Patterson-UTI Energy, Seventy Seven Energy to merge

Patterson-UTI Energy Inc. (NASDAQ: PTEN) has agreed to acquire Seventy Seven Energy Inc. (OTCPK:SVNT) in an all-stock transaction for a total consideration of $1.76 billion, including 49.6 million shares of PTEN stock and the assumption of $336 million of debt. Patterson-UTI expects to achieve synergies in excess of $50 million and believes, excluding transaction costs, the merger will be accretive to cash flow per share.

Seventy Seven emerged from a prepackaged bankruptcy in August. The company was formed as an oilfield service division of Chesapeake Energy, but spun out in 2014.

"The premium to yesterday's close of 93% is substantial, and PTEN is acquiring SSE at ~7.5x '18 EBITDA (using EBITDA of ~$184MM and including synergies of $50MM; ex synergies deal metric ~9.5x) vs PTEN's '18 multiple of ~8.5x. On an asset basis, the deal works out to roughly $18MM per high-spec rig and ~$2K per HHP," noted CapitalOne Securities analyst Luke Lemoine in a note Tuesday morning.  

The terms of the merger agreement were unanimously approved by the boards of directors of both companies. Additionally, Patterson-UTI has entered into a voting agreement with three shareholders of Seventy Seven Energy including BlueMountain Capital Management, Axar Capital Management and Mudrick Capital Management, who collectively represent more than 50% of the outstanding shares of common stock of Seventy Seven Energy.

All of Seventy Seven Energy's debt is expected to be repaid at the closing of the transaction through a combination of cash on hand, borrowing under its $500 million revolving credit facility and through the use of a senior unsecured bridge financing commitment in the amount of $150 million that Patterson-UTI arranged in connection with the transaction. Patterson-UTI also expects to issue additional equity in connection with closing the transaction in order to maintain a conservative capital structure.   

Seventy Seven Energy owns a fleet of 40 high-spec drilling rigs, approximately 93% of which are pad capable, including 28 fit-for purpose PeakeRigs™. The remainder of Seventy Seven Energy's rig fleet consists of 51 SCR rigs. Additionally, Seventy Seven Energy owns approximately 500,000 horsepower of modern, efficient fracturing equipment located in the Anadarko Basin and Eagle Ford Shale. This merger will also add a new product line to Patterson-UTI through Seventy Seven Energy's oilfield rentals business.

Piper Jaffray & Co., through its Simmons & Company International division and Vinson & Elkins LLP acted as advisors to Patterson-UTI, while Morgan Stanley & Co. LLC acted as financial advisor and Wachtell, Lipton, Rosen & Katz acted as legal counsel to Seventy Seven Energy. Canyon Capital Advisors LLC, on behalf of its funds and managed accounts, has provided a senior unsecured bridge financing commitment to Patterson-UTI.

The transaction is subject to customary regulatory approvals, stockholder approval of both companies and other customary closing conditions, and is expected to close late in the first quarter of 2017. Following close, shareholders of Seventy Seven Energy are expected to own approximately 25% of the combined company.


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