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No. of Recommendations: 2
Hi everyone,

Yesterday, Transocean announced the first quarterly installment of its new, higher dividend. $0.75 per share, which is 34% higher than the $0.56 paid previously. The board approved the higher payout a couple of weeks ago. Ex-div on 5/28, pays on 6/18.

Cheers,
Jim
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No. of Recommendations: 1
How sustainable does this look to you, Jim?

* I haven't looked….RIG isn't following the SDRL style of paying dividends with debt are they?

* Are their utilization rates improving? They were having some utilization issues a year or two ago when I last owned it.

* Your SDRL write-up (another fine job, by the way!) indicated that management expects day rates to drop. If they drop to the level SDRL expects, would that be any issue with the new RIG dividend? (Not asking you to do an analysis, just wondering if RIG commented on it).

Thanks.

Rob
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No. of Recommendations: 3
RIG isn't following the SDRL style of paying dividends with debt are they?

Hi Rob,

If you look at TTM cash flow statement, they actually did. They paid out $808 MM in dividends while CFFO was $1,948 MM and CapEx as $2,617 MM (for a negative FCF of $669 MM). But that was the first time they've done that, and they spent a lot of money on upgrading capex, more than what they spent in 2012 and 2011 combined.

I don't know what they'll be doing in capex this year (I didn't see any comments on this in the Q1 call), but part of the lower CFFO was making a $470 MM payment to the US DOJ as part of its Macondo well settlement. There's about another $400 MM to go on that.

The somewhat disturbing thing with this company, however, is that it is starting to go down the path of a more complex company structure. It's expected to IPO a MLP (Transocean Partners) next quarter and it's also thinking of forming a North Sea drilling company to hold the harsh environment rigs -- things that SeaDrill has recently done. And, it has ordered at least one rig on spec, without a contract behind it. In other words, management seems to be loosening things up a bit. I'm not sure I like these moves, but I just haven't had time to sit down and think about them yet.


Are their utilization rates improving?

Yes. 94% or so this past quarter and that's what they're guiding to for the full year.


If they drop to the level SDRL expects, would that be any issue with the new RIG dividend?

Probably not immediately. When it spins out Transocean Partners, it will get a bunch of cash from that, and it would also get a bunch of cash from selling its rigs down to the MLP.

What's more worrisome is that Transocean needs to continue to spend to upgrade its fleet and/or build new rigs and replace the old ones. Both are quite expensive propositions. The ultra-deepwater market is bifurcated between new and older rigs and Transocean is mostly on the older side, so it's already getting lower dayrates than the newest rigs are getting. Downward pressure on dayrates would not be welcome. Of its 27 ultradeepwater rigs, 11 have contracts expiring this year and dayrates range from $412,000 to $650,000 and one more expiring in Feb 2015 (at $510,000). One more expires in Apr 2015 and one is idle. So 13 of them have contracts that go into late 2015 all the way out to 2020. That was as of April. I haven't gone line-by-line to compare it with the May update.

That's what I've got right now.

Cheers,
Jim
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No. of Recommendations: 2
The somewhat disturbing thing with this company, however, is that it is starting to go down the path of a more complex company structure. It's expected to IPO a MLP (Transocean Partners) next quarter and it's also thinking of forming a North Sea drilling company to hold the harsh environment rigs -- things that SeaDrill has recently done. And, it has ordered at least one rig on spec, without a contract behind it. In other words, management seems to be loosening things up a bit. I'm not sure I like these moves, but I just haven't had time to sit down and think about them yet. -- Jim

That's one of the things that creeps me out about SDRL. The complex structure (which I'd label as "financial engineering") seems to result in less transparency…. and certainly it's harder to figure out. I prefer the finances to be more on the simpler side.

Yes, sometimes I invest in stuff that has complex finances. I own SDRL and I own a bank.

Yes, that's inconsistent. :)

Rig upgrades? To be expected with a drilling company that's been around a while. Eventually, any deferrals catch up with you. Sometimes at inopportune times, such as might be the case as rates drop.

Thanks for your response.

Rob
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