Transocean Ltd. (RIG)

[eastunder]

Transocean: Slashed Dividend, No CEO, No Problem?

http://blogs.barrons.com/stockstowatchtoday/2015/02/17/transocean-slashed-dividend-no-ceo-no-problem/?mod=yahoobarrons&ru=yahoo


By Ben Levisohn

Yesterday, Transocean (RIG) said it would seek to slash its dividend–which was expected–and announced the departure of its CEO–which wasn’t. Susquehanna’s Charles Minervino and Kai Wang discuss the ramifications of the latter:

Associated PressSteve Newman, former president and CEO of Swiss-based Trancocean Ltd.,


Transocean also announced the departure of CEO Steve Newman under a mutually agreed decision between him and the board. We believe that the departure of Newman signals more challenging times ahead for Transocean, after already impairing $2.8bn of assets last quarter with more impairments expected in 2015. The impairments highlight one of the concerns we have with Transocean, that its older fleet may lose out to competitors given this current market of a rig oversupply.

Cowen’s J.B. Lowe and Roland Morris second that emotion:



We view the departure of Steven as a negative for the company considering the tough decisions that Transocean will be faced with in the next 12-18 months. With an aging floater fleet and an increasing oversupply of rigs available for work globally, it is expected that Transocean will need to stack and retire a large number of its assets. A changeover at the top will not likely cause much upheaval at the company, particularly considering the lack of activity offshore. However, it will also be proposed at the AGM for Pete Miller to be elected Chairman of the Board, whom we expect will provide strong leadership in the boardroom. Mr. Miller is currently the Chairman of Now Inc. (DNOW) and was formerly Chairman and CEO of National-Oilwell Varco (NOV).

The Zephirin Group’s Longdley “Lenny” Zephirin is even more bullish on Transocean, his top pick among offshore drillers, following its dividend cut:


With the new expected reduction in dividend, the company should be able to sustain the lower dividend while ensuring strong free-cash-flow (FCF), solid balance sheet and cash available for rigs replacement/acquisition. Based on our estimated discounted-cash-flow (DCF) model, our 2015 FCF estimates is up by $124.3MM to $1.2 billion.

With the significant decrease in dividend, we are adjusting our price objective by $4.00/share to $35/share from $31/share. This increase implies a potential absolute return of 83.7% from current levels. Currently, the shares are yielding 15.7%. Based on the new dividend and current share price, the shares would be yielding 3.1%. We believe that the shares are very attractive trading at an EV/EBITDA multiple of 4.0x 2015 estimates. We recommend accumulating the shares at current levels or at any weakness.

Shares of Transocean have dropped 3.5% to $18.38 at 10:09 a.m. today.