06/11/2015 12:45 EDT | Updated 06/11/2016 05:59 EDT

Oilwell driller Trinidad to acquire CanElson in $505 million deal

CALGARY - Oilfield services companies Trinidad Drilling Ltd. and CanElson Drilling Inc. (TSX: CDI) have agreed to merge in a deal worth $505 million.

Under terms of the deal announced Thursday, Trinidad (TSX:TDG) will acquire all CanElson (TSX:CDI) shares for either $4.90 cash or 1.06 Trinidad shares per CanElson share, representing a 23.5 per cent premium to CanElson's 20-day average trading price.

The takeover is intended to save costs and create a more geographically diverse base of operations as the industry faces major spending cutbacks, the companies said.

In May, only 10 per cent of Canadian drill rigs were in use according to the Canadian Association of Oilwell Drilling Contractors.

Trinidad CEO Lyle Whitmarsh said in a conference call that work on the deal started six months ago, when oil prices were below US$50 a barrel, but that the oil price wasn't the main driver.

"This deal is about what we think we can do as a combined entity going forward, much more than what the current share price or current oil price was back six months ago," said Whitmarsh.

While the company expects about $10 million in cost savings through the merger, major job cuts are not expected.

"Both companies have cut a lot of people so that's certainly not the idea going into this," said Whitmarsh. "We're going to have some duplicates that we're going to have to deal with but for the most part we've done a lot of that already."

The merged company will have the third-largest rig fleet in Canada and eighth-largest in the United States with 163 drilling rigs, including eight international rigs under a Trinidad joint venture, Whitmarsh said in a conference call.

Altacorp Capital analyst Dana Benner said in a note that the greater diversity is a good strategy.

"We believe this transaction makes a lot of sense for both companies. Trinidad gains a fleet of long-standing, highly-utilized drilling rigs, with a particular strength in Saskatchewan and the Bakken generally (plus more rigs in Texas and Mexico)."

The combined company is expected to have a market capitalization of roughly $1.05 billion.