Transocean Sedco Forex Inc.

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Transocean Sedco Forex Inc.

4 Greenway Plaza
Houston, Texas
Telephone: (713) 232-7500
Fax: (713) 232-7027
Web site:

Public Company
1953 as The Offshore Company
Employees: 15,600
Sales: $1.22 billion (2000)
Stock Exchanges: New York
Ticker Symbol: RIG
NAIC: 21311 Drilling Oil and Gas Wells

Transocean Sedco Forex Inc. is the worlds largest offshore drilling company and the fourth largest oilfield service company overall. Officially a Cayman Islands corporation, it operates out of Houston, Texas, with more than 16,000 employees located around the globe. Transoceans drilling rigs and work crews are contracted by petroleum companies at a day rate, over the course of long-term and short-term contracts. Although the company offers inland drilling barges and shallow water drilling rigs, Transocean is especially active in the deepwater and harsh environment drilling segment, offering semisubmersible rigs as well as massive drillships that have drilled to record depths in the range of 10,000 feet. Transoceans mobile rigs cover all of the worlds major offshore drilling markets, including the Gulf of Mexico, the North Sea, Mediterranean Sea, and the waters off eastern Canada, Brazil, West and South Africa, the Middle East, Asia, and India.

Corporate Lineage Dating Back to 1953

Transocean is composed of a number of drilling operations that were merged, especially during the late 1990s when the offshore drilling industry as a whole began to consolidate. The surviving corporate structure belongs to The Offshore Company, incorporated in Delaware in 1953. It was created when the pipeline company Southern Natural Gas Co. (SNG) purchased DeLong-McDermott, which was a contract drilling joint venture of DeLong Engineering and J. Ray McDermotts marine construction business. A year later, Offshore established the first jackup drilling rig in the Gulf of Mexico. Oil and gas exploration then began to move farther offshore and to more remote areas of the world. Offshore was also one of the earliest companies in the 1960s to operate jackups in the inhospitable environment of the North Sea, which would develop into one of the worlds most significant sources of oil. In 1967 Offshore went public. Ten years later it expanded its range of operations to southeast Asia, where it drilled its first deepwater well. In 1978, the company became a wholly owned subsidiary of SNG, which had greatly increased its emphasis on offshore drilling and exploration operations. As a result, Offshore developed one of the largest U.S. fleets of drilling rigs. When SNG changed its name to Sonat in 1982, The Offshore Company became known as Sonat Offshore Drilling Inc.

During the 1970s new floaters were developed to accomplish deepwater drilling. Semisubmersible rigs were partially submerged below water and usually moored to the ocean floor for stability. Drill ships, able to reach depths of 3,000 feet and particularly useful in exploring remote areas, were also introduced as a cost-effective option during this period. By the late 1970s a large number of companies began to build and operate floaters, leading to a highly fragmented industry. When oil prices reached $32 a barrel in 1981, a drilling boom ensued, with oilfield service companies purchasing a great deal of equipment and saddling themselves with considerable debt. As the price of oil plunged in the mid-1980s, reaching a level below $10 by 1986, oil companies canceled drilling programs or negotiated much lower day rates for offshore rigs. A 300-foot jackup in the Gulf of Mexico that once commanded $50,000 a day now rented for less than $10,000. Many service companies went bankrupt or were swallowed up by stronger rivals. During this decade-long lean period, offshore drilling rigs in operation declined precipitously, from more than 1,000 in the early 1980s to around 500.

When oil and gas prices appeared to be rising, Sonat took advantage of investor optimism in 1993 to spin off Sonat Offshore, making $340 million while retaining a 40 percent interest, which would then be sold off in 1995. In this way the parent company hoped to transform itself from a diversified pipeline company into an exploration and production company. The newly independent Sonat Offshore, as a result of the offering, had a clean balance sheet and money in the bank, and was well positioned to weather an ensuing decline in gas prices. Moreover, the companys emphasis on deepwater oil drilling also would prove to be a wise strategy. It was recognized that the most desirable energy plays that remained in the world resided under great depths of ocean. Although the technology existed to tap these deposits, only until oil prices reached a certain level would it become economical for a company like Sonat Offshore to invest in a new generation of drill ships. The cost of such rigs was so high that only large companies were able to afford them.

Consolidation Among Offshore Drilling Contractors in the 1990s

There were other reasons why consolidation among offshore drilling contractors became desirable in the mid-1990s. It would likely bring pricing discipline to a highly fragmented industry, in which the top three companies served just 27 percent of the market. In 1995 there were around 400 jackup rigs owned by as many as 80 companies, creating a supply/demand imbalance that gave oil producers tremendous leverage over contractors. A small drop in the price of gas or oil could result in a major decrease in day rates. Clearly, companies could not expect to achieve long-term health by simply building more rigs to expand their business. Growth had to come by acquiring existing rigs, to gain some leverage with producers. With fewer but larger contractors in the industry, the addition of new rigs would hopefully become more of a rational and systematic process. In addition, larger players could operate more efficiently around the world, with rigs strategically positioned to save on moving charges while building a more diversified customer base.

In 1995 Sonat Offshore announced its proposal to acquire Reading & Bates Corp., which began offshore drilling operations in 1955. Although discussions continued over the next several months, in the end Reading & Bates rejected a $501 million cash and stock offer. In May 1996 Sonat Offshore announced a $1.5 billion stock and cash deal to acquire Norways Transocean ASA, which a few months earlier announced that it was looking for a partner. Transocean ASA had been created in the mid-1970s when a Norwegian whaling company entered the semisubmersible business, then later consolidated with a number of other companies. Because of its large North Sea operations, Transocean ASA was considered a prize catch, one that would automatically make the buyer into the unquestioned leader in deepwater drilling. Reading & Bates attempted to outflank Sonat Offshore, venturing an unsolicited bid for Transocean ASA, which because of Norway law did not have any of the American takeover defenses at its disposal, such as poison pill provisions. After a month-long skirmish, Sonat Offshore sweetened its bid and agreed to retain much of Transoceans management team, the fate of which was uncertain under the Reading & Bates offer. The deal became effective in September 1996, and Sonat Offshore changed its name to Transocean Offshore.

Rising oil prices, in the meantime, benefited offshore drilling contractors. Day rates by December 1996 doubled over the previous year, topping $130,000 a day. The chairman of Transocean Offshore, J. Michael Talbot, concluded that the trend could continue for as long as 20 years and made a commitment to expand on the companys fleet. With long-term contracts with oil companies in hand, Transocean Offshore began the development of a new generation of massive drill ships, featuring the latest in technological advances, and designed to drill to 10,000 feet, as opposed to the 3,000-foot capacity of the drill ships built in the mid-1970s. The first ship, the Discoverer Enterprise, would be 834 feet in length with a derrick that stood 226 feet high. It could sleep 200 and carry 125,000 barrels of oil and gas. Because it featured two drilling systems in one derrick, the ship could reduce the time to drill a development well by up to 40 percent and could drill and lay pipeline without the need of a pipelay barge. With its increased productivity the ship could command much higher day rates, in the neighborhood of $200,000. Moreover, the Enterprise would essentially serve as a floating research and development project for two additional high-tech ships. Due to some setbacks partly caused by accident and weather, it would be more than a year late in becoming serviceable and see its price tag grow from $270 million to more than $430 million.

In April 1999 Transocean Offshore was approached by Schlumberger Ltd., which proposed spinning off its offshore drilling operations, Sedco Forex Limited, as part of a merger of equals. Paris-based Schlumberger had been involved in offshore drilling for many years. The Forex company was created in France in 1942 to engage in land drilling in North Africa and the Middle East, as well as France. Forex teamed with Languedocienne to create a company called Neptune to engage in offshore drilling. Forex had gained complete control of Neptune by 1972, when Schlumberger bought the remaining interest in Forex. The Southeastern Drilling Company, Sedco, was an American firm, founded in 1947 by future Texas governor Bill Clements to drill in shallow marsh water. In the 1960s it began to provide drilling services in deeper water. Schlumberger acquired the company in 1984 and a year later combined it with Forex to create Sedco Forex Drilling.

Company Perspectives:

Our mission is to be the premier offshore drilling company providing worldwide rig-based, well-construction services to our customers through the integration of motivated people, quality equipment and innovative technology, with a particular focus on technically demanding environments.

Merger of Transocean and Sedco Forex in 1999

The proposed Transocean Offshore and Sedco Forex merger was announced in July 1999. It called for an exchange of stock valued at approximately $3.2 billion. Schlumberger shareholders would receive roughly one share in the new company, Transocean Sedco Forex, for every five Schlumberger shares held. In the end, Schlumberger shareholders would control approximately 52 percent of the new company. Both Schlumberger and Transocean would receive five seats on the board, while Schlumbergers vice-chairman would serve as the chairman of the company and Transoceans Talbert would become president and CEO. With a market capitalization of more than $9 billion by mid-March 2000, Transocean Sedco Forex was an independent powerhouse among offshore drilling contractors and the fourth largest oilfield service company. Its fleet included 46 semisubmersibles and seven deepwater drill ships, with others under construction. It was widely expected that the deal would create added pressure on other contractors to merge, as much needed consolidation in the industry continued to gain momentum.

Transocean Sedco Forex was added to the Standard & Poors 500 Index on the first day of trading on the New York Stock Exchange in 2000. It enjoyed an immediate boost in price, caused in large part by money managers adding the stock to their funds that mirrored the S&P 500. The company soon was involved in yet another major expansion, acquiring R&B Falcon for more than $9 billion in an all-stock transaction, which included the assumption of $3 billion in debt. After failing to beat out Sonat Offshore in the Transocean ASA acquisition, Reading & Bates had merged with Falcon Drilling Co. in 1997, then acquired Cliffs Drilling in 1998. The companys fortunes suffered a downturn in 1998 and although it had made strides in redressing its situation, its debt load remained high and management decided that the time was ripe to merge with Transocean Sedco Forex. Under terms of the deal R&B Falcon owned approximately 30 percent of the new company and received three new seats on the board of directors.

Transocean Sedco Forex was now a company worth approximately $14 billion and was the third largest oilfield services company, eclipsed only by Halliburton and Schlumberger. With 165 offshore rigs, inland barges, and supporting assets, the combined company easily outpaced its closest rival, Pride International, with just 59 offshore rigs, of which 45 were shallow-water jackups. Moreover, Transocean provided almost half of the worlds ultra-deep drilling ships. In effect, Transocean Sedco Forex was able to expand its global fleet with the most extensive range of offshore rigs and markets, while gaining a presence in the shallow and inland waters of the Gulf of Mexico, where it previously had no fleet. Because of high gas prices R&B Falcons 27 jackups in the Gulf and more than 30 inland barges promised to be an attractive addition. Overall, there was very little overlap in rigs. Nevertheless, Transocean Sedco Forex estimated that it would still be able to realize about $50 million in annual savings in purchasing, overhead, and insurance. Because the company had changed its origin of incorporation to the Cayman Islands in late 1999, it was not allowed by law to operate vessels in U.S. waters. The company complied with the law by becoming a 25 percent joint venture partner in the former R&B Falcon transportation business, which consisted of 102 inland and offshore tugboats, four crew boats, and 58 inland and offshore flat deck cargo barges and inland shale barges.

Clearly, Transocean Sedco Forex had taken the lead in the consolidation of offshore drilling contractors. Everyone agreed on the need for consolidation, but with so many operators of similar size it was difficult for executives to sort out who was to be the acquirer and who was to be acquired. In 2001 a number of contractors merged, but no one came close to rivaling Transocean Sedco Forex in size, especially in the deepwater and harsh environment offshore drilling markets. Although managements first priority was to pay down debt, there was every reason to believe that the company would continue to snap up desirable firms in an effort to grow even larger.

Principal Subsidiaries

Transocean Offshore Deepwater Drilling Inc.; Sonat Offshore International LDC; Transocean Offshore Europe Limited; Transocean AS.

Principal Competitors

Diamond Offshore Drilling, Inc.; Global Marine Inc.; Noble Drilling; Saipem.

Key Dates:

Forex is founded in France.
Southeastern Drilling Company is founded.
The Offshore Company is incorporated.
The Offshore Company goes public.
The Offshore Company becomes a wholly owned subsidiary of Sonat Inc., formerly Southern Natural Gas Co. (SNG).
Sonat Offshore is spun off.
Sonat Offshore acquires Transocean ASA to become Transocean Offshore.
Transocean Offshore merges with Sedco Forex Drilling to become Transocean Sedco Forex Inc.
R&B Falcon is acquired.

Further Reading

Antosh, Nelson, Sonat, Norwegian Firm Strike Deal, Houston Chronicle, May 3, 1996, p. 1.

Byrnes, Nanette, Seven Come Eleven, Financial World, March 15, 1994, p. 36.

DeLuca, Marshall, and William Furlow, Driller Consolidation Begins, But Will It Continue?, Offshore, August 1999, p. 56.

Harrison, Joan, Transocean Rounds Out Its Service Offerings with R&B Falcon Deal, Mergers and Acquisitions, October 2000, p. 22.

Mack, Toni, Learning from Experience, Forbes, December 2, 1996, pp. 102-08.

Opdyke, Jeff D., Mergers Could Improve Prospects Among Stocks of Offshore Drillers, Wall Street Journal, March 15, 1995, p. T2.

Sonat Offshore Drilling Inc., Oil & Gas Investor, March 1996, p. 30.

Tejada, Carloa, Schlumbergers Sedco and Transocean to Merge, Wall Street Journal, July 13, 1999, p. A3.

Wetuski, Jodi, Two Down . . . , Oil & Gas Investor, October 2000, pp. 59-60.

Ed Dinger