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Helmerich & Payne (HP) to Buy KCA Deutag for $1.97B in Cash
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Helmerich & Payne, Inc. (HP - Free Report) , a leading provider of drilling solutions, recently announced that it has entered into an agreement to acquire KCA Deutag International Limited ("KCA Deutag") for $1.9725 billion in cash. KCA Deutag is a global drilling company with a strong presence in the Middle East, South America, Europe and Africa. The company also operates offshore management contracts in the North Sea, Angola, Azerbaijan and Canada.
The acquisition is expected to significantly increase HP's presence in the Middle East, where KCA Deutag generated approximately two-thirds of its 2023 operating EBITDA. Additionally, KCA Deutag's Kenera segment, including Bentec, focuses on manufacturing and engineering for the energy sector, representing a long-term growth opportunity.
With this collaboration, the company will have a larger rig count in the region and become one of the largest rig providers in the Middle East. This strategic acquisition marks a significant landmark for HP, positioning the company for enhanced growth and diversification on a global scale.
Transaction Details
HP’s board of directors has approved the acquisition, which is expected to close before the end of 2024, subject to customary closing conditions and regulatory approvals. The transaction will be funded with cash on hand and new borrowings. HP's strong projected cash flow and long-term contracts position the company to quickly reduce debt through pre-payable term loans and newly issued bonds with staggered maturities.
Strategic and Financial Benefits of the Acquisition
Accelerating Growth Strategy: The acquisition of KCA Deutag significantly accelerates HP's international growth strategy, especially in the Middle East. This region, which generated around 70% of KCA Deutag's 2023 Operating EBITDA, will see HP's rig count increase from 12 to 88 rigs, with 71 rigs in key markets like Saudi Arabia, Oman and Kuwait. This expansion positions HP as one of the larger rig providers in the Middle East.
Enhancing Scale and Diversification: Integrating KCA Deutag will enhance HP's scale and diversification across the United States and international crude oil and natural gas markets. This acquisition introduces a complementary asset-light offshore management contract business, including 29 offshore platform rigs under management and a manufacturing and engineering business with three facilities serving the energy industry. This transaction is expected to boost HP's international land operations from 1% to 19% and offshore operations from 3% to 7% based on the 2023 Operating EBITDA of KCA Deutag.
Strengthening Cash Flow and Durability: With a projected $5.5 billion contract backlog from KCA Deutag and a robust customer base, HP anticipates resilient revenues, strong cash flow and increased earnings visibility. On a combined basis, the last 12 months’ Operating EBITDA is estimated to be $1.2 billion. This acquisition enhances HP's financial strength and stability, crucial for navigating market fluctuations.
Generating Attractive Returns: The transaction is expected to be immediately accretive to cash flow and free cash flow per share, with double-digit free cash flow growth anticipated by 2025. HP projects that the returns from this acquisition will exceed the cost of capital by 2026, highlighting the financial attractiveness of the deal.
Maintaining Financial Discipline and Investor Returns: HP is committed to maintaining a high-quality investment-grade credit rating post-acquisition. The company plans to prioritize debt reduction, aiming to lower the net-debt-to-operating EBITDA ratio from 1.7x to close to 1x or below within one to two years post-close. HP intends to continue paying its base dividend and will not provide a supplemental dividend during the deleveraging period. As debt decreases, the company will explore investment opportunities with strong return profiles and consider additional shareholder returns beyond the base dividend.
Realizing Synergies: Despite minimal geographic overlap, HP expects to achieve $25 million in run-rate synergies by 2026, primarily through overhead reduction and procurement savings. The company also plans to refinance KCA Deutag's existing debt, enabling reinvestment at a lower cost of capital.
Post-Close Operations
Following the acquisition, HP will continue to be headquartered in Tulsa, Oklahoma, with John Lindsay serving as president and CEO. The company will have three primary operating segments, including North America Solutions, International Solutions and Offshore Solutions, with the North America Solutions segment remaining unchanged.
Leadership Statements
Lindsay highlighted the company's customer-centric approach and focus on safety, welcoming KCA Deutag's employees to the H&P family. The acquisition aims to enhance the company's performance and value to its customers globally. Lindsay also emphasized that the acquisition is transformative for the company, accelerating international expansion, especially in the Middle East and enhancing global leadership in onshore drilling solutions. KCA Deutag’s assets and operations will add resilient revenues and greater earnings visibility. This transaction is expected to deliver long-term growth and value for HP’s shareholders.
Joseph Elkhoury, CEO of KCA Deutag, noted the strategic benefits for all stakeholders and highlighted the alignment of the two companies' customer-centric cultures focused on safety and quality services. The combined organizations’ size and strength will provide a stable foundation for long-term growth and diversification, benefiting employees, customers and investors.
Conclusion
Helmerich & Payne's acquisition of KCA Deutag marks a key moment in the company's strategic expansion. By significantly increasing its presence in the Middle East and diversifying the company’s operational portfolio, HP is positioning itself as a global leader in the drilling services industry.
The transaction's anticipated financial benefits, including increased cash flow and returns to its shareholder, highlight its strategic importance. As the company integrates KCA Deutag's operations and leverages the combined strengths of both organizations, the future looks promising for HP.
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SUN’s extensive distribution network across 40 states provides a robust and reliable source of income and the Brownsville terminal expansion should add to its revenue diversification.
Denver, CO-based SM Energyis valued at $5.12 billion. The company currently pays a dividend of 72 cents per share, or 1.62%, on an annual basis.
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Helmerich & Payne (HP) to Buy KCA Deutag for $1.97B in Cash
Helmerich & Payne, Inc. (HP - Free Report) , a leading provider of drilling solutions, recently announced that it has entered into an agreement to acquire KCA Deutag International Limited ("KCA Deutag") for $1.9725 billion in cash. KCA Deutag is a global drilling company with a strong presence in the Middle East, South America, Europe and Africa. The company also operates offshore management contracts in the North Sea, Angola, Azerbaijan and Canada.
The acquisition is expected to significantly increase HP's presence in the Middle East, where KCA Deutag generated approximately two-thirds of its 2023 operating EBITDA. Additionally, KCA Deutag's Kenera segment, including Bentec, focuses on manufacturing and engineering for the energy sector, representing a long-term growth opportunity.
With this collaboration, the company will have a larger rig count in the region and become one of the largest rig providers in the Middle East. This strategic acquisition marks a significant landmark for HP, positioning the company for enhanced growth and diversification on a global scale.
Transaction Details
HP’s board of directors has approved the acquisition, which is expected to close before the end of 2024, subject to customary closing conditions and regulatory approvals. The transaction will be funded with cash on hand and new borrowings. HP's strong projected cash flow and long-term contracts position the company to quickly reduce debt through pre-payable term loans and newly issued bonds with staggered maturities.
Strategic and Financial Benefits of the Acquisition
Accelerating Growth Strategy: The acquisition of KCA Deutag significantly accelerates HP's international growth strategy, especially in the Middle East. This region, which generated around 70% of KCA Deutag's 2023 Operating EBITDA, will see HP's rig count increase from 12 to 88 rigs, with 71 rigs in key markets like Saudi Arabia, Oman and Kuwait. This expansion positions HP as one of the larger rig providers in the Middle East.
Enhancing Scale and Diversification: Integrating KCA Deutag will enhance HP's scale and diversification across the United States and international crude oil and natural gas markets. This acquisition introduces a complementary asset-light offshore management contract business, including 29 offshore platform rigs under management and a manufacturing and engineering business with three facilities serving the energy industry. This transaction is expected to boost HP's international land operations from 1% to 19% and offshore operations from 3% to 7% based on the 2023 Operating EBITDA of KCA Deutag.
Strengthening Cash Flow and Durability: With a projected $5.5 billion contract backlog from KCA Deutag and a robust customer base, HP anticipates resilient revenues, strong cash flow and increased earnings visibility. On a combined basis, the last 12 months’ Operating EBITDA is estimated to be $1.2 billion. This acquisition enhances HP's financial strength and stability, crucial for navigating market fluctuations.
Generating Attractive Returns: The transaction is expected to be immediately accretive to cash flow and free cash flow per share, with double-digit free cash flow growth anticipated by 2025. HP projects that the returns from this acquisition will exceed the cost of capital by 2026, highlighting the financial attractiveness of the deal.
Maintaining Financial Discipline and Investor Returns: HP is committed to maintaining a high-quality investment-grade credit rating post-acquisition. The company plans to prioritize debt reduction, aiming to lower the net-debt-to-operating EBITDA ratio from 1.7x to close to 1x or below within one to two years post-close. HP intends to continue paying its base dividend and will not provide a supplemental dividend during the deleveraging period. As debt decreases, the company will explore investment opportunities with strong return profiles and consider additional shareholder returns beyond the base dividend.
Realizing Synergies: Despite minimal geographic overlap, HP expects to achieve $25 million in run-rate synergies by 2026, primarily through overhead reduction and procurement savings. The company also plans to refinance KCA Deutag's existing debt, enabling reinvestment at a lower cost of capital.
Post-Close Operations
Following the acquisition, HP will continue to be headquartered in Tulsa, Oklahoma, with John Lindsay serving as president and CEO. The company will have three primary operating segments, including North America Solutions, International Solutions and Offshore Solutions, with the North America Solutions segment remaining unchanged.
Leadership Statements
Lindsay highlighted the company's customer-centric approach and focus on safety, welcoming KCA Deutag's employees to the H&P family. The acquisition aims to enhance the company's performance and value to its customers globally. Lindsay also emphasized that the acquisition is transformative for the company, accelerating international expansion, especially in the Middle East and enhancing global leadership in onshore drilling solutions. KCA Deutag’s assets and operations will add resilient revenues and greater earnings visibility. This transaction is expected to deliver long-term growth and value for HP’s shareholders.
Joseph Elkhoury, CEO of KCA Deutag, noted the strategic benefits for all stakeholders and highlighted the alignment of the two companies' customer-centric cultures focused on safety and quality services. The combined organizations’ size and strength will provide a stable foundation for long-term growth and diversification, benefiting employees, customers and investors.
Conclusion
Helmerich & Payne's acquisition of KCA Deutag marks a key moment in the company's strategic expansion. By significantly increasing its presence in the Middle East and diversifying the company’s operational portfolio, HP is positioning itself as a global leader in the drilling services industry.
The transaction's anticipated financial benefits, including increased cash flow and returns to its shareholder, highlight its strategic importance. As the company integrates KCA Deutag's operations and leverages the combined strengths of both organizations, the future looks promising for HP.
Zacks Rank and Key Picks
Currently, HP carries a Zacks Rank #4 (Sell).
Investors interested in the energy sector might look at some better-ranked stocks like Sunoco LP (SUN - Free Report) and SM Energy Company (SM - Free Report) , each sporting a Zacks Rank #1 (Strong Buy) and Energy Transfer (ET - Free Report) , carrying a Zacks Rank #2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Sunoco is valued at $5.56 billion. It is a major wholesale motor fuel distributor in the United States, distributing more than 10 fuel brands through long-term contracts with 10,000 plus convenience stores, ensuring consistent cash flow.
SUN’s extensive distribution network across 40 states provides a robust and reliable source of income and the Brownsville terminal expansion should add to its revenue diversification.
Denver, CO-based SM Energyis valued at $5.12 billion. The company currently pays a dividend of 72 cents per share, or 1.62%, on an annual basis.
SM, an independent energy company, engages in the acquisition, exploration, development and production of oil, gas and natural gas liquids in the state of Texas.
Energy Transfer is valued at $54.53 billion. ET recently completed the previously announced acquisition of WTG Midstream Holdings LLC.
This acquisition expanded ET’s presence in the Midland Basin as it added 6,000 miles of complementary gas-gathering pipelines in the region. The company expects the WTG assets to add 4 cents of Distributable Cash Flow per common unit in 2025, increasing to around 7 cents per common unit in 2027.