Offshore Drillers: There Will Be (More) Dividend Cuts -- Barron's Blog
DOW JONES & COMPANY, INC. 10:31 AM ET 2/2/2016
Symbol Last Price Change ESV 9.05down -0.34 (-3.62%) RIG 9.045 -0.745 (-7.61%) QUOTES AS OF 12:02:39 PM ET 02/02/2016
JPMorgan's Sean Meakim and Brian Harbour contend offshore drillers like Ensco(ESV) and Noble ( NE) will be " following Transocean(RIG) and Rowan's ( RDC) lead" and eliminating their dividends. They explain why:
With cost levers largely exhausted, we think the next steps for drillers to de-risk cash flow schedules involve restructuring contracts and evaluating discretionary obligations (dividends, maintaining idle fleet). Dividend cuts are the lower-hanging option compared to fleet consolidation, and the recent yield expansion suggests the market is anticipating more suspensions following Transocean(RIG) and Rowan's lead. Ensco(ESV) (2/26 declaration) and Noble (4/29) are more likely candidates to slash policies than Diamond Offshore Drilling ( DO) (2/4), in our view, considering proportional potential cash relief (25% capex v. 15% Diamond Offshore) and yields relative to 1Q15 cut levels (Ensco(ESV) 6% now v. 11% in 1Q15, Noble 8% v. 17%, Diamond Offshore 3% v. 10%). While we expect the market will mostly reward cash preservation, performance should also reflect prudent use of cash via debt retirements, fleet R&M/upgrades and potential M&A. After the market's response to Rowans's dividend removal/debt retirement last week (+10% v. +8% peers), we suspect others will eventually follow.
Shares of Transocean(RIG) have tumbled 8.6% to $8.93 at 10:25 a.m. today, while Rowan has dropped 6.3% to $11.58, Ensco(ESV) has fallen 3.9% to $9.02, Noble has slumped 5.6% to $7.08, and Diamond Offshore Drilling is off 7.7% to $16.96.
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