April 23, 2018
Subsea 7’s attempt to acquire rival contractor McDermott could create a powerful new entity in the global market for subsea umbilicals, risers and flowlines (SURF), giving it a best-in-class market share of 24%, according to research and analysis by Rystad Energy.
UK-based Subsea 7 confirmed today that it submitted an offer last week (April 17, 2018) to acquire the entire issued share capital of US-based rival McDermott, pricing the common stock at USD 7.00 per share. This offer arrives just as McDermott is in the process of completing its proposed merger with Chicago Bridge & Iron.
“The train is about to leave the station. McDermott is the only acquisition target that could make Subsea 7 the market leader in the SURF sector,” says Audun Martinsen, VP of Oilfield Service Research with Rystad Energy. “With this proposed acquisition, Subsea 7 is hoping to strengthen its offshore SURF and engineering capabilities, and it would propel the company beyond TechnipFMC and Saipem to assume the global throne in that segment,” Martinsen adds.
In the SURF market, a merged Subsea7-McDermott would boast a combined market share of 24%, with TechnipFMC following at 20% and Saipem at 15%. In addition to acquiring McDermott’s SURF and engineering business, Subsea 7 would also get the US contractor’s Fabrication & Operations product line, specializing in topside and jacket structures, which is currently busy with the Tyra Redevelopment Project in Denmark.
McDermott has been very successful in the Middle East, securing major frame agreements with Saudi Aramco, and in Asia, winning key contracts with Reliance for the KG-D6 project in India and with Inpex at the Ichthys LNG project in Australia. The Middle East and Asia regions represent more than 90% of McDermott’s upstream revenues. Subsea 7 has had more focus and success in the North Sea, Africa and the Americas, and these regions represent about 85% of its upstream revenues.
“Geographically speaking, Subsea 7 and McDermott are a perfect match,” Martinsen comments. “Subsea 7 does have presence in the Middle East market with its acquisition of Emas Chiyoda’s subsea business, but that region still only represents less than 5% of its business. With the McDermott business, it would grow to 15% for the combined entity.”
A merger between Subsea 7 and McDermott could expect to achieve average annual market growth of 6% from 2017-2020. This is considerably higher than the potential growth of 4% per annum that McDermott and CB&I could achieve through their proposed merger. The rationale behind McDermott’s proposed acquisition of CB&I, announced in December 2017, was to diversify its offshore exposure into the onshore engineering, procurement, construction and installation (EPCI) business, and to create a vertically integrated company.
“Oil prices have climbed considerably since December and, according to our analysis of oil market fundamentals, the offshore service market will see a clear comeback as the world will need more offshore production. Hence we think McDermott’s board of directors now faces a bit of dilemma on how to respond to the takeover bid by Subsea 7,” Martinsen concludes.
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