by Aaron Levitt | November 12, 2013 1:53 pm
I’m not necessarily a fan of corporate raider Carl Icahn’s tactics when it comes to investing. But in the case of Transocean (RIG) … well, I’m having a hard time finding something not to like.
To me, Icahn’s version of activist investing generally focuses too heavily on the short-term and not enough on the long-term picture. Take a look at the cash grab he’s doing at Apple (AAPL), for example. Distribute all $150 billion of the company’s funds via a buyback? That seems very shortsighted.
But every once in a while, Icahn does right by long term shareholders — as he’s doing at Transocean. After a yearlong proxy battle, RIG and Icahn have finally come to an agreement about the fate of the offshore specialist — specifically about the company’s cash hoard and the potential for lower costs and tax savings. Icahn and Transocean’s management have come up with a plan that will suit both long-term investors as well as those just looking for some quick gains.
Based on the new plan, RIG is looking like an even stronger buy.
Since 2010’s Deepwater Horizon disaster — courtesy of BP (BP) — Transocean stock hasn’t been the best deepwater drilling equity on the planet. But the potential was there, and Icahn began to circle the embattled firm to draw out more value. That led to some nasty threats and proxy fights.
At first, it seemed like RIG was going to hold steady and go forth with its own plans — which weren’t that bad to begin with — but Icahn’s persistence has paid off in spades for shareholders.
According to the new plan, RIG will boost its dividend, cut costs and explore the possibility of spinning off assets into a tax-advantaged master limited partnership. That’s a move several rivals — such as SeaDrill (SDRL) — have been pursuing in spades. All in all, the proposed agreement with Icahn should be a huge benefit to anyone in Transocean stock.
How, you ask?
First, there’s the increased payout.
RIG slashed its dividend after the Deepwater Horizon spill, coveted its excess cash because the potential for a hefty legal bill was a real possibility. Since its legal liabilities have been pretty much taken care of and wiped clean, Transocean has once again restored its payout.
Originally, Icahn wanted to distribute much of the driller’s cash pile back toward shareholders via a special $4 dividend payout. After winning last year’s proxy, RIG decided to placate the billionaire raider by boosting its dividend to $3 per share — up from $2.24.
That proposed dividend hike essentially rewards long-term investors who have held RIG during all the Gulf oil spill drama for their patience. At the same time, it’s a quick buck for those who are holding in the shorter term on the premise of “Gimme that cash!”
More importantly, it still gives RIG the ability to fund the construction of new advanced deepwater drilling rigs — the kind that can charge over $600,000 a day to rent. Ultimately, that will help Transocean increase its cash flows and boost its payouts in the future. (And RIG already yields a very juicy 4.7%.)
Then there are the cost savings.
Under the deal, RIG will look to boost its margins by $800 million through a series of cost-cutting measures. That includes reducing its corporate board down to 11 directors from the current 14 as well as Transocean’s “shore-based” initiative, which will save about $200 million by the end of 2014.
But most importantly, there’s the MLP.
RIG plans to convert some of its fleet into a new master limited partnership. As we’ve mentioned plenty of times before, sponsoring firms can realize huge tax savings and large distributions by placing certain assets into an MLP subsidiary. And like many in the refining space — such as the Icahn-controlled CVR Refining (CVRR) — the deepwater drillers are flocking to the corporate structure in spades.
Transocean should be able to realize plenty of advantages by placing some of its more advanced drilling rigs into the proposed MLP. Not to mention greater financial flexibility when it comes to buying and building new rigs in the future. For investors in the MLP and RIG shares, that could mean larger dividends in the future as cash from the new company begins flowing. The initial public offering is anticipated to happen around mid-2014.
With the current proposals on the table, Carl Icahn seems to be doing right by long-term Transocean shareholders. Ultimately, the plans in place are designed to boost the profitability and cash flow generation at the driller — all of which will send more cash flows back to shareholders over the longer term. That’s the key factor to this piece of shareholder activism.
And given just how much potential RIG has — especially with deepwater drilling continuing to be hot — its forward P/E (less than 10) screams “Buy! Buy! Buy!” That’s dirt cheap by any means, but is even more so when you factoring in the higher payouts and cash flows generated by the future MLP.
For investors, now is the time to buy RIG.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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