Transocean (NYSE:RIG), the world’s largest offshore drilling company, has outlined plans to raise its dividend, accelerate its cost cutting program and spin off some of its assets into a Master Limited Partnership (MLP) structure as it moves to mend fences with activist investor Carl Icahn who had launched a proxy battle against the company earlier this year.  The company will also reduce the size of its board of directors from 14 to 11 and will give Icahn, who holds a 6% stake in the company, a second seat on the board. Under the agreement, in return, Mr. Icahn has committed to restrict his future moves regarding Transocean  while supporting the company’s board in the next annual general meeting. . We see these developments, particularly the cost cutting plan and MLP, as being largely positive for the company and its shareholders.
Trefis has a $53 price estimate for Transocean, which is slightly below the current market price.
MLP: Transocean intends to spin off some of its assets into a master limited partnership next year, a move that the company says will complement its capital structure and provide some additional financial flexibility. The company is expected to conduct an IPO for the proposed entity next year. Many energy services companies are opting to move assets into MLP structures since they do not need to pay income taxes at the corporate level and typically pay out a bulk of their cash flows to investors through distributions, which are similar to a quarterly dividend.  While Transocean didn’t provide specific details as to which assets it would spin off into the MLP, it has indicated in the past that rigs with long term contracts and stable cash flows would be prime candidates. Transocean has a few ultra-deepwater drill ships that are currently under construction, with contracts of between 5 and 10 years and these assets could be ideal for the MLP. The company will provide additional details during its analyst day event scheduled for November 21.
Cost Savings Plans: Transocean says that it is committed to increasing operating margins by around $800 million through cost cutting and higher efficiencies by the end of FY 2015. This would be exceed the company’s previous plan of reducing costs by about $300 million through its restructuring of its shore-based support infrastructure. The company also said that it would continue to renew its fleet by investing in premium, high-return drilling rigs including floaters and jackups.
Higher Dividend: Earlier this year, Icahn had proposed that the company reinstate its dividend at around $4 per share but failed to win investor support as shareholders voted with the company-backed dividend payout of $2.24 per share for the year 2013-14. However, the company now intends to raise its dividend to around $3 per share for the year 2014-15, subject to approval at the company’s annual general meeting next May. Based on Transocean’s current share count of around 360 million, the $3 dividend payout would entail an annual outflow of close to $1.08 billion which is around $300 million higher that the previous dividend.Notes: