Transocean LTD (NYSE:RIG) finally succumbed to the inevitable Monday, with its board recommending the company cut its dividend by 80% after tumbling oil prices caused RIG stock to crater over the past six months. Transocean CEO Steven Newman also stepped down.
RIG stock has been due for a dividend cut for months. As recently as January, shares in Transocean had been beaten down so far that the dividend yield was close to 20%. Even the yield on the riskiest junk bond index — the Merrill Lynch CCC — has a 52-week high of less than 12%.
Anytime the yield on a dividend stock reaches such absurd levels because of crashing prices, it’s only a matter of time before the payout gets slashed. That explains why RIG stock was essentially unmoved by the news.
And this is probably only the beginning of a period of turmoil for the industry. Oil drillers and exploration companies like Transocean are on the cusp of what promises to be a large round of consolidation. It’s just about the only way many of these names can survive amid the epic collapse in oil prices.
Benchmark crude prices that were topping $110 a barrel last summer now go for $50 to $60, and that has clobbered demand for new drilling. There’s already too much oil chasing too little demand, so why go looking for more?
As a result, Transocean and other drillers such as Noble Corp plc (NYSE:NE) and Ensco plc (NYSE:ESV) have seen demand and day rates for their rigs plummet. With cash going out faster than it’s coming in, Transocean had little choice but to cut the dividend. Pending approval at its May annual meeting, the quarterly dividend on RIG stock will go to 15 cents a share from 75 cents a share.
Transocean CEO Jumps Overboard
The dividend isn’t the only casualty of the steep drop in prices for oil and natural gas. CEO Steven Newman stepped down abruptly after presiding over an epic collapse in the RIG stock price.
Transocean stock lost 76% of its value since Newman assumed the helm almost five years ago, and as much as no one foresaw the recent implosion in oil prices, he still had to fall on his sword for strategic blunders.
The operator of the world’s biggest fleet of offshore rigs invested heavily in the latest high-tech drillers to catch up with competitors’ new fleets. True, the newest rigs command the highest day rates, but Transocean’s big push came just as the industry’s focus turned to onshore drilling in the U.S. shale oil fields. Even now — amid industrywide overcapacity of the newest rigs — Transocean has 12 of them still under construction.
Bottom Line
Anyone who bought RIG stock for the sky-high dividend just learned a painful lesson about the risks of chasing yield.
Meanwhile, if there’s any hope for some limited upside in the RIG stock price, it will come from a merger or acquisition — an endgame that is probably not that far from the horizon.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
