Guess the bidders – Wellstream edition | FT Alphaville

Guess the bidders – Wellstream edition

At last — some de-equitisation.

From RNS on Tuesday:

The Board of Wellstream has noted the movement in its share price and confirms that it has received a number of preliminary approaches regarding a possible offer for the Company.

There can be no certainty that an acceptable offer will ultimately be made. A further announcement will be made in due course.

So who might these suitors be?

Well, three names are on traders’ lips this morning: Saipem, Aker and Prysmian. But Wellstream could equally be a target for one of the big oilfield services companies or even General Electric, Cameron International, National Oilwell Varco (which has a lot cash) and FMC Technologies.

That’s because of its unique technology. Wellstream makes flexible risers (basically pipes) for oil rigs, in contrast to traditional risers, which are rigid oil tubes. These are becoming increasingly important in offshore drilling and particularly deep water exploration.

Indeed, it is for that reason that Brazil (including the national oil company Petrobras) is Wellstream’s most important market, accounting for around 50 per cent of group revenues.

According to Olivetree Securities, the buyer most usually associated with Wellstream is Italy’s Saipem, which has no flexible capability, but a market-leading rigid offering. But Saipem have always rejected that speculation — saying they prefer to focus on capex, says the broker.

So what about Prysmian? The Italian cables company is trying to breaking into the oil market and Wellstream would be a fast track to 2,500m water depth capability. However, Prysmian is close to Petrobras – it aksed Prysmian to enter the flexible pipe market in 2008 – and the Brazilian oil company has apparently warned them off bidding in the past. This is because Petrobras is keen to add a fourth supplier of flexible pipes.

Which leaves any of the major oil field services companies and others like GE. As Wellstream only manufactures the tubes – it has no installation capacity or fleet of ships – it could be easily bolted on to one of these companies. And Wellstream is also represents a way to get exposure to Brazil’s giant pre-salt fields — so called because they are trapped under several kilometres of sea water, rock and a hard-to-penetrate layer of salt –which could contain 60bn to 100bn barrels of oil.

As for price: the “killing zone” for Wellstream on account of its unique technology — only four companies have anything like its offering (Technip, NKT Flexibles, Acergy, and Prysmian) — will be in the £9 to £10 region, says Olivetree.

Thanks to the unique nature of the assets, equity multiples are broadly irrelevant here – it is more of a question as to what price a potential buyer is willing to pay to get access to Wellstream’s technology and client base. It is very possible that an offer gets competitive, and therefore no suprise to see Wellstream refer to “a number” of approaches.

Meanwhile, here’s the early price action in Wellstream:

Also worth noting is that short interest in Wellstream is 6 per cent of its outstanding share capital. Based on average daily volume that would take 18 days to cover! But already today 2.4m shares have changed hands and that’s six times the daily average.

Update: 9:20am (BST) Traders says both Saipem and Prysmian are playing down their interest in Wellstream. Sources close to Saipem say it’s not interested in flexible pipes (and traders are prepared to give them the benefit of the doubt for now) while Prysmian seems intent on building its relationship with Petrobras. Increasingly, it looks as if Wellstream’s suitor(s) are Northern American.

Update 9.40am (BST) Comment and chart from JP Morgan:

In our view it makes a lot of sense for Wellstream to be integrated into an existing installation contractor – although we believe it makes less sense for an installation contractor (vessel owner) to own manufacturing capacity (indeed oil companies often specify a preferred pipe supplier). However, with much of the Subsea Umbilicals Risers and Flowlines (SURF) growth opportunity in Brazil, ownership of Wellstream can help satisfy critical local presence requirement in that market.