Transocean: When Dividends Fail

| About: Transocean Ltd. (RIG)

Transocean (NYSE:RIG) used to be regarded as the top deepwater driller in the world. Its stock was considered a must-wn large cap in the energy sector. All that changed for the worse with the dramatic blowout of the Macondo well in 2010.

Unfortunately, what seemed like an isolated event was just the beginning of a downward spiral for shareholders. Since then RIG continues to have problems meeting analyst estimates. On top of that, RIG just announced a shocking share issuance of up to 30M shares that pushed the stock down to 7 year lows. Yes, lows greater than from the financial crisis of 2008 and lows greater than 2010 lows after the explosion. Both those lows were eclipsed.

How can Brent oil exceed $110 and a former premier driller be making a run at new lows? Other drillers such as Noble Drilling (NYSE:NE), Atwood Oceanics (NYSE:ATW), and SeaDrill (NYSE:SDRL) are all currently attempting to claw their way to 3 year highs.

Apparently bad management runs deeper than just mismanaging a drilling project. The company recently implemented a $1B dividend program for 2011 only to now issue a ton of stock at the lows. Stock that equates to roughly $1B or $1.2B with the over-allotment of shares.

RIG dropped $4.31 on Tuesday. Shareholders lost more market value yesterday than the $3.16 annual dividend. That is just poor management and inexcusable.

RIG makes the claim that the proceeds are to be used to refinance the debt assumed in the acquisition of Aker Drilling ASA. Though the press release clearly talks about replenishing cash that will be applied to the expected $1.7B repurchase of its 1.50% Series B Convertible Senior Notes due December 2037. Which one is it?

Clearly RIG boxed themselves into a corner with too much debt with the Aker Drilling deal. Why else would they repay 2037 convertible debt with stock at 7 year lows? RIG made the mistake of not using equity in the original deal. Now shareholders are paying the price.

Per Transocean Proposed Share Offering PR:

  • announced that it has commenced a public offering of 26,000,000 of its shares to be newly issued utilizing Transocean's authorized share capital, subject to market and other conditions. The underwriters will have an option to purchase up to an additional 3,900,000 shares from Transocean solely to cover over-allotments, if any.
  • Transocean intends to use the net proceeds from the share offering to partially refinance its acquisition of Aker Drilling ASA, which was initially financed through the use of available cash and the assumption of Aker's outstanding debt. In particular, the equity offering would replenish cash that would be applied to the expected approximate $1.7 billion in aggregate repurchase by Transocean Inc. of its 1.50% Series B Convertible Senior Notes due December 2037.
  • The offering price for the shares is expected to be determined via an accelerated bookbuild process. The offering represents up to 8.9% of Transocean's total issued and outstanding shares, and preemptive rights will be excluded.

Late on Tuesday, RIG announced the offering, priced at $40.50 or $5.44 below the closing price the day before the offering announcement. That is a heavy price for shareholders to pay for a company's refinancing activities.

It is possible that this will prove to be the floor in this saga. Though having just broken through crucial support, it seems very unlikely that the stock would find support so quickly. Investors will probably do well to wait for the stock to cross back above the $44-45 level or wait for lower levels. The stock hit $41.88 and closed at $42.58 on June 9th, 2010 providing some support for the close on Tuesday.

RIG operates in an appealing sector of deepwater drilling and still remains a leader in the sector, but until management shows the ability to increase shareholder value I'd steer clear of this stock.

Disclosure: I am long ATW.

Disclaimer: Data is provided for informative purposes only. Before making any investment decisions, investors should consult their investment advisor.

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