Abbot in move to capture mobile rig firm for pounds-247m DEAL OF THE

0 Comments | Sunday Herald, The, Apr 30, 2006 | by Julia Fields Senior Business Writer

THE pounds-247 million purchase of a Norwegian firm should allow Scottish drilling specialist Abbot Group to cash in on the increasing demand for mobile oil rigs to exploit hard-to-access reserves.

Abbot Group last week agreed to offer the cash to buy Songa Drilling, which owns three so-called jack rigs, which are currently being refurbished.

The Aberdeen-based company's offer is subject to shareholder approval.

According to its management, the deal will "significantly increase turnover and ebitda [earnings before interest, tax, depreciation and amortisation]".

Mike Salter, chief operating officer of Abbot, said it was also finalising a contract with the Houston-based independent Escopeta Oil, which would see one rig working off Alaska. A letter of award, subject to certain conditions, had also been received for the use of a second jack rig, details of which will be revealed next month.

Abbot currently owns 51 land rigs in mainland Europe, the Middle East and North and West Africa and it also provides offshore platform drilling services in the North Sea and elsewhere around the world. But the Songa acquisition allows the group to take advantage of escalating day rates for jack rigs.

These mobile units are towed to the drilling site, where three or four legs are then lowered until they rest on the sea bed. They are typically used for drilling in shallower waters and can be reused.

The equipment is currently in hot demand as companies scramble to keep up with a surge in exploration and drilling activity, prompted by record oil prices and a need to increase oil and gas reserves. In the Gulf of Mexico, a 250ft rig that fetched day rates of dollars- 50,000 a year ago is now pulling in as much as dollars-130,000 a day.

According to Abbot executive chairman Alasdair Locke, Songa's three jack rigs should generate net cash of dollars-310,000 (pounds- 173,000) to dollars-320,000 a day. It is expected Abbot will secure one-year to four-year-long contracts for the Songa equipment.

Songa was formed last year by Norwegian investors including shipping magnate Arne Blystad. The company did not initially have any contracts and has invested considerable capital in having the three jack rigs, which date from the 1980s, refurbished. As part of the deal, Abbot will assume Songa's net debts of around pounds-76m on completion.

Salter said that the pounds-247m price tag was a fair price for Songa and that the rigs once upgraded would be "like brand new".

Two rigs should be ready to use by the early summer and the third by the autumn. Salter said that buying the equipment second-hand would give it a headstart against other oil services companies, which were still waiting for new equipment to be built.

"The rigs being built now will not be available until 2007. If you were to put an order in now, it wouldn't be available until at least 2008. We specifically targeted these assets because they are being used for development drilling, which is our forte, " said Salter.

Phil Corbett, an analyst at Numis Securities, welcomed the deal but said its merits would be judged in the long term by what happens with rig rates. He pointed out that rig operators were trying to increase capacity, which could bring more rigs to the market in three to four years' time.

The stock market, however, responded well to the news. Abbot's share price closed up 17p, or 5-per cent, at 340p on the day of the announcement.

Abbot has agreed a pounds-533m facility from lenders including the Royal Bank of Scotland and HBOS, part of which will be used to pay for the Songa acquisition. But Abbot has also offered Songa shareholders the alternative of receiving up to 75-per cent of their consideration in new Abbot shares. This option has already been taken by 62.1-per cent of stockholders.

That should leave Abbot with considerable capital to make more purchases.

Salter said that the company would like to make further investments to bolster its land rig fleet. "This is likely to be through new builds, " he said. "The opportunity to buy second-hand has virtually disappeared."