsh environment floaters – including in Brazil, West Africa and Norway –without compromising its liquidity or balance sheet flexibility.
“The combination of constructive and stable oil prices over the last several quarters, stream-lined offshore project costs and undeniable reserve replacement challenges has driven a material increase in offshore contracting activity,” he said.
Ocean Rig CEO and president Pankaj Khanna said the combination of Ocean Rig and Transocean creates a world-class fleet well positioned for the market recovery while reducing fragmentation that exists in offshore drilling.
Analysts at Tudor, Pickering, Holt liked the deal, saying it was the right strategic move at a cycle trough and high-grades Transocean’s rig fleet at the relatively attractive price of $300 million per floater.
Simmons & Co. analyst Ian MacPherson said the deal is much more speculative than Transocean’s previous Songa acquisition due to the highly uncontracted and stacked complexion of Ocean Rig’s fleet. “But it’s in keeping with the buyer’s more overtly bullish commentary on the looming recovery prospects for the space,” he said.