Drilling M&A Heads into Overdrive

Montreal, Canada

The bull market in oil services is accelerating. As oil exploration budgets surge to fresh records this year to more than $500 billion dollars, according to Barclays Capital, the drillers are looking to expand production. That’s especially the case with deepwater drilling — home to the fattest daily lease rates for rigs.

Oil rig company Ensco PLC (NYSE-ESV) announced it will purchase Pride International (NYSE-PDE) on Monday for $7.3 billion dollars in cash and stock. That makes Ensco the world’s second-largest offshore drilling concern with more than $10 billion dollars of combined revenue in back-orders in fiscal 2011.

The combined entity will have a market value around $16 billion dollars and harbor 74 rigs, including 21 ultra-deepwater and deepwater platforms in some important locations around the world.

Ensco is paying a 21% premium for the Texas-based company, sending the stock soaring on Monday.

The oil majors reported superb Q4 and full-year 2010 earnings recently and are ramping-up exploration budgets to meet rising demand. Oil prices continue to trade in a rising range with $90 a barrel, the next support level. Pundits are calling for at least $100 oil this year.

My favorite energy sector is the oil services field. Corporate earnings should remain flush over the next several years provided oil prices are stable and global economic growth doesn’t slow or at least contract. Also, in a world whereby many company are facing a margin-squeeze because of rising inflation, this sector is passing on rising costs and then some.

Like most of the broader market, the oil services group is over-bought and due for a pullback. I’d be boosting my allocation to this sector on any short-term weakness. In 2011, oil drillers will dominate the energy sector and probably make more money than in any single year in their history.

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