Carl Icahn filed a 13-D late Friday, indicating that he had acquired ownership of around 5.6% of Transocean’s RIG stock, up from 1.7% ownership earlier in January. Icahn strongly believes that Transocean should issue a dividend of at least $4 per share, or around $1.4 billion using the current diluted share count of 359 million shares.
The manager plans to propose a dividend at the company’s annual meeting, and under Swiss law, if the majority of Transocean’s shareholders support the proposal, the company must pay the dividend whether the board supports such a decision. Icahn also plans to have additional discussions with management regarding Transocean’s business, and may pursue board seats as well.
The fact that Icahn is seeking a dividend isn’t an outlandish proposition. After all, Transocean recently paid out a $1 billion dividend, with the last payout coming in early 2012 before the firm eliminated it in order to protect its balance sheet. At the time, the firm faced possible a possible credit rating downgrade from the agencies to below investment grade. Today, we think Transocean has about $6 billion in cash after repurchasing $1.7 billion in convertible notes in December 2012, receiving about $855 million in cash from the sale of most of its standard jackup fleet to Shelf Drilling in November 2012, as well as the cash flows generated from its operations during the fourth quarter.
Transocean’s obligations in 2013 include roughly $3 billion in capital expenditures, $1 billion in further debt repayments, and $560 million in Macondo-related penalties, which is about $1.6 billion in excess of the $3 billion in operating cash flow we expect Transocean to generate during 2013. Therefore, at the end of 2013, Transocean will have about $4.4 billion in cash (assuming Transocean uses cash to cover its obligations) and $2.9 billion in an undrawn revolver and a secured credit facility, which totals around $7.3 billion in available liquidity. These numbers are still sharply higher than the $5 billion-$6 billion liquidity target that interim Transocean CFO Gregory Cauthen (now replaced by Esa Ikaheimonen) indicated on the third-quarter conference call.
However, we estimate that Transocean would also have around $11.2 billion in total debt at the end of 2013, which is significantly higher than Cauthen’s $7 billion-$9 billion gross debt target. Therefore, Icahn’s demand for a $1.4 billion payout, which at this stage seems to be a one-time dividend, is somewhat supportable based on the firm’s own liquidity targets. However, given the attractive opportunities available for newbuild rigs today, which should generate returns in the high teens, as well as Transocean’s need to invest more heavily in its fleet to keep pace with peers, we’d prefer to see any excess cash invested in rigs.
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