Transocean’s 80% Dividend Cut Won’t Be Enough

magnus towing ddII bosphorus strait
Transocean’s DDII under tow through the Bosphorus last fall, image: Harms Bergung

By David Wethe

(Bloomberg) — Transocean Ltd. will have to do more than slash its dividend by 80 percent for the owner of the world’s largest fleet of offshore rigs to weather the oil price crash, analysts said.

The company is recommending shareholders approve a cut in the annual payout to 60 cents a share from the current $3, according to a Feb. 15 statement. Transocean, which also announced that day that Chief Executive Officer Steven Newman will step down, had boosted the dividend last year after fighting off a challenge from billionaire investor Carl Icahn.

The company, based in Vernier, Switzerland, is facing falling demand for its equipment as producers cut spending amid collapsing prices. A 50 percent decline from oil’s June high has forced the industry to cut more than $40 billion in spending and eliminate 100,000 jobs globally. While a reduced dividend will shore up Transocean’s balance sheet, it may not be enough.

“They probably do need to raise capital in some way, as early as the end of this year or next year,” Rob Desai, an analyst at Edward Jones in St. Louis who rates the shares a hold and owns none, said in a phone interview. “The dividend’s not the only thing they need” to cut.

Transocean didn’t immediately respond to a phone message and e-mail seeking comment.

Icahn, the fourth-largest Transocean shareholder, called for the company to boost its payout to as much as $4 a share in 2013, saying it had the cash available for shareholders. The company had halted dividend payments after its Deepwater Horizon rig exploded in the Gulf of Mexico, leading to the biggest offshore oil spill in U.S. history. A call to Icahn’s office for comment Tuesday wasn’t returned.

Cash Sources

Transocean, which will save about $850 million a year from the dividend cut, has nearly $2 billion in debt maturing over the next year and a half, J.B. Lowe, an analyst at Cowen & Co., wrote today in a note to investors. A larger cut was expected, he wrote.

Potential sources of cash could include issuing more shares or dropping down ownership stakes in some of its deepwater rigs to tax-advantaged subsidiary Transocean Partners LLC, Angie Sedita, an analyst at UBS AG, wrote today in a note to investors.

Transocean, which has six buy, 13 hold and 20 sell ratings from analysts, was unchanged at the close in New York. The company was the worst performer in the Standard & Poor’s 500 Index last year, falling 63 percent.

CEO Exiting

The company said in a separate statement over the weekend that Chairman Ian Strachan will take over until a permanent CEO can be found.

During the next three years, the company has spending commitments to build rigs as the price for its equipment falls and existing contracts end. A glut of new vessels is competing for less work as producers reduce spending.

Transocean said Tuesday it will delay delivery of five shallow-water rigs under construction by about six months and will space out the time of delivery between each of the vessels.

The company may see its $9.1 billion debt lowered to junk status if the drilling downturn is prolonged, Moody’s Investors Service said last month.

Copyright 2015 Bloomberg.