Transocean, Inc. (RIG) has been the source of a lot of excitement among investors over the past number of months. It started with activist investor Carl Icahn pushing his way onto the stage and wanting to exert his will on the company. Many claim that this will bring significant value to shareholders as he fights for the cause of the investor. Is this hype warranted?
Without diving too much into the positives and negatives of activist investors' influence on stock performance, I think we all can agree that results are often mixed. It is very common to see significant pops on the announcement of activist investor involvement, with buying for several months to a year or so. Often, this is just enough for the activist investor to pump things up, and for them to leave with nice profits, leaving investors flat most of the time.
So what should we expect from Carl Icahn's involvement in Transocean?
From a short-term stock performance standpoint, Transocean gapped over $56 and is now trading around $51. There has not been the normal pop provided by this announcement, other than a few weeks of buying correlated with the market. Many expect that Carl Icahn's involvement will bring big value to Transocean. However, given his recent mixed record and the lack of initial buying; I do not see a reason to mess with Transocean based on his involvement.
It is reason enough to stay away if only for the sole purpose of avoiding the headache of dealing with the erratic price action that can come on rumors from what the investor is thinking. Take what happened to Peabody Energy (BTU) on Thursday. The stock jumped from $19.55 to $21.29 in a matter of minutes on a rumor that Carl Icahn took a major stake. Later that day, the stock dropped from $21.00 to $20.25 in a single minute as the rumor was denied. The rumor-mill swirls when there is involvement by activist investors. For me, I prefer avoiding the headache.
Another reason why hype is surrounding Transocean is the greater visibility on the Macondo incident. With this visibility and the involvement of Icahn, the hope is that all the headwinds are behind. I don't believe this. I agree with Deutsche Bank which downgraded Transocean to sell shortly after the announcement of Carl Icahn. Citing increased rig downtime, increased costs, and a soft market, Deutsche Bank also made this comment,
With greater visibility on its Macondo liability and greater clarity on the demands of activist Carl Icahn, most catalysts have been realized as well.
Some Fundamental Positives
There are some positives cited with regards to Transocean.
High dividend - $2.24 this year
Decent multiple of forward earnings - 8.7
Strong EPS growth compared to last year
The stock is trading at the bottom of a five year range based on Price-to-Book (P/B), Price-to-Cash-Flow (P/CF), and Price-to-Sales (P/S)
Some Fundamental Negatives
Revenues and revenue efficiency moving in the wrong direction
Operating cash flow fell 80% compared to 2012 Q1 earnings
With an ROE of just over 6%, it is significantly below the industry average as well as the overall market
High debt-to-equity ratio relative to industry average - 0.70
While there are some positive spins that can be put on Transocean's fundamentals, the negatives far outweigh. Any movement in a positive direction has still let Transocean well below industry standards. The company's lack of cash flow is striking and very concerning. While some have cited valuations sitting near 5 year lows as a positive catalyst for the stock, is it really? Frankly, it shows how investors continue to prefer its peers over it.
The most significant thing to me is the selling pressure that the stock price has seen in the face of clarity on the Macondo situation and the involvement of Carl Icahn. The stock is closing in on being 20% off this year's highs. This is very ugly price action given that the hoped for positive catalyst have been realized. The 2013 Q1 miss in earnings and revenue, along with Transocean's continued inability to provide value to investors, make this a dicey investment.
There are much better places to go within the industry. Places that are not swirling with rumor and uncertainty, and that are providing results above the industry average. Atwood Oceanics (ATW), Diamond Offshore Drilling (DO), Ensco plc (ESV), Noble Corp. (NE), or even other players in the Oil Services ETF (OIH) are better options to look to. My favorite service play continues to be Halliburton (HAL)
Bottom line - Investors are looking for anything positive to give hope for their investment into Transocean, while the bottom pickers who came in after the 2010 Macondo incident are also trying to grasp onto anything that will give them hope. They are using the involvement of Carl Icahn as a way to sweep the major problems facing Transocean under the rug, but the hope is very unlikely to be real. What is there is uncertainty, and investors hate uncertainty.
Transocean, why bother?