Citi: Merger between Transocean and Seadrill is highly likely to create the largest offshore drilling operator

According to the financial news app Zhitong Finance, Seadrill (SDRL.US), an offshore drilling company, is reportedly in merger negotiations with its larger counterpart Transocean (RIG.US). Citigroup analysts believe that the likelihood of this transaction taking place is quite high. Transocean currently owns 24 active deepwater drilling rigs, while Seadrill owns 11 active deepwater drilling rigs. The merger of the two companies is expected to create the largest offshore operator.

During the previous economic cycle, Transocean was the only public offshore drilling platform company that did not go bankrupt, but it carried a large amount of legacy debt. Citigroup analysts believe that a merger would be a deleveraging event for Transocean and the combined company may have a more robust financial foundation.

Citigroup believes that Transocean needs to utilize its premium valuation to acquire cash flows and accelerate its deleveraging process. Seadrill seems to be a good choice as its modern deepwater drilling rig portfolio complements Transocean's, and the scale is large enough to potentially reduce RIG's leverage by nearly 30% by 2025. Citigroup stated that although current day rates are reasonable, concerns about next year's oil prices indicate that now may be a good time to strike a deal.

Citigroup mentioned that if the merger is ultimately realized, Seadrill's stock price is expected to reach around $55, while Transocean's stock price will continue to rise