September 28, 2020 7:31 AM

Trinidad Drilling’s debt forces the selling of shares to Ensign

Using a Warren Buffett style of acquisition, Ensign has managed to purchase most of Trinidad Drilling Ltd's shares and is now looking at a full takeover.

/ Published 2 years ago

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As with any business, many companies transform due to its success. And as they succeed with its values, its model of expertise gets noticed. Other companies come and see if they can plug into that model by buying shares. That’s exactly what happened when several companies noticed Trinidad Drilling and liked what they saw. Businesses survive by making money, but businesses become built on a set of values, which then creates an opportunity of stocks to watch.

By its nature, oil and gas drilling remains a high-risk high-cost venture. Nothing unusual in companies buying each other’s shares as they try to get enough capital to sustain or start a new drilling venture. However, despite its best efforts, Trinidad stock remained undervalued, making investors warry.

In an attempt to up the value of the stock, Trinidad began to seek business relationships that would help do that. The company did this by contract drilling globally, resulting in a debt load.

Other companies

Ensign (TSX:ESI) offered a hostile bid back in August. Precision Drilling Corporation followed suit in October with a proposal. Trinidad then made a review of its assets to deal with its undervalued stock and developed a strategic plan in February. Shareholders were exerting pressure, wanting better returns on investment. Trinidad, seeing the inevitable, expressed to shareholders a wish that they chose Precision but instead they swung support to Ensign.

In a classic move, Ensign did a Warren Buffet style of acquisition. It managed to buy most of the shares and began a full takeover of Trinidad Drilling. As it did, it will merge the values of Trinidad into their Ensign business structure if it cannot acquire the rest of the shares.

drilling
Ensign owns 66.73 percent shares of Trinidad and has a controlling interest. (Source)

Shareholders will initially lose money due to the fact Trinidad has to pay Precision a termination fee to the tune of $20,000,000 to walk away. Shareholders will also lose money since Ensign offers the lower end of pricing on the stock. Ensign owns 66.73 percent shares of Trinidad and has a controlling interest.

Because of this, the board of directors at Trinidad resigned. Ensign offered an invitation to Trinidad shareholders to sell their stock to Ensign. Full acquisition depends on how many of Trinidad’s shareholders go for the $1.68 per share offered as in cash. Trinidad was the disruption in the industry because it insisted on value. In another era, the strategy may have worked, but present conditions worked against the path they chose.

Ensign

Ensign remains in a long line of oil companies with similar ideas. The acquisition of Trinidad gives the company additional holdings in Canada and the U.S. Trinidad sold its Saudi Arabia rigs to pay the debt which released them from an obligation to build platforms in West Texas’s Permian Basin. Ensign’s $947 million takeover bid worked and now has a large drilling fleet in USA Rocky Mountains. The company has also developed an innovative technology with its slant rigs. Its ASR 150 called automated services rig gets rid of all manual manipulation of going tubular in the pipe rack, and the engineered solution will make for fast and efficient wells. How much Trinidad had to offer in technology and value will be under the control of Ensign now.

Now one can only conclude that values matter in a business. Brokers and consumers depend on a set of parameters to make deals. Rarely does everything line up in a business financially or even with vendor supply lines. A business relationship of trust develops as issues become encountered then solved. Though the original set of people who created a company may move on due to circumstances, often a portion of the values that created that company stays within. 

The idea, especially in the oil and gas industry, did not fail in Trinidad but circumstances forced a set of decisions to develop. In those decisions, the debt became more than the productivity. Business sums it up in the word “risk”.  Selling stock within a company has a risk that another company will take over the enterprise.

Instead of starting over the idea, the oil field, the process or the technology goes on just with different people. Business gets a model, and the consumer of the commodity get a product or a service. Often someone leaving gets enough money to start another enterprise or make another deal.

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