KCA Deutag - comment

KCA Deutag is rumoured to be in exclusive talks with Saipem over their onshore drilling activities. Saipem has 66 rigs (compared to KCA Deutag’s 76), which generate c. $2.6m EBITDA per operable rig, in line with KCA’s metrics. There are some geographical synergies, but Sapiem has 30 rigs in South America, a region where KCA Deutag have none.

The purchase price of c. $500m seems a little high but the low utilisation rate of 47% indicates there is some upside. However, more importantly, we struggle to see how KCA Deutag would finance any purchase given the lack of headroom for additional borrowings at KCA Deutag. There is a 2.5x Incurrence Test on the restructured bonds and with a diverse shareholder base, there is a low probability of new equity being provided.

We are working on a larger note on KCA Deutag, both in terms of a potential acquisition and concerning their Russian exposure, but our initial view is KCA Deutag could acquire Saipem’s non-South American rigs (36 in total) within the covenants of their existing bonds. This might be the most likely outcome.