These 3 Major Factors Seem To Be Guiding Transocean Shares

Mar. 5.13 | About: Transocean Ltd. (RIG)

Transocean, Inc. (NYSE:RIG) shares were trading for just about $40 in early January, but the stock has been trending up for the past few weeks. However, one issue recently knocked the stock down from February highs of about $57 and that is the ongoing legal claims stemming from the oil spill in the Gulf of Mexico. Recent headlines about the case against BP plc (NYSE:BP) and the fact that Transocean still has not put this issue completely to rest seems to have caused the stock to drop to around $52. Even news that Transocean would possibly reinstate a dividend seemed to fizzle, so it is worth taking a closer look at the issues that seem to be guiding this stock up or down:

1. The Dividend: On Monday, March 4, Transocean announced its board of directors would suggest reinstating the dividend at the annual shareholders meeting on April 13, at a rate of $2.24 per share. Based on a current share price of about $52, a dividend of $2.24 annually would provide a yield of roughly 4%. While this beats the average stock in the S&P 500 Index (NYSEARCA:SPY) which currently yields about 2%, it is less than what some investors had hoped for and that is why the initial rally on this dividend news faded quickly. A dividend rate of $2.24 per share is also substantially less than the $3.16 level it paid before the dividend was suspended.

2. Shareholder activism: Carl Icahn has taken a position in Transocean and he recommended that it reinstate the dividend at $4 per share. That might have created expectations that were too high and it could be why the stock closed nearly unchanged after an initial rally on this news. Analysts expect Transocean to earn about $4.72 per share in 2013, so a dividend rate of $4 per share seems quite aggressive as it could lead to a high payout ratio of roughly 85%. This would not give the company much of a buffer in the event of another downturn or other issue. However, Carl Icahn is probably not done as a shareholder activist and he might be able to keep putting pressure on the board to create shareholder value. That is why headlines and announcements from Carl Icahn could continue to move this stock.

3. Legal claims: While Transocean has settled many of the legal claims that stem from the oil spill in the Gulf of Mexico, it still could face legal and other expenses as a case for punitive damages remains pending. As the BP case proceeds, news and other developments could come out and any negative or positive headlines could also move this stock. Transocean is also facing some legal claims in Brazil, although these claims appear manageable.

While Transocean may have put the worst behind it in terms of the financial crisis and the oil spill in the Gulf of Mexico, headline risks could continue to loom large in the short term. That's why I would wait for pullbacks before considering the stock and the potential risk factors that come with this stock. If oil prices continue to head lower, that could also create a better buying opportunity in the coming weeks.

Key Data Points For Transocean From Yahoo Finance:
Current Share Price: $52.19
52-Week Range: $39.32 to $59.50
Dividend: none (but a dividend might be reinstated in April)
2013 Earnings Estimate: $4.72 per share
2014 Earnings Estimate: $6 per share
P/E Ratio: about 11 times earnings

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.